The European Union Agency for the Cooperation of Energy Regulators (ACER) has announced plans to consult on inter-temporal cost allocation mechanisms for financing hydrogen infrastructure. This initiative is part of the broader European Union’s strategy to foster a competitive hydrogen market and integrate renewable gases into the energy system. The EU aims to support the development of a competitive hydrogen market through its Hydrogen and decarbonised gas market package. This package extends ACER‘s responsibilities to include tasks related to hydrogen.
Consultation will focus on methodologies for setting inter-temporal cost allocation mechanisms. These mechanisms are designed to spread the costs of hydrogen infrastructure over time, ensuring that early adopters are not disproportionately burdened compared to future users. Aim is to achieve a fair distribution of costs between current and future hydrogen consumers, which is crucial for encouraging demand and ensuring the economic viability of hydrogen projects.
Traditionally, financing infrastructure through regulated tariffs can lead to high fees for early users, making hydrogen less affordable and potentially stifling demand growth. By allowing hydrogen network operators to recover infrastructure costs over time, these mechanisms aim to stabilize costs for initial users while ensuring that future users also contribute to the infrastructure investment. Successfully implementing these mechanisms could accelerate the development of hydrogen infrastructure by mitigating financial barriers for early market participants.
ACER’s recommendations will influence how Member States and national regulatory authorities structure tariffs and investments for hydrogen infrastructure, potentially affecting the pace and scale of hydrogen project development across Europe.
The EU has set ambitious targets for renewable hydrogen production and consumption by 2030, aiming for 10 million metric tons both domestically produced and imported. This is part of the broader strategy to achieve net zero emissions by 2050 and reduce dependency on Russian fossil fuels. The Europe hydrogen market size surpassed USD 39.1 billion in 2023, with expectations to grow at a CAGR of over 3.5% from 2024 to 2032, driven by the push towards industrial decarbonization and mandates to reduce emissions. The European hydrogen market is currently in a phase of significant development, aiming to play a critical role in the continent’s strategy towards decarbonization and energy security. Green hydrogen, in particular, has seen substantial interest fueled by increasing investments in renewable energy.
The “Fit for 55” package introduced binding targets for renewable hydrogen uptake in industry and transport, complemented by the Hydrogen and decarbonised gas market package to support infrastructure and market development.
Despite numerous project announcements, only a small percentage have reached final investment decisions (FIDs) or become operational. This discrepancy between announced and committed projects highlights challenges in translating policy ambitions into practical outcomes. production costs, lack of demand due to uncertainties, and the need for infrastructure like pipelines are significant hurdles. The European Hydrogen Bank auctions aim to bridge cost gaps and encourage investment, but progress is slow.
The market is still in its early stages with green hydrogen being more expensive than traditional grey hydrogen. Innovations in electrolysis technology and scaling up of electrolyser manufacturing are seen as crucial for cost reduction. There’s a need for clear, uniform demand-focused regulations to simplify project development across the EU. The current regulatory framework is criticized for being too complex or not market-driven enough.
European hydrogen market is at a pivotal point, with substantial policy backing but facing practical challenges in execution. The success of this market will largely depend on technological advancements, cost reductions, clearer regulatory frameworks, and an actual increase in demand for hydrogen as a clean energy carrier.
Major infrastructure projects include repurposing existing gas networks for hydrogen, new hydrogen-capable infrastructure, and the development of a European hydrogen backbone initiative for cross-border transport. Significant public and private investments are being channeled into hydrogen projects, with the EU announcing substantial budgets for low-carbon hydrogen, though actual project commitments lag behind.
The “European Hydrogen Backbone” (EHB) initiative represents a comprehensive plan to create a continent-wide infrastructure network for hydrogen, aiming to facilitate the transition to a carbon-neutral energy system by 2050. EHB aims to support the EU’s climate targets by providing infrastructure for the transport and storage of hydrogen, which is seen as a key vector for decarbonizing industries, transport, and energy production where electrification is challenging. The vision includes a network of approximately 40,000 km by 2040, connecting 21 European countries. This network would consist of both new hydrogen pipelines and repurposed existing natural gas pipelines, with estimates suggesting about 60% repurposed and 40% new pipelines.
Utilizing existing gas infrastructure reduces the investment cost, with estimates suggesting a total investment of €43-81 billion for the 2040 network. The cost of transporting hydrogen over 1,000 km is estimated at €0.11-0.21 per kg, making pipeline transport a cost-effective method for long-distance hydrogen delivery compared to alternatives like shipping.
Since its initial proposal, the EHB initiative has grown, involving 31 European network operators and covering more member states, including Norway, the UK, and Switzerland. he backbone would integrate with current natural gas networks, allowing for the gradual transition to hydrogen, which can be blended with natural gas or used in pure form.
While the EU has made strides in reducing dependency on Russian gas, particularly after the 2022 invasion of Ukraine, there’s an ongoing risk from over-reliance on a limited number of alternative suppliers. New dependencies could emerge, especially if these suppliers are in politically unstable regions or countries with less democratic governance. With global LNG markets being tight, any disruptions in supply chains, like those through the Panama or Suez Canals, or conflicts in key energy-producing regions, could lead to supply shocks and price volatility. he push towards decarbonization is commendable, but rapid policy shifts, such as the phase-out of nuclear power in some countries without adequate renewable replacements, can temporarily increase reliance on fossil fuels, impacting energy security.
The EU needs substantial investments in both new renewable energy infrastructure and the retrofitting of existing systems for hydrogen or other green gases. Delays or insufficient funding could slow down energy security enhancements. While hydrogen holds promise for decarbonization, the nascent state of the hydrogen market, including infrastructure like the European Hydrogen Backbone, presents risks. Delays in project realization, high costs, and uncertainties in demand could hinder this transition.
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