How shall the Energy Efficiency First principle be applied in the hydrogen economy?

By Oscar Laviolette

How shall the EE1 principle be applied in the hydrogen economy?

Hydrogen is expected to play a big role in the EU’s decarbonization goals. By 2030, it hopes to consume 20Mt of green hydrogen, producing half of it domestically. However, hydrogen currently only makes up less than 2% of the EU’s total energy consumption and is mainly produced as a by-product of unabated fossil fuels. There is thus an entire new economy to be built in a matter of decades, from supply to demand-creation. While this poses enormous challenges, it also provides a unique opportunity to build this economy in a way that avoids wasteful energy production and consumption. The energy efficiency first principle (E1st), which aims to prioritise demand-side measures over supply-side resources whenever they provide the same value, will be a central principle to achieve this objective.

Hydrogen is a highly inefficient energy carrier, with important energy losses in its production, transportation and storage phases. Furthermore, hydrogen may often have to be transformed into a different carrier such as ammonia to be transported more economically or used in industry which adds further energy losses. This makes hydrogen generally less efficient than direct electrification of end uses. For example, heating homes with renewable hydrogen (hydrogen produced from renewable electricity) is estimated to require more than five times as much total power capacity than direct electrification.

Nonetheless, many sectors for which direct electrification is technically or economically not feasible will necessitate hydrogen to decarbonize. These are likely to be the steel and chemical industries, heavy-duty transport, shipping, and energy storage. While the need for hydrogen is clear, the magnitude of the demand is still uncertain. International reports vary widely in the role of hydrogen in a decarbonized future, ranging from close to 5% of total final energy demand to more than 15% by 2050, but they all agree that building up a hydrogen economy cannot happen without substantial government support and guidance.

The current EU hydrogen strategy

In this regard, the EU developed a strategy for the creation of a sustainable hydrogen economy structured around demand and supply creation, infrastructure deployment, investment support and international cooperation. In practice, the strategy aims to ensure that demand for and production of hydrogen are scaled up equally fast and have the necessary infrastructure to connect to avoid bottlenecks or stranded assets. Additionally, the EU aims to serve as a catalyst for financing, by providing initial funds to develop projects before they are commercially viable and to ensure long-term price guarantees and market viability to create a reliable environment to inject private finance. Currently the main tools used by the EU are the following: European Clean Hydrogen Alliance: a forum for hydrogen stakeholders throughout the value chain to achieve deployment objectives of hydrogen by 2030. The Clean Hydrogen Partnership: a public private partnership, part of the Horizon Europe programme, to provide funding for R&D projects aligned with the EU’s hydrogen objectives. European Hydrogen Bank: a platform for subsidies of clean or low-carbon hydrogen production to promote economic viability and encourage private investments. Important Projects of Common European Interest (IPCEI): the IPCEI provides clearance for state-aid for the development of projects that respond to the strategic needs of the EU. For hydrogen, two rounds of IPCE fundings have provided financing for 76 projects spanning the entire value chain. EU rules on hydrogen: the EU also put forward criteria to define clean hydrogen and a methodology to calculate the life cycle emissions of hydrogen and thus define what projects can count towards the EU’s production targets. Overall, the hydrogen strategy is supposed to follow the general principles set in the EU’s strategy on energy system integration which defines how the EU is to coordinate the transition towards multiple fuels across different sectors in a way that ensures both economic and energy efficiency. The strategy explicitly states that E1st is to play a ‘core’ role.

Applying E1st to the hydrogen economy

A hydrogen economy aligned with E1st is an economy where hydrogen: 1) only exists in sectors for which direct electrification or alternative carriers cannot provide the same energy service with fewer primary energy demand or for which hydrogen can provide efficient sectoral synergies; 2) total hydrogen infrastructure is only as big as what is necessary to meet the final energy demand after demand-side measures have been implemented where applicable; 3) the structure of the hydrogen supply chain is organised to minimise losses due to production, transportation, conversion, and storage. Developing an efficient hydrogen economy will require constant coordination between the development of technologies to decarbonize end-uses, including hydrogen, with wider system considerations. This can only be achieved gradually and will require constant feedback between bottom-up processes of technological development and top-down considerations of system efficiency.

