Potential of the energy transition for investors in Germany – Noerr Insight No 6: Hydrogen

In our briefing German energy transition: Potential for investors we gave a detailed overview of the opportunities and risks of the energy transition in Germany for domestic and foreign investors. After looking in detail at the opportunities and challenges in the offshore wind, onshore wind, photovoltaics, renewable energy storage and electricity grids sectors in our series, we take a closer look at hydrogen in part 6.

1. Status quo and challenges

As part of the energy transition, the goal is to gradually replace all fossil fuels with renewable energy sources. Green hydrogen is intended to replace natural gas, serving as both a storage medium and a fuel, as well as a source of heat production and as a fuel in industry. Hydrogen is already being used today as a secondary energy source in the energy mix, for example for refinery processes and in the chemical industry. Additionally, there are initial small-scale pilot plants for energy generation using hydrogen. Thus, the concept of using hydrogen is not entirely new. However, producing green hydrogen on an industrial scale using only surplus electricity from renewable energy sources is both novel and costly, presenting significant new technical challenges. The high investment costs required for infrastructure ‒ from production facilities to pipelines and storage ‒ mean that establishing a sufficient supply of green hydrogen will not be feasible without substantial subsidies. In addition, the market for green hydrogen is still emerging, leading to various pricing challenges.

To meet these challenges, the German government has developed a national hydrogen strategy and launched various legislative initiatives. The national hydrogen strategy from June 2020 was updated in July 2023. It is divided into four key areas of action: (i) ensuring the availability of sufficient hydrogen, (ii) expanding the hydrogen infrastructure, (iii) establishing hydrogen applications and (iv) creating favourable framework conditions.

2. Regulatory framework for domestic hydrogen production

The expansion of renewable energies described above is fundamental for the domestic production of green hydrogen. Electrolysers are energy-intensive production facilities, and the production of hydrogen in Germany should not result in additional greenhouse gas emissions, negative environmental impacts or additional bottlenecks. The majority of the electrolysers to be built by 2030 must therefore be system-integrated, meaning that they are intelligently connected with the electricity grid and the hydrogen transport and storage infrastructure. Locations in northern Germany, particularly coastal areas, are ideal for hydrogen production. Electrolysis should be flexible, occurring primarily during periods of low residual load and with moderate full load hours. The requirements for system suitability are currently being finalised.

Under section 96(9) of the German Offshore Wind Energy Act (Windenergie-auf-See-Gesetz), tenders for offshore wind turbines with an installed capacity of up to 500 MW per year will be held annually from 2023 and 2028 to supply electrolysers for green hydrogen production.

The national hydrogen strategy also includes the further development of the H2Giga project, which promotes the series production of electrolysers.

At the same time, the European Hydrogen Bank (EHB) is organising tenders for subsidies for electrolyser projects. In the first auction, producers of renewable hydrogen had until 8 February 2024 to apply for funding through a fixed premium per kilogramme of hydrogen produced. This premium aims to close the gap between production costs and the price that (generally industrial) consumers are currently willing to pay. The producers were able to submit bids as part of an auction. The lowest bids that met all other criteria were prioritised until the funding volume of €800 million was exhausted. Out of 132 applicants from 17 countries, seven projects from four countries (Finland, Norway, Spain and Portugal) were selected for funding ranging from €8 million to €245 million. A second round of auctions with a larger volume of €2.2 billion is planned for this year.

In addition, Member States offer various funding programmes for projects that were not selected for funding by the Innovation Fund due to budget constraints, with Germany providing an additional €350 million.

On 29 May 2024, the Federal Cabinet also passed the German Hydrogen Acceleration Act (Wasserstoffbeschleunigungsgesetz) to streamline planning and approval procedures and expedite governmental decisions. The draft law prioritises, for example, the overriding public interest in hydrogen installations and shortens court appeal processes and governmental procedures.

