Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term

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1 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term Grant agreement no.: Deliverable No. D1.3 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term Status: Final Dissemination level: PU Public Document Last update: 16 May 2016

2 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term 2

3 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term Authors: Daniel Fraile, Hinicio Angelica Torres, Hinicio Azalea Rangel, Hinicio Frederic Barth, Hinicio Jean-Christophe Lanoix, Hinicio Wouter Vanhoudt, Hinicio Checked by: Patrick Maio, Hinicio Date: 19 May 2015 Revised version: 16 May

4 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term Executive Summary If Europe is to remain on track of its commitment for CO2 emission savings in the long term, it is to be expected that the European Union will propose new and innovative policy and regulatory measures that will lead to the desired emission reductions. In that context, we expect future CO2 savings policy (including the promotion of renewable energy sources) to be a main driver for the use of green 1 hydrogen in fuel cell vehicles, for power to gas applications to enable the larger penetration of intermittent renewable energy, and for the decarbonisation of energy-intensive industries such as refineries. In addition to policy and regulatory pressures that will lead to an increased demand for renewable based and/or lowcarbon hydrogen, a number of market segments and consumer aspirations will be met by emerging environmentally friendly and cheaper production pathways. 1 The definition of «Green» hydrogen is to be determined at the end of Work Package 2 ; for now, «green» hydrogen refers to environmental friendly hydrogen. 4

5 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term Overview of regulatory, market and economic drivers for green hydrogen in a CO2 policy driven scenario (see CertifHy scenario in section 2) Drivers for hydrogen/green hydrogen in the main 3 markets analysed (policy driven scenario) Driver scope Refineries Amonia (other chemicals) Industry metal processing Food, Glass production, Semiconducto rs, Aerospace, etc. Mobility and transport H2 use infcvs Power to gas (injection into the natural gas grid) Energy storage and system transformation Fuel quality directive Regulatory drivers RED (including. Renewables Transport target) Emissions Performance standards for passenger cars Air quality (Low Emissions Zones) Alternative fuel infrastructure directive Mix driverregulation through Market & Economic drivers ETS (Cap, exemptions, CO2 price) Oversupply of variable renewable energy/ Energy storage market Consumers choiceclean transportation CSR- Green marketing/ Company image cost competitive vs. SMR of natural gas (reference technology) Legend: Timeframe Short term: 2015 Medium Term: Long term: >2030 Relevance/impact on green H2 demand No impact Low/limited demand potential high demand potential Type of hydrogen demand for RES based hydrogen for low-carbon hydrogen for hydrogen Based on the assessment of the drivers presented in the previous table, the formulation of a 2030 CO2 savings policy scenario (developed by Hinicio in the framework of the CertifHy 5

6 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term project) and the analysis of existing roadmaps for the penetration of hydrogen 2, the following conclusions can be made: 1. Demand for renewables-based and low-carbon hydrogen is expected to grow to significant levels in the mid- to long term in a CO2 policy driven scenario If Europe is to continue its ambition policies on climate change, energy security and competitiveness of its industry, green hydrogen will play a significant role in the decarbonisation of the transport sector, through its direct use as fuel in Fuel Cell vehicles and through the decarbonisation of conventional fuels (e.g. by replacing conventional hydrogen with low-carbon hydrogen needed in refineries). To a lesser extent, it could also contribute to reduce emissions on the energy-intensive industry. Overall, we expect that about 17% of all hydrogen could be originated from renewable and/or low-carbon sources by 2030, representing a market of about 1.7 million tons of green hydrogen per year. Evolution of hydrogen demand under a CO2 policy driven scenario for all sector analysed. Source: Hinicio analysis 2. The European industry would benefit from a GoO scheme for green hydrogen, even before 2020 As contemplated by the Fuel Quality Directive, refineries could benefit from the use of green hydrogen as feedstock to process fuels and comply with the regulation s target (6% reduction of the fuel carbon intensity). In the case refineries decide to use low-carbon hydrogen based on renewables, refineries will need to proof the renewable origin of the hydrogen use. This may represent an important administrative burden (as there is no established GoO scheme for green hydrogen in the marketplace) as well as an economic cost (the traceability of the origin will incur significant costs for the fuel supplier). Therefore, in the absence of an EUwide GoO for green hydrogen which can prove the renewable origin of the hydrogen, 2 The CertifHy consortium is not tasked to develop its own market scenario, but rather to reflect existing literature, include projections from existing national roadmaps, reflecting and assessing the possible developments. 6

7 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term renewables-based hydrogen feedstock would possibly not be retained by refiners as a possible option to comply with the obligations of the Fuel Quality Directive. Additionally, the renewable origin of the hydrogen would allow fuel suppliers (refineries) and consequently Member States to comply with the 10% renewable energy target in the transport sector by 2020, as mandated in the Renewable Energy Directive (RED). Separately, food processing industries and other industrial players (glass producers, ammonia producers) could benefit from the use of green hydrogen as a market strategy (green labelling) or to respond to increasing pressures in environmental regulations. There are existing examples of companies committed to become 100% renewable 3. In the case of those using hydrogen, a GoO for renewable-based hydrogen would facilitate them reaching such goals. 3. Disconnecting the production site from the demand for green hydrogen through the use of a GoO system will be essential for an effective use of green hydrogen Tradable GoOs will allow different industrial actors to comply with regulations and accounting obligations in a much more economical way by allowing all users in all countries to purchase renewable based and low carbon H2 where it is not physically produced. In addition, this would make the green hydrogen a premium molecule tradable at a potentially higher price, thus enabling further market acceptance and buy-in. With the deployment of power-to-gas applications (e.g. injection into the natural gas grid), green hydrogen could potentially be produced at competitive cost where variable renewable energy is most abundant and the gas infrastructure is developed (e.g. North Sea), and could be cancelled at industrial sites (where the demand exist due to legislative requirements), where conventional hydrogen production would be maintained. Disconnecting the production site and the demand for green hydrogen will be essential for the success of a green hydrogen market as it will drive the production of green hydrogen where is the most cost effective. 4. Ideally, a good GoO scheme should be flexible enough to serve both objectives: proof of renewable origin and of a low-emission content Premium hydrogen may be used to comply with different regulations and policies, as it has been shown. In some cases, proving the (renewable) origin of the energy to produce hydrogen will be requested (e.g. RED). In some other cases, a proof of reduced emissions would be sufficient (e.g. FQD, ETS). When regulation is not the driver, the market and final customer 3 RE100, a group of global companies aiming to use 100% renewable energy. 7

8 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term will decide (e.g. food processing industries and green labelling, corporate social responsibility, fuel cell vehicles users). The GoO for hydrogen should address the market and regulatory needs of different hydrogen users. Therefore, the GoO should be designed in such a way that information about its (renewable) origin and its associated GHG emissions are provided to the final customer. 8

9 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term Table of Contents Executive Summary... 4 List of Abbreviations Introduction Methodology Drivers for the use of green hydrogen Long-term Policy context Policy landscape by Detailed assessment of the regulatory drivers Renewable Energy directive, Transport target Fuel Quality Directive (FQD) target Emissions Performance Standard for passenger cars Low Emissions Zones Alternative Fuels Infrastructure Directive Market and economic drivers Need for flexibility and energy storage Hydrogen Injection in to the Natural Gas Grid (Power to Gas) The Emission Trading Scheme (ETS) and the price on CO2 emissions Consumers choice - Clean transportation Corporate Social responsibility, green image Summary and conclusions on drivers A market outlook for green hydrogen Green hydrogen demand in Industry Refineries Chemical industry (including Ammonia producers) Other industry (glass manufactures, semiconductor industry, food industry) Green hydrogen demand in the power to gas sector Green hydrogen demand in the H2 mobility sector Overall demand for green hydrogen Amount of renewable or low carbon energy required to meet the estimated green hydrogen demand Conclusions

