The EU has spent about five years devising policies to support the growth of clean hydrogen production with ever-increasing amounts of public money. It has circumvented rules on state aid to allow direct grants to hydrogen projects and even created a European Hydrogen Bank, through which developers can bid for subsidies to bridge the gap between real costs and the price that end-users are willing to pay.

Gradually, the focus of policymakers has switched to the demand side as the lack of offtakers has deterred investment and forced some developers to abandon projects, sometimes even after the start of construction. The IEA has been flagging concerns about the lack of measures to support demand for a couple of years. The problem is quite simple: Even in those markets with the most available renewable power, clean hydrogen projects struggle to produce the stuff at prices even remotely acceptable to industrial consumers. Not to mention the huge capital costs of converting industrial processes to run on hydrogen.

A consensus seems to be emerging, at least in Brussels, that there is only one real answer to the industry’s demand-side problem: lead markets. EU President Ursula von der Leyen even mentioned them in her latest state of the union speech.

Broadly speaking, in the hydrogen market this would involve the intervention of the EU and/or member state governments to create demand for clean products, such as green steel, the production of which uses clean hydrogen.

Proponents of this approach claim it could be the perfect solution for the EU, which is trying to engineer a dash for net-zero that leaves the competitiveness of European industry intact.

Industry group Hydrogen Europe commissioned a study by accounting firm PwC to support the idea. Matthias Stephan, local partner at PwC, said: “Our study proves that lead markets for clean products can stimulate significant clean hydrogen offtake while ensuring Europe's competitiveness and climate ambitions."

The study focused on lead markets in the fertiliser and steel industries. In the fertiliser sector, PwC expanded on three possible lead market mechanisms: Quotas on the use of green ammonia that fertiliser producers must meet or face penalties for non-compliance; a bonus model, under which farmers are paid a bonus if they use non-fossil fertilisers; and a third mechanism that would see food retailers pay a levy that enables EU clean ammonia producers to receive compensation and offer their product at competitive prices.

For the steel sector, one idea was to impose a levy on various steel-containing products sold in the EU, which can finance a set of tenders to cover the price difference between gas and hydrogen, according to PwC.

Crucial intervention?

Overall, PwC concluded that lead markets are necessary to generate demand for clean hydrogen. “Current policy instruments, such as the EU ETS and CBAM, are not sufficient on its own to close the cost gap between conventional and clean production,” it said. “To support climate neutrality and industrial competitiveness, establishing lead markets for clean hydrogen in the EU via the steel sector is crucial.”

Lead markets of some description for clean hydrogen in the EU certainly appear to be on the horizon. 

However, big questions around this approach need to be answered, not least in terms of financial cost and its compatibility with the wider global hydrogen market. Within the EU, the imposition of yet more complex rules and regulations on an already tightly regulated hydrogen value chain may be a step too far for some in the industry, regardless of the potential benefits.

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Author: Stuart Penson