As the approval procedure for electrolysers involving public participation under section 10 of the German Federal Immission Control Act (Bundes-Immissionsschutzgesetz ‒ BImSchV) is lengthy and complex, significant amendments were made to the 4th German Federal Immission Control Act (4. Bundesimmissionsschutzgesetz ‒ BImSchV) on 24 July 2024 to simplify it. Electrolysers with a rated electrical output of less than five megawatts are now completely exempt from requiring emission control authorisation. Before simplifying the approval process for electrolysers in Germany, an amendment to the Industrial Emissions Directive (IED) 2010/75/EU was required at the European level. The amendment came into force on 4 August 2024.

On 15 February 2024, the European Commission approved State aid for 24 German projects in the Important Project of Common European Interest (IPCEI) hydrogen infrastructure programme (Hy2Infra). The German federal government and the federal states are planning to contribute around €4.6 billion to the German IPCEI hydrogen infrastructure projects, with total investments reaching around €8 billion when including company contributions.

3. Regulatory framework for the import of hydrogen and hydrogen derivatives

a) Import strategy of the German government

According to the German government, most future demand for green hydrogen will need to be met through imports.

Initially announced for 2023, the import strategy was presented on 24 July 2024. The German government estimates national hydrogen demand to be between 95 and 130 TWh in 2030, with imports accounting for 50 to 70 per cent of this demand.

The primary objective of the import strategy is to ensure a reliable supply of hydrogen and its derivatives to support the decarbonisation of the German economy and meet national climate protection targets. While importing green hydrogen will be preferred, low-carbon hydrogen and its derivatives will also be included to facilitate a rapid hydrogen ramp-up. With regard to imported products, the German government’s strategy aims for diversification in both molecular (gaseous and liquid) hydrogen and derivatives such as ammonia, methanol, naphtha, electricity-based fuels and carrier media such as LOHC (Liquid Organic Hydrogen Carriers). The goal of diversification extends to import infrastructures and exporting countries, enabling transport by pipeline, ship, rail or road while considering technical and economic aspects. With regard to partners, the German government aims for close cooperation with European partners and as many international partner countries, regions and stakeholders as possible. The goal is to diversify supply sources broadly and prevent new unilateral dependencies. Obviously, the aim is to avoid repeating the mistake of becoming overly reliant on a single exporting country in the development of the hydrogen supply, as happened with the natural gas supply.

The German government seeks a coordinated European hydrogen ramp-up at EU level by establishing an EU-wide hydrogen network and utilising Europe’s full production potential. Efforts include supplying hydrogen from the sunny southern regions to northern consumer areas. Initial projects include a planned connection between hydrogen-demand regions in Italy, Austria and Germany with North Africa, identified as a low-cost production area for green hydrogen within the European Hydrogen Backbone (EHB) initiative. The first cross-border pipeline is to be built between Germany and Denmark. From 2030, a pipeline will enable hydrogen imports from Norway. Discussions are also underway with the United Kingdom and other neighbouring European countries about potentially constructing additional hydrogen pipelines to Germany. Through climate, energy and hydrogen partnerships, the German government intends to use bilateral cooperation to advance local support for the energy transition while simultaneously accessing additional sources of supply. In addition to countries like Canada and Australia, with which such partnerships already exist, the focus will increasingly include countries in the Global South. Sustainability criteria within the meaning of Agenda 2030 and local value creation in the sense of a socially just energy transition should also be taken into account.

b) H2Global

H2Global, the first international trading platform for green hydrogen and its derivatives, has been established to promote non-European imports of green hydrogen and stimulate market growth. For the first time, a double auction mechanism is to be used to transparently determine prices and volumes for trading green hydrogen derivatives.

H2Global will be used to conclude long-term purchase agreements with non-European producers of hydrogen and hydrogen products as well as short-term supply contracts with customers. The H2Global Foundation, funded by 65 international companies, was created for this purpose. Contracts are concluded through a vehicle of the foundation, namely the Hydrogen Intermediary Company GmbH (Hintco). Prices for both purchasing and selling are established through a competitive auction process. Any difference between procurement and selling prices are to be offset by a state or non-profit organisation. As short-term supply contracts and anticipated price increases in the procurement market evolve, the price difference requiring compensation is expected to decrease over time. The long-term purchase agreements with Hintco, as a state-financed buyer, will provide producers with the necessary security need for large-scale investments.