10 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term 5 ANNEXES Annex 1- Revised analysis of scenarios for transport fuels, JRC European Commission Air Quality and air pollution in Cities Annex 3- Energy Storage solutions List of Figures Figure 1: Work Package 1 methodology Figure 2: European Roadmap towards a low-carbon Economy Source: European Commission Figure 3: Outlook of green hydrogen markets overtime Figure 4: Rules for accounting in the Fuels Quality Directive Figure 5: Added value of carbon neutral hydrogen over CO2 certificate price. Source: Christoph Stiller, Linde AG Figure 6: Overview of green hydrogen drivers in a policy driven scenario Figure 7: Evolution of hydrogen and green hydrogen demand in the industry sector Figure 8: Evolution of hydrogen and green hydrogen demand in the power to gas sector. Source: Hinicio analysis Figure 9: Comparative analysis of existing roadmaps for FCEV and H2 demand for transport. Source: Hinicio analysis based on national H2 mobility roadmaps, Hyways project, A portfolio of power-trains for Europe (McKinsey) Figure 10: Evolution of hydrogen and green hydrogen demand in the transport sector. Source: Hinicio analysis Figure 11 Evolution of hydrogen and green hydrogen demand in all sectors analysed. Source: Hinicio Figure 12 Snapshot of possible green hydrogen demand by 2030, divided by market segments. Source: Hinicio List of Tables Table 1: 2030 policy driven scenario developed in the context of CertifHy Table 2. Emissions factors for different fuels under the Fuel Quality Directive and Renewable Energies Sources directive. Source: Hinicio, based on the values presented in both Directives

11 Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term List of Abbreviations CAES CO2 CCS ETS EU FCV FCEV FQD GoO GHG GW GWh H 2 HRS ICE Kg Km kw kwh LEZ MW MWh Mtoe NG Nm 3 P2G PEM RED SMR TSO WE WP Compressed Air Energy Storage Carbon Dioxide Carbon Capture and Storage Emission Trading System European Union Fuel Cell Vehicle Fuel Cell Electrical Vehicles Fuel Quality Directive Guarantee of Origin Green House Gases Gigawatt Gigawatt hour Hydrogen Hydrogen Refueling Station Internal Combustion Engine kilograms kilometers Kilowatt Kilowatt hour Low Emission Zones Megawatt Megawatt hour Million Tons of oil equivalent Natural Gas Normal cubic meters (0 C and 1 bar) Power to Gas Proton Exchange Member Renewable Energy Directive Steam Methane Reforming Transmission System Operator Water Electrolysis Work Package 11

12 1 Introduction This report, is part of a set of 3 reports (deliverables) produced under the first Work Package (WP1) of the project CertifHy. The objective of WP1 is to assess the needs and benefits of green hydrogen in light of a market outlook, in order to provide evidence of a rational for adopting green hydrogen by policy makers and market players, and provide an insight of the potential penetration within the different market segments in Europe for the years For this purpose, the work has been divided in 3 individual reports, each one described in a separate deliverable: D1.1. Bibliographic review of market outlooks for hydrogen in Europe. D1.2. Overview of the market segmentation for hydrogen across potential customer groups, based on key application areas. D1.3. Generic estimation scenarios of market penetration and demand forecast for premium green hydrogen in short, mid and long term Figure 1 presents the scheme of the proposed distribution of tasks for WP1 as explained above, in order to demonstrate the narrow-down of the tasks from a global demand perspective of the hydrogen market, into a sector specific demand outlook of green hydrogen, including the evaluation of different roadmaps, policy drivers and considerations for each evaluated sector in the context specified. Figure 1: Work Package 1 methodology 12

13 For a full understanding of the assumptions and sources used in this report, we recommend the reader to read at deliverables D1.1 and D1.2 as well. The present deliverable D.1.3 pays particular attention at addressing the evolution of penetration rates of green hydrogen production at different time horizons: short term (2015), mid-term ( ) and long term (beyond 2030) depending on the evolution of key market drivers and (internal and external) factors of influence such as: Regulatory constraints (e.g. European Fuel Quality Directive, Renewable Energy Directive); Cost of electricity; Value of CO2; Cost of conventional hydrogen production technologies; Demand for renewable electricity storage; Industrial sectorial demands; Geographic aspects; Subsidies. 1.1 Methodology The work has been structured in the following steps: 1. Analysis of the existing regulatory framework that could potentially impact the demand of hydrogen and green hydrogen (bottom-up), 2. Development of a CO2 policy driven scenario until 2030, in line with Europe s longterm decarbonisation goals, 3. Analysis of market and economic drivers for green hydrogen (bottom-up), 4. For each demand segment (as classified in Deliverable 1.1), study which specific drivers (from the identified ones) could lead to hydrogen demand (either as new demand or substitution of non-green hydrogen use), 5. Quantification of green hydrogen (first, by quantifying how much will be produced from electrolysis, then assessing the energy mix), 6. Conclusion on which type of hydrogen (renewable origin, low-carbon) and GoO (tradable) could be most beneficial. All the sources and reports used for preparing this document are listed in D1.1 Bibliographic review of market outlooks for hydrogen in Europe 4. 4 CertifHy project, April 2015, 13

14 2 Drivers for the use of green hydrogen The major policy drivers for the (future) use of green hydrogen can be classified as: Climate change related policies along with the decarbonisation of the transport and industrial sectors Energy security and independence of fossil fuels Reduction of local air pollution to minimize human health risks Industry competiveness by technology development and innovation These key policy drivers can lead decision makers to introduce or adjust regulations, set market instruments and complementary policies (i.e. subsidies) to incentive the use of lowcarbon fuels, including hydrogen. From an economic point of view, on-site hydrogen production through electrolysis or biomass gasification may provide in some cases a competitive alternative for users of hydrogen that do not produce it onsite and need to purchase from a supplier (since transport and distribution cost could lead to prices 2-3 times higher). In order to assess the impact of various regulatory and policy drivers of green hydrogen demand beyond 2020, it is important to draw some plausible scenarios, making assumptions on the evolution of the current regulatory framework. European policy on climate change and emission reductions in the power sector, the transport sector and the energy-intensive industries sector could have the largest impact on the demand for green hydrogen (e.g. lowcarbon mobility, refineries, ammonia production, injection into the natural gas grid). The propose policy scenario is presented in the following chapter. Once the policy context is defined, we are able to assess the impact of policies currently and in the future, as presented in chapters 2.2 and Long-term Policy context The EU is committed to reduce emissions by 80-95% below 1990 levels by The largest emissions cuts will come from the power sector, with almost a full decarbonisation and where renewable electricity could penetrate between 60% and 95%, depending on the scenarios from the European Commission 5. The Commission analysis 6 also shows that while deeper cuts can be achieved in other sectors of the economy, a reduction of at least 60% of GHGs by 2050 with respect to is required from the transport sector, with an estimated electrification 5 Energy Roadmap 2050 [COM/2011/885] 6 Cf. Commission Communication A Roadmap for moving to a competitive low carbon economy in 2050, COM (2011) This would correspond to emissions cuts of around 70% below 2008 levels. 14

