Without government kick-start support, the ramp-up of the hydrogen economy will not succeed. CfDs could serve as a bridge to competitiveness, argues our guest author from CIP, a global fund manager and leading investor in renewable energy infrastructure.
Text: Klaus Ulrich Hachmeier
In Germany, the low-carbon hydrogen economy is still in its infancy. Without steady and strong policy support, this will not change. The gap between the market prices expected for the coming years and the price level acceptable to internationally competitive industry is simply too wide. The latter lies between two and three euros per kilogram of hydrogen, depending on the sector and purpose.
That is far removed from the market prices of five to twelve euros per kilogram forecast in the German Federal Government’s monitoring report. The ramp-up must therefore be driven by public policy and reliably designed so that the financing of concrete projects by private investors gains momentum.
The Hydrogen Acceleration Act (Wasserstoffbeschleunigungsgesetz, WasserstoffBG), which entered into force in April of this year, is at least an important boost for the sector. Since then, hydrogen infrastructure facilities and pipelines have been classified as being “of overriding public interest,” which underscores the political determination to develop this energy carrier and the associated technologies.
The tightening of the greenhouse gas reduction target adopted by the Bundestag, the Federal Parliament of Germany, also points in the right direction: for several years now, fuel suppliers have been obligated under the German Federal Immission Control Act (Bundes-Immissionsschutzgesetz, BImSchG) to progressively reduce the CO2 intensity of their fuels.
Alongside the blending of biofuels and the provision of electricity for electric vehicles, the use of green hydrogen in refineries is the most important option for this purpose. The Bundestag’s decision provides even more momentum than the Federal Government had planned. Specifically, the greenhouse gas reduction mandate (THG-Quote) will be extended through 2040, rising incrementally from the current 10.6 percent to 65 percent, six percentage points more than the draft adopted by the cabinet had envisaged.
Decisive for the hydrogen ramp-up is the so-called “RFNBO sub-quota,” which specifies a minimum blending of green hydrogen (RFNBO stands for renewable fuels of non-biological origin). It stands at 1.5 percent for 2030, three percent for 2032, and is intended to rise to ten percent by 2040. To meet these sub-quotas, however, electrolysis capacities of an estimated more than three gigawatts (GW) would be necessary for 2030 alone.
Slowed down by the cabinet Unfortunately, the Federal Government is slowing progress elsewhere: according to the recently published draft of the Electricity Supply Security and Capacity Act (Strom-Versorgungssicherheits- und Kapazitätsgesetz, StromVKG), the hydrogen-capable gas reserve power plants once envisaged as important anchor customers are initially only to be implemented in a weakened form. They merely need to be “H2-ready” so they can later be upgraded for operation with hydrogen.
That means additional investments for retrofitting down the road. And the originally ambitious expansion targets for electrolyzers of ten gigawatts by 2030 are to be replaced by “flexible” targets that, due to their vagueness, hardly convey any political or economic signaling effect.
In short: the signals from the political sphere are currently not very coherent and thus not well suited to supporting the hydrogen ramp-up. A robust foundation for a dynamic increase in positive investment decisions has so far not been established. For this to change, several conditions must be met:
1. Predictable revenue streams and viable financing structures Long-term offtake contracts with creditworthy counterparties are a central prerequisite for the economic viability of hydrogen projects. Without industrial customers, energy suppliers, or the state as long-term offtakers or guarantors, raising debt capital will hardly be possible.
After all, the funds raised must later be serviced from the reliable cash flows of the project. Since the current market prices for green hydrogen do not yet meet thecompetitiveness required by industrial customers, an active government is indispensable to temporarily bridge this gap.
To attract private capital, sound project structuring is also required. Hydrogen projects must be clearly delineated and have robust project rights, all required permits in place, and transparent and reliable governance structures.
2. Regulation and support Regulatory risks are often the most difficult risks for project developers to hedge. This is precisely why coherent regulation that follows a comprehensible logic is so important. The legislator’s strategy here is to stimulate the market ramp-up through incentives on both the supply and demand sides. The largely averted weakening of the European Emissions Trading System (EU ETS), the almost completed implementation of the RED III Directive in the transport sector, and the strengthened THG quota will have a positive effect on demand for green hydrogen.
In addition to these instruments, Carbon Contracts for Difference (CfDs) are also a proven means of increasing the investment security of hydrogen projects. They reduce price risk by hedging the difference between the still too-high production costs for green hydrogen and the market prices of fossil energy.
With the 2027 federal budget, the Federal Government could set a decisive impulse for the hydrogen ramp-up by creating the foundation for hydrogen CfDs and further guarantee instruments.”
Such state-backed contracts would offer green hydrogen producers long-term planning security by guaranteeing the offtake of defined volumes over several years. An alliance of the energy industry, industry, SMEs, and municipalities has proposed a model to the Federal Government showing what this could look like in concrete terms, one that would reduce the cost gap and secure demand.
Specifically, by combining CfDs with guarantee instruments in such a way that they bundle generation and demand on the one hand and incentivize cost efficiency through market-based action on the other.
Through the competitive award of CfD contracts in an auction procedure, this financial predictability would provide financial certainty for all actors in the supply chain, a genuine launching point for the ramp-up of the hydrogen economy.
Outlook: Innovative future fields Despite the currently stalling hydrogen ramp-up, there is so far no doubt that green or low-carbon hydrogen remains an essential building block of decarbonization. It will foreseeably have to be deployed in large quantities. Already now, the focus is on new application fields and technological innovations, not least to advance cost declines for green hydrogen.
One possible building block is artificial energy islands to produce green hydrogen from offshore wind power in the North Sea. With the help of this future technology, wind power could be used that would otherwise have to be curtailed due to grid bottlenecks. And it would save billions in the transformation of the energy system, because the very expensive electricity transmission lines from offshore wind farms to the mainland could be built with significantly lower capacity.
Instead, the wind power generated at sea would be used directly offshore for hydrogen production, and the hydrogen would then be transported cost-efficiently to shore via pipelines. Offshore hydrogen production in the framework of demonstration projects in the North Sea should therefore be realized as quickly as possible.
As a further possible building block, “white” hydrogen, which occurs naturally in the earth, should also be considered. Admittedly, the data situation regarding deposits and economic feasibility is still unclear. All the more reason that the Federal Government has taken initial steps with the Hydrogen Acceleration Act that enable exploration and potential development.
Overall, the hydrogen ramp-up in Germany stands at a crossroads. With the consistent further development of existing support programs, in particular through a national program for hydrogen CfDs, the Federal Government could underscore its commitment to the technology.
From an investor’s perspective, well-structured projects with clear revenue streams are needed. If the Federal Government succeeds in reliably establishing a policy mix with the elements described, sufficient private capital can in any case be mobilized for a successful ramp-up. 
Klaus Ulrich Hachmeier
Head of Government Affairs at CIP – Copenhagen Infrastructure Partners, Hamburg