The initial round of auction financing was provided by the German Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz ‒ BMWK), amounting to €900 million. The first tenders for green ammonia (Lot 1), green methanol (Lot 2) and electricity-based sustainable aviation fuel (Lot 3) started at the end of 2022, with applications closing in spring 2023. Results for Lot 1 and Lot 3 were announced in July 2024. Lot 1 for green ammonia, valued at €397 million, was awarded to Fertiglobe, a company from the United Arab Emirates. No winner could be determined for Lot 3 on electricity-based sustainable aviation fuel. The Federal Ministry for Economic Affairs and Climate Action is allocating up to €3.53 billion from the German government’s Climate and Transformation Fund for the years 2027 to 2036. In the future, H2Global will be accessible to all EU governments interested in organising hydrogen tenders and will also collaborate with the European Hydrogen Bank on joint European tenders.

4. Regulatory framework for expanding the hydrogen infrastructure

By 2027/2028, Germany plans to establish a hydrogen start-up network with more than 1,800 km of converted hydrogen pipelines in Germany, supported by IPCEI funding. Across Europe, an additional 4,500 kilometres will be added as part of the European Hydrogen Backbone, forming the initial segment of the hydrogen core network.

The rapid expansion of the hydrogen core network is essential for transitioning industries nationwide to hydrogen. This is because industrial sites not connected to the grid will struggle to participate in the transition.

The legal foundation for the hydrogen core network was established by the German Act on the Adaptation of Energy Industry Law to EU Provisions and the Amendment of Other Energy Law Provisions (Gesetz zur Anpassung des Energiewirtschaftsrechts an unionsrechtliche Vorgaben und zur Änderung weiterer energierechtlicher Vorschriften), which came into force on 29 December 2023. These provisions are now outlined in sections 28q to 28s of the German Energy Industry Act (Energiewirtschaftsrecht). On 22 July 2024, German transmission system operators submitted a joint application for approval of a hydrogen core network to the German Federal Network Agency (Bundesnetzagentur), proposing a total length of 9,666 kilometres. Sixty per cent of this network will use converted natural gas pipelines. At the same time, measures to boost natural gas supply will be necessary to ensure the supply of natural gas until the transition is complete. Pursuant to sentence 3 of section 28q(6) of the German Energy Industry Act, affected parties and the public had to submit comments by 6 August 2024, before the Federal Network Agency could make its decision. Consequently, consistent implementation of these ambitious plans will be crucial.

The legislative framework for funding the hydrogen core network was established by an amendment to the German Energy Industry Act passed by the Bundestag on 12 April 2024. The hydrogen core network will essentially be entirely financed through grid fees. However, as there is a risk of prohibitively high charges during the initial phase when there are still fewer users, a secondary financial safeguard will be provided by the federal government through an amortisation account. The grid fee to be paid during the initial phase of the hydrogen market ramp-up is intended to be significantly lower than the cost-covering fee. Later, the grid fee will exceed the cost-covering fee. This approach aims to ensure the financing of the hydrogen core network by 31 December 2055.

On 21 June 2024, the European Commission approved €3 billion in German aid to support the development of the hydrogen core network. The aid is provided as a state guarantee, enabling transmission system operators to secure more favourable loans to cover initial losses during the ramp-up phase.

The amendment to the Energy Industry Act also lays the foundations for the second stage of hydrogen network development. Future expansion will occur through regular network development planning. To this end, transmission system operators and regulated hydrogen transport network operators will collaboratively create a scenario framework and a network development plan every two years through an integrated process.

5. Outlook

There are global initiatives for producing green hydrogen, supported by various national and European funding programs. After years of investors primarily seeking projects outside of Germany, a sufficient level of trust has now apparently been established, leading to the parallel planning of diverse projects by different stakeholders. Even external financiers are now willing to invest in these ventures.

This is particularly remarkable because none of these projects will succeed without sufficient government support and the relevant funding programmes are still in their start-up phases or under negotiation with the EU Commission. Ultimately, further developments remain to be seen.

Larger power plants with capacities of several hundred megawatts are expected to be operational in one to two years at the earliest. However, the currently foreseeable number of planned projects suggests that the German government is planning the right incentives and (at least) currently enjoys sufficient trust.