15 of road transport of about 65%. By 2030, the goal for transport will be to reduce GHG emissions to around 20% below their 2008 level, in order to be in line with the long-term projections. Finally, energy intensive industries are meant to reduce emission by about 80% by 2050, with the Emission Trading Scheme as the main existing tool to make the transformation happen. 100% 100% 80% Power Sector Current policy 80% 60% Residential & Tertiary 60% Industry 40% 40% Transport 20% 20% Non CO 2 Agriculture 0% Non CO 2 Other Sectors 0% Figure 2: European Roadmap towards a low-carbon Economy Source: European Commission Policy landscape by 2030 The 2030 Climate and Energy framework agreed in October 2014 by the European Union includes a proposal for a 2030 Renewable energy target of 27% of final energy demand. The policy package, however, does not propose yet any specific target for transport. In the case there was not transport target, the renewables target would be reached primarily in the power sector (with an approximate penetration of 45% renewable share), through the deployment of wind power, solar power and biomass combustion since these technologies are already competitive or close to competitiveness (requiring much less public financial support). Nonetheless, the European Commission is currently revising its 2011 White Paper on Transport, and this could lead to new discussions and proposals for the 2030 policy package. As for the Fuel Quality Directive, its role is unclear. The 2030 Climate and Energy policy package does not contemplate the renewal and continuation of the FQD, however, it does not exclude its continuation either. Finally, the ETS is expected to lead to emission cuts in the power and energy intensive industries of 40%. A number of sectors that are considered to be exposed to carbon leakage, are included in the so call carbon leakage list 8, thus they do not need to comply with the 8 Second carbon leakage list (2014/746/EU) 15

16 targets so far. The current list covers the period and includes refineries, aluminium production, among others. The list is renewed every five years. As it is explained throughout this document, a number of initiatives are already in place (Fuel quality directive, renewables transport target, alternative fuel infrastructure directive, etc.). A rather concrete strategy is foreseen until 2030 especially in the power sector. However, the European Union has not yet indicated a clear strategy to tackle decarbonisation of the transport sector beyond 2020 and how the ETS will evolve beyond 2020 is rather uncertain at this moment. The European Commission has recently launched a public consultation 9 on the White paper on transport 2011, to review its assumptions and help drive the policy debate towards For the purpose of this exercise, we believe it is important to take a number of assumptions, in line with the long-term European policy goals, in order to assess the impact that different regulatory and market drivers could have in the future demand of green hydrogen. The following are some indicative assumptions for a CO2 policy-driven scenario: CertifHy s 2030 Policy Driven Scenario (developed for CertifHy) Power sector Renewable Energy Directive Transport Renewable Energy Directive Fuel Directive CO2 regulation Quality cars - The Renewables energy directive is continued after The EU-wide binding target of at least 27% renewable share is reached by 2030 with as RES penetration of about 45% in the electricity sector. - National initiatives would lead to at least 20% emission cuts in transport by 2030 (in line with the European Commission 2011 White paper on transport 10 ). This may be supported by a renewable target specific for the transport sector. - Fuel quality directive: it continues after 2020.It sets a target of about 10-12% reduction in the GHG intensity of fuels traded in the EU by 2030 compared to 2010 baseline. - The Fuel quality directive allows fuel suppliers to reduce emissions by improving their specific refining process (so the use of an standard emissions benchmark is no longer valid even before 2020) - It continues after There is an indicative target of about 70 g CO2/km for 2025 that will continue to decrease overtime unlocking the potential of electric vehicles and FCV. Alternative fuels infrastructure - Member State overachieve the existing indicative targets for infrastructure deployment of hydrogen refuelling stations Energy-intensive industries ETS - The ETS is strengthened in a number of ways (deeper annual reduction cap, cancellation of back loaded emission certificates, reduced list of carbon leakage where refineries and other sectors would not be included after 2020) 9 Mid-term review of the 2011 White Paper on transport (March 2015),

17 Table 1: 2030 policy driven scenario developed in the context of CertifHy If Europe is to remain on track of its commitment for CO2 emission savings in the long term, we can only expect that the European Union will continue the current regulatory framework as shown in table 1 and even propose new and innovative measures that will lead to the desired emissions reduction. In that context, we expect European future CO2 savings policy to be the main driver for the use of green hydrogen in fuel cell vehicles within the transport sector, for the use of power to gas applications, in order to cope with large penetration of intermittent renewable energy, and for the decarbonisation of energy-intensive industries such as refineries. Figure 3: Outlook of green hydrogen markets overtime It is very important to note that without a continuation of the current regulatory framework (renewable policies and target, fuels decarbonisation objectives, regulation and financial incentives for new vehicles),, the role of hydrogen in the mobility and the power to gas is not at all clear, at least not before Thus, it is imperative that policy makers at European and national level set an ambition set of policies to drive CO2 emission reduction and increase of renewable energy, thus having an impact on market demand for hydrogen. In a parallel effort industry needs to gear up efforts toward cost reduction of the technology. 2.2 Detailed assessment of the regulatory drivers This section describes the main regulatory drivers for the use of green hydrogen. It present the current regulation and its potential impact and provides some insight on how the 17

18 regulations and future policies could evolve in the future, backing up the assumption for the scenario presented in section Renewable Energy directive, Transport target 10% renewable energy share of transport fuel consumption by 2020 (Directive 2009/28/EC). 7% of the target is already or will be achieved through the use of food-based biofuels. The remaining market will be left for advance biofuels, as well as for renewables through electrification and the use of renewable-based hydrogen in FCV. The potential market until 2020 is about 10Mtoe 11 of renewable energy. It is not clear how hydrogen contribution to mobility would be accounted towards target, as there is not, at the moment, any specific regulation that tracks the origin of hydrogen, to proof it comes from renewable energy sources. Based on literature review and consultation with industry, we estimate that most of this market share will be fulfilled by the use of advance biofuels (which are incentivized by the use of double counting methodologies to ease target implementation). Some other parts of the target would be fulfilled with electric vehicles (although it is also unclear how much renewable sources would be allocated to this electricity used). And finally, and almost negligible share could be reached by the use of hydrogen in FCV. A report from the Joint Research Centre of the European Commission 12 does not foresee hydrogen to play any role (expected use is at 0.0Mtoe) in the implementation of the 2020 renewable energy target. If hydrogen was to contribute to this target, the contribution of hydrogen to this amount seems almost negligible, at least for 2020, as it would be most likely below 0.1Mtoe. Even if small as compared to other technologies, this 0.1Mtoe 13 could lead to demand of about 35,000 tons of hydrogen a year by This contribution could be made feasible through policy support, such as multiple counting, in order to reduce the competitiveness disadvantage of this technology with respect to more established ones. The Renewable Energy Directive (RED) beyond 2020 As for beyond 2020, the 2030 Climate and Energy framework agreed in October 2014 by the European Union includes a proposal for a 2030 Renewable energy target of 27% of final energy demand. The policy package, however, does not propose yet any specific target for transport. 11 3% of EU s transport final energy demand by 2020, which is estimated at 360Mtoe in the report Energy, transport and GHG Emission trend until 2050, Reference Scenario, European Commission EU renewable energy targets in 2020: Revised analysis of scenarios for transport fuels, JRC European Commission. A table overview is added in Annex Mtoe represent approximately 350,000 tons of hydrogen 18