1: Be technologically impartial in the initial stages

Governments must play an important role in financing R&I in the initial stages of technological development, and for sectors where multiple carriers are competing, ensure that all potential technologies have a fair chance of developing. Horizon Europe is a perfect tool to finance such research considering the wide range of fields it covers. While supporting R&I is important, developing a network of actors to translate technological developments into concrete projects is key to facilitating the deployment of new technologies. In this regard, while initiatives like the European Clean Hydrogen Alliance are necessary to develop a hydrogen supply chain and involve private finance, these platforms centred on hydrogen run the risk of biasing policies towards hydrogen and making it easier for hydrogen-related technologies to become commercially viable compared to alternatives. Instead, similar initiatives could be developed for electrification or, better, create dedicated platforms per final-sectors where industry actors can more easily assess the current technological landscape. In the initial stages, policies for end-sector uses should not focus on the development of hydrogen per se, but rather on the development of technologies per end uses that need to be decarbonized. 

2: Provide progressively more stringent requirements for system efficiency

A challenge for system-efficient integration of new technologies is that it can be difficult to estimate the efficiency potential of nascent technologies. Nonetheless, this factor must be progressively given more weight in public funding schemes. For example, the first two rounds of IPCEI dedicated to hydrogen did not explicitly include efficiency performance as a criterion for project selection^, . As time passes and the need for mature technologies to emerge increases, this criterion should be introduced and become progressively more important in the Strategic Research and Innovation Agenda. Evaluating efficiency performance should not be sector specific but must instead consider the potential synergies that hydrogen can offer across sectors. Additionally, energy efficiency and commercial potential should also be kept distinct. While commercial viability will ultimately be what determines the adoption of technologies, it should not be a discriminatory factor too early on. Indeed, emerging technologies may initially suffer from lower commercial viability compared to hydrogen technologies that could benefit from the expertise and infrastructure of incumbent industries (particularly the natural gas industry), which may favour earlier commercial viability even in cases of poorer overall energy efficiency. Initial phases of technological development should also provide the opportunity to create transparent data on technological performance of emerging technologies, to allow private finance to get a sense of the technologies and sectors with potential, this will encourage the involvement of private finance and the (energy) efficient allocation of private resources.

3: Become technology partial and direct private capital

In later stages of technological maturity, policymakers will have to ensure that the technological direction taken by each sector is the most efficient one. At this stage, the EU’s energy system integration strategy must be more than a simple aspiration but be an integral principle, alongside E1st, to assess where hydrogen is an efficient and viable solution. System integration requires important coordination across member states, sectors, finance, and industries which could be facilitated by a dedicated platform. In this regard, the recently announced Net-Zero Europe Platform is a good initiative. Considering that hydrogen is not expected to be viable without important public support, governments will have considerable power in shaping the development of the hydrogen economy. This should be leveraged. The subsidies provided by the Hydrogen Bank are currently not targeted for specific sectors and simply aim at creating an initial momentum for a hydrogen economy. However, while the current subsidies will only cover a small portion of the total hydrogen required, overly generous subsidies in the future could lead to inefficient usage of hydrogen, which will hurt consumers or industry after the subsidies end. An alternative approach, once hydrogen production starts to pick up and needs to penetrate specific industries, could be to provide purchase subsidies that only certain sectors can claim. Sectors for which hydrogen is deemed to be the best solution could benefit from financial assistance to switch to hydrogen as well as consumption subsidies to bridge the gap between the green premium of hydrogen and the cost of the fuel it replaces. Additionally, sectors switching to hydrogen will see important replacement of assets. This creates a window of opportunity to encourage investment in energy efficiency measures. For certain industries, barriers to additional energy efficiency investments are the potential disruption to production processes which the perceived low strategic value of energy efficiency generally does not justify. These important investments could thus provide the necessary justification for industry actors to consider more ambitious energy efficiency investments. In this regard, policymakers should ensure that they provide the necessary tools and instrument for industry actors to implement ambitious efficiency investments, by, for example, making energy audits before a switch to hydrogen production mandatory.

Recommendations:

Step 1

• Policies should not focus on the development of hydrogen per se, but instead on the development of technologies per end uses that need to be decarbonized ;
• Create initiatives similar to the European Clean Hydrogen Alliance per end-use sectors to favour a fair comparison of competing decarbonization technologies ;

Step 2

• Introduce progressively more stringent conditions for contribution to system efficiency in the selection criteria for public funding ;
• Ensure availability and communication of data on performance indicators of competing decarbonization technologies to facilitate investment in and adoption of most efficient technologies ;

Step 3

• Create a dedicated platform for the coordination of the relevant stakeholders in the implementation of the strategy of energy system integration ;
• Favour subsidies for purchase of hydrogen, allocated to specific sectors, rather than production subsidies ;
• Take advantage of asset switching to hydrogen to simultaneously maximise investments in energy efficiency measures.

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