19 A transport specific target could have a direct effect on the uptake of green hydrogen demand for transport. The continuation of the Renewable Energy Directive even without a transport specific target could have an important indirect effect through the increased penetration of variable renewable electricity sources in the power sector. As renewable sources reach significant penetration levels on the grid, the need to deal with larger differences between supply and demand increases, as does the need to store that energy. The need to store electricity, to latter inject it back into the grid (power to power), or transform it into another energy carrier such as hydrogen (power to gas) for uses in other sectors (e.g. as a feedstock in industry, heating or transport) may lead to a significant market update of hydrogen production through electrolysis. This is due to the fact that hydrogen is potentially a good solution for long-term and seasonal storage, if costs decrease materialise. This point is further elaborated in sections Need for flexibility and energy storage and Hydrogen Injection in to the Natural Gas Grid (Power to Gas Fuel Quality Directive (FQD) target The FQD (Directive 2009/30/EC) sets environmental requirements for gasoline and diesel fuels in order to reduce their GHG intensity. These requirements consist of technical specifications for fuel quality parameters and binding targets to reduce the fuels life cycle GHG emissions. By 2020, based on a 2010 baseline, the FQD requires: a 6% reduction in the GHG intensity of fuels traded in the EU by 2020 compared to 2010 baseline (2% indicative reduction by 2014 and 4% by 2017); The FQD places the responsibility for reducing life cycle GHG emissions of fuels traded in the EU on fuel suppliers. The FQD Article 7a target takes into account the impact of renewable fuels on life cycle GHG emission savings of fuels supplied for road vehicles, non-road mobile machinery (including rail and inland marine), agricultural and forestry tractors, and recreational craft. It is intended to leave to the fuel supplier the choice of the most cost effective way to achieve the target: utilisation of biofuels, upstream emission reduction, or the use of alternative fuels. After 5 years of entering into forced, as part of the set of measures agreed in the EU climate and energy package 2009, the FQD is the only law from the package that has not yet been fully implemented. Against that context the European Commission published in October 2014 a revised proposal to implement Article 7a. Contrary to the previous version (EC s 2011 proposal), every fuel supplier gets the same EU default value per product (carbon intensity of fuels- figures reflected in the next table), regardless of feedstock used to make the product. This average is the average 2010 carbon intensity for fossil petrol and diesel. The reporting of one single EU carbon intensity value does not discourage the use of high carbon oils in the meantime (heavily criticized by environmental groups); and subsequently does not encourage fuel suppliers to make use of green hydrogen to reduce their specific carbon intensity footprint. 19

20 Each fuel supplier has to achieve the 6% reduction target but all suppliers will report annually the same EU-wide carbon intensity value for fossil petrol and diesel (95% of current fuel sales), whether they use green hydrogen in their refining process or whether their products originate from high-carbon sources like tar sands or not. The role of green hydrogen in the FQD Under the current directive, hydrogen is incentivized to be used for reducing the overall GHG footprint of the fuel used, along with the use of biofuels and electricity. The use of natural gas and other fuels is also contemplated, as shown in the table below: Vehicle Fuel or energy type place on the technology market Internal combustio n engine In a spark ignition engine In a fuel cell Raw material, source and process Petrol (aver.) Conventional crude, shale, others 93.3 Diesel or gasoil (aver.) Conventional crude, shale, others 95.1 Petrol, diesel or gasoil Waste plastic from fossil fuels 86 Bioethanol (high GHG) Wheat 70 Bioethanol (low GHG) Sugar cane 24 Biodiesel (high GHG) Palm oil 68 Biodiesel (low GHG) Sunflower 32 Compressed Gas Natural gas, EU mix 69.3 Liquefied Gas Natural gas, EU mix 74.5 Compressed syntheric methane sabatier reaction of H2 from nonbiological RES electrolysis 3.3 Liquefied Petroleum Gas Any 73.6 biogas as compressed natural gas Municipal organic waste 23 biogas as compressed natural gas Dry manure 15 Compressed Hydrogen Steam methane reforming Electrolysis (non-biological RES) 9.1 Coal Coal with CCS 57.7 Life cycle unit GHG intensity (gco2eq/mj) Table 2. Emissions factors for different fuels under the Fuel Quality Directive and Renewable Energies Sources directive. Source: Hinicio, based on the values presented in both Directives Hydrogen, if originated from non-biological renewable energy source, through electrolysis, presents a very low emissions footprint value (9.1gCO2eq/MJ), which could potentially lead fuel suppliers to choose this route instead of blending biofuels (which shows significantly higher values). Even taking into account the power train factor, in which the fuel will be burned (in the case of hydrogen, a fuel cell), the overall emission intensity for Hydrogen present a value of 22,75 (9.1/0.4) which is lower than for most existing first generation biofuels. Figure 4: Rules for accounting in the Fuels Quality Directive 20

21 Hence, hydrogen could prove much more efficient at reducing carbon intensity of fuels. Obviously, this comes with an associated cost which strongly depends on the infrastructure needed to supply and deliver the fuel to the final consumer. In the other hand, refineries may opt to purchase the GoO of green hydrogen, thus reducing the carbon content of their fuels without incurring on infrastructure investments. Nonetheless, large investments have been already done on biofuels infrastructure in Europe, and biofuels will be the main solutions that fuel suppliers will use to comply with the 6% reduction target (Article 7a) until 2020, at least partially. Other fuels will also play its role, largely depending on how the legislation evolve 14. The revision of Article 7a and the scope of the 6% (allow accountability of emission reductions within the refinery process instead of applying average standard values to all suppliers in Europe) could be the trigger for green hydrogen demand in this sector. The future of the FQD beyond 2020 Beyond 2020, the role of the FQD is unclear. The European Union agreed in a 2030 Climate and Energy policy package back in October The package does not contemplate the renewal and continuation of the FQD, however, it does not exclude its continuation either. A recently published report from E4Tech 15 looks into different transport decarbonisation scenarios by Only when considering a continuation of the FQD with a target of 10% GHG emission saving by 2030, the role of hydrogen (and electrical vehicles) starts to increase, representing about 4% of the total road-vehicle mileage by Most of the target would be achieved through the deployment of second generation biofuels, and reduction in Venting & Flaring activities. The report concludes that liquid fuels will continue to play a role in road transport for decades due to infrastructure transition times and possible limits on the extent of liquid fuel displacement (electric vehicles cannot easily displace heavy duty vehicles) Emissions Performance Standard for passenger cars Vehicle CO2 targets: 95 gco2 /km for new vehicle sales in 2021 compared to 130 gco2 /km in 2015 (Regulation (EU) 333/2014). The EU first introduced mandatory CO2 standards for new passengers in The objective of the regulation is to set emission performance standards for new passenger cars that will yield to a CO2 emission reduction from light duty vehicles. This regulation (443/2009) set up a target of 130 gco2/km for the fleet average of all manufacturers combined by After 14 The FQD is being discussed by European Parliament and Council at the time of writing this report (April 2015) 15 EU 2030 Road Transport Decarbonisation Scenario Analysis, E4Tech,

22 three years, the European Parliament and the European voted for the new standards in 2021 (EU 333/ ), which they agreed a target value of 95gCO2/km. The situation today shows that there has been improvements since the regulation has been issued, firstly new cars dropped from about 160g/km in 2006 to 132g/km in 2012, representing a 17% of reduction. The annual reduction rate is about twice what it was before introduction of mandatory emission targets. Thus, if the pace continues it is expected in 2015 that the target of 130g/km will be reached about 2 years in advanced. This indicates that the EU-wide mandatory CO2 regulation, which was agreed on in 2008, is a key driver behind this development and is proving effective at increasing vehicle efficiency. Besides all the benefits that the regulation yields to, there is no clear position for green hydrogen. Current technology (ICE) will be sufficient to achieve the targets, by improving and making more efficient cars. Electric cars and hydrogen is not envisaged for assisting the industry to comply with this policy target, unless the target are made much more stringent. CO2 car regulation beyond 2020 The European Parliament has already introduced an indicative range of g/km for a 2025 target. The European Commission is asked to carry out a review and impact assessment with respect to this 2025 target range and, if duly justified, a lower target as well. The review is to be carried out by 1 January Low Emissions Zones As part of the effort to improve air quality in cities (see annex 2 for a more detailed description), the European Commission is encouraging the establishment of Low Emission Zones (LEZs) as a powerful tool to improve air quality. The Low Emission Zones Program (LEZ) has become a tool to increase the penetration of alternative fuel vehicles and it is the most effective measure that cities can take to reduce air pollution problems in their area. LEZ are areas or roads where the most polluting vehicles are banned or in some cases charged if they overpass the set level in the zone. The program works to reduce emissions of fine particles; NOx and indirectly ozone, which are the three pollutants of particular concern in Europe. Many large cities in Europe are enrolled to this program 17 and more cities are trying to implement this ambitious program, improving the air quality in cities. As a first measure, cities are introducing infrastructure for electrical vehicles. An increasing number of charging points are being made available. Electrical vehicles are generally well adapted for private users within cities are distances are relatively short and in many cases there are individual users (commuting to work). However, most of the emissions associated to road transport within urban areas come from commercial activities: good deliveries (incl. post), public transport such as buses, maintenance and services vans, etc. For this particular market segment, FCV See interactive map at 22

23 are gaining attention as driving range (up to km) and fast recharging is crucial for keeping optimizing the fleets operation and profitability. It is worth noting that while this driver could lead to the uptake of FCV, aiming to reduce tank to wheel emissions, it does not necessary mean an incentive to reduce well to wheel (covering the full cycle). Therefore, demand for hydrogen would be increased, but not necessarily demand for green hydrogen Alternative Fuels Infrastructure Directive The EU Directive on Deployment of alternative fuels Infrastructure (COM 2013/18) was adopted on September EU Member States have until end of 2016 to prepare and submit their national policy strategies. Such national strategies will have to present a set of infrastructure targets, such as number of publicly accessible refuelling stations for different fuels and ports. The infrastructure targets will be set up for the period 2020 to 2030, depending on the type of fuel. Although the targets are finally not compulsory, contrary to the European Commission s proposal, the preparation of long-term national strategies for alternative fuels will bring together industry, NGOs, public authorities and policy experts to debate a very crucial debate, and it is expected that this will have an impact on public opinion regarding technology choices and pathways to a low-carbon future. Besides the implementation of national strategies, the directive also foresees the development and use of common technical specifications for recharging and refuelling stations, which will allow a vehicle to refuel anywhere in Europe and lead to significant cost reductions and market update of niche sectors, such as hydrogen for transport. The new directive covers electricity, compressed and liquefied natural gas and hydrogen for both road and maritime transport. In the case of hydrogen, as well as for most alternative fuels no specific figures have been assigned at EU level nor national level, thus the impact of this directive, in its current estate is minimal. We cannot discard however, that in the future this directive will be revised, and more concrete targets will be set for hydrogen refuelling stations. It is worth noting that while this driver could lead to the uptake of FCV, aiming to reduce tank to wheel emissions, it does not necessary mean an incentive to reduce well to wheel (covering the full cycle). Therefore, demand for hydrogen would be increased, but not necessarily demand for green hydrogen. 23

24 2.3 Market and economic drivers Need for flexibility and energy storage The increasing penetration of variable renewable energy source in the electricity mix increases the challenge for the system operator to match supply and demand. While demand is well understood and follows predictable yearly, weekly and daily variations, large amount of wind and solar power resources increases variability and unpredictability in the supply side, thus calling for flexibility. Several solutions exist to easy this challenge, such as demand side management, flexible supply (e.g. hydro power, gas fired power plants), upgraded electricity infrastructure, better interconnections and couple electricity markets. Weather forecast tools and other technology advancements, as well as improved regulatory schemes will also help to alleviate for sudden changes on the supply side. All these solutions are essential for the further penetration of variable renewable energy but may not be sufficient to cope with large penetration rates. Therefore, energy storage needs to be developed along with the increase of solar and wind power solutions. It is important to differentiate the different system needs in order to identify the most appropriate technological solution. Hydrogen-based solutions are most suitable for long-term season storage, competing with technologies such as hydro-pump storage and CAES. A more detailed description of energy storage solutions is given in Annex 3. It is difficult to assess what will be the future system needs in terms of energy storage in order to address variability of energy supply. Different studies have tried to forecast the amount of electricity surplus under different renewable energy penetration scenarios. Most of these exercises are done at the national level (mostly in Germany) and thus, are likely to wrongly assess future development in adjacent markets that could be net importers of energy surplus. For instance, a recent study from Mc Kinsey concludes that by 2030, 4TWh 18 of renewable electricity will need to be stored, increasing to up to 173TWh by Fraunhofer IWES estimates that the potential lies somewhere between 20 and 100TWh by , heavily depending on transmission and distribution infrastructure developments. The German National Innovation Programme for Hydrogen and Fuel Cell Technology points to up to 20TWh 20 potential in Germany as from 2020, representing the disparity between studies Hydrogen Injection in to the Natural Gas Grid (Power to Gas) Hydrogen cannot only be stored, it can be made available to a wide range of possible applications, such as feeding into the gas network, as a fuel for vehicles, or as raw material for industrial processes, or chemical products. Over the medium term new business models 18 Commercialisation of Energy Storage In Europe, McKinsey, commissioned by Fuel Cell and Hydrogen Joint Undertaking, March Interaction of Energy Storage and Grid Expansion, M.Sc. Mareike Jentsch, IRES National Innovation Programme for Hydrogen and Fuel Cell Technology (NIP)- Germany,

25 will be derived with substantial potential for regional added value, smart specialisation and jobs creation. Likewise other storage technologies, electricity can be stored as hydrogen and be converted back into electricity using a fuel cell or being burned in a gas turbine. In this case, hydrogen storage competes with other long-term storage solutions and its value lies in the ability of store electricity in bulk. Its value is however limited due to low round-trip conversion efficiency. Chemical storage (as hydrogen) provides other alternative options for storage. These include blending hydrogen with natural gas (injecting it in the natural gas grid), converting it to synthetic methane (methanation), converting it to liquid fuel, or using simply using hydrogen as a feedstock in the chemical and petrochemical industries. Injection of hydrogen to the natural gas grid (directly or through conversion of hydrogen to methane) presents a number of advantages in comparison to other storage solutions: - Location shifting: energy can be stored and reallocated through the use of the natural gas infrastructure, - Application shifting: the hydrogen does not need to be reconverted to electricity but can be used for heating applications or any other application of natural gas (e.g. Compresses natural gas vehicles) - High energy storage capacity: the capacity of energy storage is potentially extremely high (even with strict condition for limited amounts of blending, such as 5vol%) The most critical factors to define the limits of H2 blending are the sensitivity of end-use appliances as well as the materials use for storing and transporting the gas, which react negatively to high concentrations of hydrogen (hydrogen is very light and thus easy to leak). Gas appliances such as burners, boilers, gas turbines and combustion engines are set to operate at a specific range of feed-gas. Increasing hydrogen concentration in the natural gas distribution change the fluctuation properties of the natural gas. This effects has generally a much higher impact in the gas quality than the hydrogen concentration per se. And thus will set very strict blending limits in order to avoid the modification of installed equipment and current technology. For instance, gas turbines are optimize to operate with a 3vol% of hydrogen; compressed natural gas vehicles cannot cope with more than a 2vol% of hydrogen mix. This is why most European countries have introduce strict regulation for the injection of hydrogen into the natural gas grid. Limits vary widely from 0% in countries like UK up to 5% and 6% in Germany and France respectively, with even stricter conditions depending on the specific grid topology and local case. In many cases, blending will occur in the distribution gas grid, closer to the appliances and thus it will be relatively easy to identify the critical applications in order to adjust the injection limits. In Falkenhagen, Germany, where EON is injecting hydrogen into the gas grid as part of a demonstration project, the gas grid operator has set the limit to 2vol%, as there is a compressed natural gas refuelling station in the vicinity. 25

26 In any case, it is commonly agreed that natural gas infrastructure could theoretically bear without major problems 5vol% blending at the national-grid level 21 (transportation pipeline at high pressure), and up to 15-25vol% in the distribution or regional grids (when these are not connected to sensitive appliances, such as a compressed natural gas refuelling station or gas turbines). A quantitative analysis of the market potential for hydrogen injection into the natural gas grid has been developed in D1.2. Overview of the market segmentation for hydrogen across potential customer groups, based on key application areas 22. It assumes that 1vol% of natural gas summer demand in Europe could be reached by 2025, and it could increase up to 2vol% by The Emission Trading Scheme (ETS) and the price on CO2 emissions Altogether the EU ETS covers around 45% of total greenhouse gas emissions from the 28 EU countries. The system covers emissions of carbon dioxide (CO2) from power plants, a wide range of energy-intensive industry sectors (including oil refineries, steel works and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals) and commercial airlines. Nitrous oxide emissions from the production of certain acids and emissions of perfluorocarbons from aluminium production are also included. Refineries, as well as aluminium producer are currently under the carbon leakage list ( ) and therefore are not affected by carbon pricing policy. While the ETS is a market instrument, it is clearly dominated by regulatory intervention, which help setting the specific emission cap, reduction trajectories and exemption, having a dominating impact on the final carbon price (this driver could also be represented on the policy drivers chapter). The European Commission is set to undertake a set of measures 23 to strengthen the ETS, which is currently facing a great challenge in the form of a growing surplus of allowances, largely because of the economic crisis which has depressed emissions more than anticipated. As set out in the 2030 framework for climate and energy policy, the ETS will support the achievement of the 40% emission reduction target by 2030, as compared to 1990 levels. In all the sectors included in the ETS, the emission linked to the production of hydrogen need to be covered by CO2 certificates. Therefore, the added value from green hydrogen is easy to 21 Except in areas close to underground storage of gas and pressure boosting stations 22 CertifHy project, April 2015, 23 The Commission has taken the initiative to postpone (or 'back-load') the auctioning of some allowances as an immediate first step. Additionally, the Commission has put forward a legislative proposal to establish a market stability reserve at the beginning of the next trading period in

27 quantify with the saving on CO2 certificates. By producing carbon-neutral hydrogen, these certificates can be saved. With a price for the certificates of approx. 7 /tonco2, the added value is however relatively small. As shown in Figure 5 the effect is currently under 0.10 /kg; following the CO2 price expectation, this will not change drastically until Figure 5: Added value of carbon neutral hydrogen over CO2 certificate price. Source: Christoph Stiller, Linde AG With this in mind, we can conclude that the ETS will not be an important driver for the substitution of hydrogen with green hydrogen production as for to save CO2 certificates, at least, until CO2 prices do not reach very high levels and/or water electrolysis becomes in closer competition with conventional hydrogen production technology (Steam Methane Reforming) Consumers choice - Clean transportation Further to regulations, obligations on car manufactures, requirements on fuel suppliers and other policy initiatives, consumers wiliness to drive CO2 free vehicles in in the rise. The market uptake of electrical vehicles both in Europe and the USA shows that there is an increases part of the population that is willing to pay a premium in order to drive more sustainable vehicles. Both electric vehicles and fuel cell vehicles will need, at the beginning, to build on the current infrastructure (electricity and hydrogen are not per se green) in order to reach mass deployment and economies of scales. As the market for this vehicles and alternative fuel growth and technology price becomes more affordable, we foresee public support (tax breaks, direct subsidy on cars purchase, etc.) to be limited to those cases where CO2 emissions savings are ensured by the technology. Consumers will demand reassurance (throughout a labelling system, certificates, etc.) that the fuel they use is renewable based and/or from low-carbon sources. We expect some demand of green hydrogen in vehicles to be driven by consumers choice. This demand is difficult to assess and will be linked closely to the availability of products in 27

28 the market (e.g. through emission in cars regulation), transparent information toward consumers and potential public support to afford next technology Corporate Social responsibility, green image While difficult to quantify, we recognize that corporate social responsibility and greening of the company s image could lead to a market update of green hydrogen in the quest to reduce the companies carbon footprint, and to be able to label the possible product as renewable sources-originated. More and more companies, including large energy-intensive industry are pursuing this route. 2.4 Summary and conclusions on drivers Figure 6 summaries the analysis of drivers, providing an indication of the impact of each driver in each of the three segments analysed. The qualitative evaluation of the impact is presented for the 3 different timeframes. For each driver, it is indicated whether demand is simply for hydrogen, or if it is specific for low-carbon and/or renewable based hydrogen. The analysis presented builds on the assumptions given in the policy driven scenario (see section 2.1). 28

29 Overview of regulatory, market and economic drivers for green hydrogen under a CO2 policy driven scenario Drivers for hydrogen/green hydrogen in the main 3 markets analysed (policy driven scenario) Driver scope Refineries Amonia (other chemicals) Industry metal processing Food, Glass production, Semiconducto rs, Aerospace, etc. Mobility and transport H2 use infcvs Power to gas (injection into the natural gas grid) Energy storage and system transformation Fuel quality directive Regulatory drivers RED (including. Renewables Transport target) Emissions Performance standards for passenger cars Air quality (Low Emissions Zones) Alternative fuel infrastructure directive Mix driverregulation through Market & Economic drivers ETS (Cap, exemptions, CO2 price) Oversupply of variable renewable energy/ Energy storage market Consumers choiceclean transportation CSR- Green marketing/ Company image cost competitive vs. SMR of natural gas (reference technology) Legend: Timeframe Short term: 2015 Medium Term: Long term: >2030 Relevance/impact on green H2 demand No impact Low/limited demand potential high demand potential Type of hydrogen demand for RES based hydrogen for low-carbon hydrogen for hydrogen Figure 6: Overview of green hydrogen drivers in a policy driven scenario 29

30 3 A market outlook for green hydrogen Based on the future demand for hydrogen in the sectors analysed and drivers described in the section 2, we present here an estimation of green hydrogen demand per market segment, always considering the policy driven context. 3.1 Green hydrogen demand in Industry Refineries In refineries the green hydrogen demand may be driven by: 1. The substitution of conventional hydrogen by renewables-based hydrogen in the refining process in order to achieve the 10% transport target in the RED (competing with biofuels and renewables-based electricity). 2. The substitution of conventional hydrogen by low-carbon hydrogen in order to reduce emissions in the refining process (upgrading and desulphuration of oil crudes), helping to comply with the 6% target of the FQD. This demand does not really exist at the moment as the FQD does not incentive the reduction of emissions in the refining process itself (standard values for conventional fuels) The substitution of conventional hydrogen by low-carbon hydrogen to profit from the CO2 market (ETS). This is a mid to long-term drivers as currently, the ETS excludes refineries from the need to purchase CO2 certificates (refineries are part of carbon leakage list, at least until 2019). To assess whether refineries would decide to substitute conventional hydrogen with low-carbon and/or renewable hydrogen in order to comply with regulation, we would need to compare this option with other options from an economic point of view (e.g. reducing emissions in venting and flaring, using less carbon intensive crude oils, etc.). Hydrogen use in refineries will represents about to 2% of all the energy demand in road transport 25 in 2020, equally to about 3.6 Mtoe. This represent a maximum theoretical market for green hydrogen in refineries (substituting conventional hydrogen) of 1,260,000 tons. Under our policy driven scenario, we could consider a very small penetration in the early years driven by the Renewable Energy Directive target on transport (pushed by multiple counting 26 ) and the FQD: 0.03% of all energy in transport; in other words, a substitution of approximately 3% of conventional hydrogen. This penetration could 24 This is currently under discussion and being studied as a potential solution 25 EU s transport final energy demand by 2020, which is estimated at 360Mtoe in the report Energy, transport and GHG Emission trend until 2050, Reference Scenario, European Commission The RED allows for certain renewable fuels to count multiple towards the national renewable target (e.g. advance biofuels, renewable electricity for transport, hydrogen for Fuel cell vehicles) 30

31 increase further to a substitution rate of about 25% beyond 2030 (meaning that 25% of all hydrogen use in refineries would come from renewables or low-carbon sources; if not physically, through the purchase of GoOs) Chemical industry (including Ammonia producers) Demand for green hydrogen in the chemical industry may be driven mainly by two elements: 1. CO2 carbon policy (ETS), once the carbon prices reaches significant levels and once industries have exploited other more competitive pathways of reducing their carbon footprint. However, this is unlikely to happen any time before On the other hand, increasing environmental pressure in Europe could challenge industry players to come up with more sustainable agribusiness food processing alternatives (reducing the footprint of fertilizers for crops), either creating opportunities for green hydrogen, or displacing this industry outside the European market. 3. Corporate Social Responsibility and image Other industry (glass manufactures, semiconductor industry, food industry) Demand for green hydrogen in these sectors will be driven mainly by two elements: 1. Hydrogen purity. Some of the sectors in this group tend to choose hydrogen from electrolysis as it can supply higher purity. This is the case, for instance for polysilicon producers. As electricity becomes greener (implementation 27 of Renewable targets by 2030), so does the demand for green hydrogen, even if indirectly. 2. Corporate Social Responsibility and image. In some industries, such as the food industry, the use of green labels is on the rise. For instance, margarine production needs hydrogen for the hydrogenation of fats. It is expected that this companies will pay the premium needed for ensuring the green origin of the hydrogen used. Similar argumentation could be used in the glass industry, as products become under bigger scrutiny in terms of their efficiency and sustainable origin. As a simple assumption, we could expect that by 2025, 30% of the hydrogen use in this sector is green hydrogen, increase to 40% beyond Figure 7 summaries the expected penetration of green hydrogen in the main hydrogen industrial markets. 27 by 2030 we expect electricity to be about 45% from renewable energy sources, based on the 27% share of renewable energy target in final energy demand at EU level 31

32 Figure 7: Evolution of hydrogen and green hydrogen demand in the industry sector 3.2 Green hydrogen demand in the power to gas sector The main driver for power to gas applications will be the availability of low-price electricity in the grid part of the time due to oversupply of variable renewable energy in the electricity system. As explain in section and 2.2.2, hydrogen producers (based on electrolysis) may decide to inject hydrogen into the natural gas grid when there is not enough demand from other higher value users (H2 for mobility or feedstock to the industry), but when it is still economically interesting due to low electricity prices. In addition, public support in the form of feed-in-tariffs for green hydrogen (such as in the case of biogas) could develop an important incentive and help creating a real market for power to gas. An additional driver for this segment could be the demand of green hydrogen GoOs. We could expect that industries, either forced by regulation or due to marketing reasons (see previous chapter), will decide to green their process by shifting from conventional hydrogen to green hydrogen. Instead of investing in new technology and onsite generation, they may decide to continue their operation and simply purchase green hydrogen certificate/goo in the market, at a much lower cost. 32

33 Figure 8: Evolution of hydrogen and green hydrogen demand in the power to gas sector. Source: Hinicio analysis In order to calculate the potential market for power to gas, we have considered that a vol. 1% blending of hydrogen of the total natural gas demand could be done in 2025 without any technical constraint. This percentage increase up to 2% in We consider that about 80% of the total hydrogen injected to the natural gas grid is from renewables based electricity. This assumption shows that while hydrogen may be produced when electricity prices are zero or very low (due to large availability of non dispatchable renewable, low demand, etc.), the energy mix might still not be fully green (as electricity from dispachable sources will still be used). 3.3 Green hydrogen demand in the H2 mobility sector Demand of green hydrogen in the mobility sector will be driven by a combination of regulation (CO2 emissions reduction in cars, decarbonisation of fuels, emission limits in urban areas), and increasing consumer willingness to shift to a more sustainable technology, as the infrastructure deploys. A number of studies have analysed the penetration of fuel cell vehicles and hydrogen supply systems in the European road transport network 29. All scenarios assumed strong policy measures on emission reductions. Based on the most recent hydrogen penetration roadmaps at national level (H2 mobility initiatives), Hinicio has extrapolated some of the long-term penetration assumptions at the European level. The different H2 demand scenarios are presented in figure Overview of the market segmentation for hydrogen across potential customer groups, based on key application areas CertifHy project, April 2015, 29 Hyways, McKinsey, H2 mobility scenarios 33

34 Figure 9: Comparative analysis of existing roadmaps for FCEV and H2 demand for transport. Source: Hinicio analysis based on national H2 mobility roadmaps, Hyways project, A portfolio of power-trains for Europe (McKinsey) Hinicio s proposed scenario presents a more modest development, reflecting the latest energy prices outlook (with important oil prices decreases), a delay on the penetration of fuel cell vehicles and the slower deployment of the infrastructure. It reflects however the ambitious deployment plans from the various H2 mobility initiatives presented in a small number of countries and assumes that other key markets (Benelux countries, Italy, Spain Austria) will follow within the next decade. In order to assess which share of the expected hydrogen consumed will come from green sources we have analysed the projections for hydrogen production in the various national H2 mobility roadmaps. The penetration of electrolysers will progressively increase, reaching some 50-60% of total hydrogen production (in the mobility sector) by We expect also an uptake of hydrogen from biomass gasification and biogas reforming (although there is no clear market expectations in the reviewed literature). Other technologies such as hydrogenby-product or SMR with CCS could also provide low-carbon hydrogen 30. We consider that for the period beyond 2025, all electricity used for H2 mobility will be either low emissions and/or renewable origin. For this analysis, we have considered that the rest of the hydrogen (25% in 2030) will still come from conventional sources. 30 The specific selection of valid technologies to produce a renewables-based and/or low-carbon Hydrogen GoO is the objective of WP2 of CertifHY 34

35 Figure 10: Evolution of hydrogen and green hydrogen demand in the transport sector. Source: Hinicio analysis 3.4 Overall demand for green hydrogen When assessing the overall market of hydrogen, its future evolution and the potential penetration of green hydrogen (figures 11 and 12), we can make the following observations: - Green hydrogen could represent about 17% of all hydrogen demand by With a clear increasing tendency towards the end, - Most of the green hydrogen demand will come from new hydrogen markets, namely H2 mobility and power to gas, - There is a very small substitution rate of conventional hydrogen in the industry sector (<9%) 31. However, when looking into specific sectors, the situation is very diverse, with sector such as refineries, showing a potential substitution of about 25%, food industry with substitutions of 40%, or chemical industry with rates of only 2%. 31 Hinicio analysis, considering the policy driven scenario presented in section 1 of this document 35

36 Figure 11 Evolution of hydrogen and green hydrogen demand in all sectors analysed. Source: Hinicio Figure 12 Snapshot of possible green hydrogen demand by 2030, divided by market segments. Source: Hinicio 3.5 Amount of renewable or low carbon energy required to meet the estimated green hydrogen demand Although biomass is one of the renewable primary energy sources from which green hydrogen can be produced, it is expected that renewable electricity will be the main primary energy used for this purpose in the future. Indeed, the biomass based pathway is subject to feedstock availability limits, whereas the electrolysis based pathway is the one that presents the least constraint on primary energy availability, while offering the lowest projected costs on average. 36

37 The amount of low carbon or renewable primary energy needed to meet the demand of green hydrogen estimated further above will therefore hereafter be determined assuming that all this hydrogen is produced from renewable or low carbon (e.g. nuclear) electricity by electrolysis. The 2025 estimate of green hydrogen demand, representing 3.7% of projected total hydrogen demand, amounts to 0.3 Mt/yr. The production of this quantity by electrolysis requires a total of 15.8 TWh of electricity, corresponding to an installed electrolyser capacity of 1.9 GW, assuming a consumption of 50 kwh/kgh2. Similarly, the 2030 estimate of green hydrogen demand, representing 17.3% of projected total hydrogen demand amounts to 1.7 Mt/yr, the production of which requires a total of 83 TWh of electricity, corresponding to an installed electrolyser capacity of 10 GW. These amounts of electricity are relatively small compared to the total European renewable and low carbon electricity generation. Indeed, in , renewable energy generation already amounted to 880 TWh, next to 870 TWh of nuclear electricity. Furthermore, with the share of electricity from variable renewable energy expected to grow from 10% of to 50% of total gross consumption by 2030, it is foreseen that conversion of electricity to hydrogen will play a key role for balancing the grid. 32 Eurostat latest year for which data is published 37

38 4 Conclusions Demand for renewables-based and low-carbon hydrogen is expected to grow to significant levels in the mid- to long term in a CO2 policy driven scenario If Europe is to continue its ambition policies on climate change, energy security and competitiveness of its industry, green hydrogen will play a significant role in the decarbonisation of the transport sector, through its direct use as fuel in Fuel Cell vehicles and through the decarbonisation of conventional fuels (e.g. by replacing conventional hydrogen with low-carbon hydrogen needed in refineries). To a lesser extent, it could also contribute to reduce emissions on the energy-intensive industry. Overall, we expect that about 17% of all hydrogen could be originated from renewable and/or low-carbon sources by 2030, representing a market of about 1.7 million tons of green hydrogen per year. The European industry would benefit from a GoO scheme for green hydrogen, even before 2020 As contemplated by the Fuel Quality Directive, refineries could benefit from the use of green hydrogen as feedstock to process fuels and comply with the regulation s target (6% reduction of the fuel carbon intensity). In the case refineries decide to use low-carbon hydrogen based on renewables,, refineries will need to proove the renewable origin of the hydrogen use. This may represent an important administrative burden (as there is no established GoO scheme for green hydrogen in the marketplace) as well as an economic cost (the traceability of the origin will incur significant costs for the fuel supplier). Therefore, in the absence of an EU-wide GoO for green hydrogen which can prove the renewable origin of the hydrogen, renewables-based hydrogen feedstock would possibly not be retained by refiners as a possible option to comply with the obligations of the Fuel Quality Directive. Additionally, the renewable origin of the hydrogen would allow fuel suppliers (refineries) and consequently Member States to comply with the 10% renewable energy target in the transport sector by 2020, as mandated in the Renewable Energy Directive. Separately, food processing industries and other industrial players (glass producers, ammonia producers) could benefit from the use of green hydrogen as a market strategy (green labelling) or to respond to increasing pressures in environmental regulations. There are existing examples of companies committed to become 100% renewable 33. In the case of those using hydrogen, a GoO for renewable-based hydrogen would facilitate them reaching such goals. 33 RE100, a group of global companies aiming to use 100% renewable energy. 38

39 Disconnecting the production site from the demand for green hydrogen through the use of a GoO system will be essential for an effective use of green hydrogen Tradable GoOs will allow different industrial actors to comply with regulations and accounting obligations in a much more economical way by allowing all users in all countries to purchase renewable based and low carbon H2 where it is not physically produced. In addition, this would make the green hydrogen a premium molecule tradable at a potentially higher price, thus enabling further market acceptance and buy-in. With the deployment of power-to-gas applications (e.g. injection into the natural gas grid), green hydrogen could potentially be produced at competitive cost where variable renewable energy is most abundant and the gas infrastructure is developed (e.g. North Sea), and could be cancelled at industrial sites (where the demand exist due to legislative requirements), where conventional hydrogen production would be maintained. Disconnecting the production site and the demand for green hydrogen will be essential for the success of a green hydrogen market. Ideally, a good GoO scheme should be flexible enough to serve both objectives: proof of renewable origin and of a low-emission content Premium hydrogen may be used to comply with different regulations and policies, as it has been shown. In some cases, proving the (renewable) origin of the energy to produce hydrogen will be requested (e.g. RED). In some other cases, a proof of reduced emissions would be sufficient (e.g. FQD, ETS). When regulation is not the driver, the market and final customer will decide (e.g. food processing industries and green labelling, corporate social responsibility, fuel cell vehicles users). The GoO for hydrogen should address the market and regulatory needs of different hydrogen users. Therefore, the GoO should be designed in such a way that information about its (renewable) origin and its associated GHG emissions are provided to the final customer. 39

40 5 ANNEXES 5.1 Annex 1- Revised analysis of scenarios for transport fuels, JRC European Commission Source: EU renewable energy targets in 2020: Revised analysis of scenarios for transport fuels, JRC European Commission 40

41 5.2 Air Quality and air pollution in Cities There are two main EU instruments dealing with overall air pollution. The first is the EU Ambient Air Quality Directive (revised and adopted in 2008), which sets EU air-quality standards for ground level ozone, Particulate matters (PM), nitrogen oxides, dangerous heavy metals and a number of other pollutants. The second is the National Emissions Ceilings Directive (adopted in 2001 and revised in 2013), which caps overall emissions of sulphur dioxide (SO2), nitrogen oxides (NOx), ammonia (NH3) and volatile organic compounds (VOC). In late 2013, the European Commission proposed a new Clean Air Policy Package for Europe which aims to achieve full compliance with existing air quality legislation by 2020 and further improve Europe s air quality by 2030 and thereafter. It includes: A proposal for a revised NEC Directive 34, with new national emission reduction commitments from 2020 and 2030 for the current four pollutants and two additional ones (fine particulate PM2.5 matter and methane CH4). Additional proposed actions focusing on air quality in cities, national and local actions supported by EU funds, as well as a reinforced research and innovation agenda. 5.3 Annex 3- Energy Storage solutions The most important storage capabilities are the power requirements and the desired discharging time 35 : Short-term storage is usually used by the system operator to maintain power quality through frequency and voltage control as well as to avoid the interruption of power supply (frequency response reserve). Flywheels, supercapacitors, superconducting magnetic energy storage and some chemical batteries are coming to provide storage in this market. Medium term storage (hourly and/or daily) is used to shift the load and shave daily peaks. This may help avoid grid congestion, and can also take advantage of price differentials between low and high-demand periods (price arbitrage). Chemical and flow batteries are competing for this storage application. Long-term storage is used to level the annual load (winter and summer patterns), minimizing the need for capacity reserves, as well as ensuring security of supply. The main technologies used for power-fleet optimization and large-scale balancing are pumped hydro storage (PHS) and compressed air energy storage (CAES). However, the 34 Directive of the European Parliament and of the Council on the reduction of national emissions of certain atmospheric pollutants and amending Directive 2003/35/EC (2013/0443 (COD)) 35 Hydrogen-based energy conversion. SBC Energy Institute, Schlumberger,

42 increasing among of variable of renewable are expected to increase the need for longer-time storage (seasonal) and of large quantities (TWh) for which this technologies will be limited. PHS is really mature technology but its industrial development is limited by geographical constraints. CAES still performs low conversion efficiencies (Adiabatic method, with significantly higher efficiency rates is still under development 36 ) and also presents geographical limitations. Hydrogenbased storage solutions (using fuel cells for small power requirement and combustion turbines for larger power needs) would be the only technology that can meet intermittent balancing requirements at very high penetration levels. Overview of energy storage requirements and suitable technologies: (Source: Hydrogen-based energy conversion, SBC Energy Institute, Schlumberger, 2014) 36 Energy Storage Association 42