Coronavirus represents an unprecedented challenge to humanity. It affects our way of life, our governance and our economies. Together with climate change, it creates a perfect storm. Recent power outages and their impacts on populations are a warning to urgently address climate issues. The Inter-governmental Panel on Climate Change (IPCC) believes that the world has only 10 years to reduce greenhouse gas (GHG) emissions by 50 percent. Unfortunately, we can see that international cooperation is failing to respond to these two challenges. Differences regarding the World Health Organization (WHO) and controversy about Russia’s announcement that it has a coronavirus vaccine are good examples. The pandemic and its impact on economies has overshadowed the need for climate actions. In times of uncertainty, leadership is crucial. The European Union (EU) could provide this leadership by building a successful pathway towards its goal of having a carbon neutral economy by 2050. As energy drives the economy and is also the largest source of GHG emissions, the energy transition is a key element in the Green Deal. The energy sector has been heavily impacted by the pandemic. The current fall in energy demand is the largest in 70 years, and the impact of the coronavirus is seven times greater than that of the financial crisis in 20082009. The International Energy Agency (IEA) estimates that in 2020 energy demand will be at least six percent lower than in 2019. Energy investment is down by $400 billion, a 20 percent reduction. The EU electricity demand decreased by three percent in the first quarter of the year and the carbon footprint of electricity generation decreased by 20 percent, with renewable energy sources (RES) reaching a 40 percent share of the power mix. Increased flows of intermittent renewable energy in this low demand environment need to be managed. Electricity day-ahead prices and gas prices have plunged.
What is being done and what could be done to assist with the recovery
The growing numbers of infected people around the world and the time needed to successfully vaccinate populations remove the possibility of a full recovery in 2021. Even a U-shaped recovery is questionable, as in some areas there could be permanent shock. Governments are deploying massive recovery packages, and many people see them as a good opportunity to achieve three goals at the same time: boost economies, create jobs and improve the environment. The IEA suggests there should be public investments to improve the energy efficiency of buildings, to increase solar and wind electricity generation capacity and to modernize and digitalize grids. Without disputing the positive impact that recovery packages could have, we need to recognize that they are temporary measures and they will not necessarily make a sustainable change. During the financial crisis there was a substantial decrease in GHG emissions and recovery packages were implemented, but after a couple of years, GHG emissions started to grow faster than before the crisis. 2020 could see an eight percent drop in GHG emissions worldwide, but this drop will be unsustainable if there is not a structural change in the energy sector. Two elements are crucial: markets should reward lower GHG emissions; and more investment in decarbonized energy research is needed. The EU Emissions Trading System (ETS) has responded reasonably well to the COVID-19 shock. After an initial drop in the price of emission allowances, it quickly recovered to the 2019 level. The EU ETS strengthened with the market stability reserve can substantially increase the price of allowances. As the mechanism is somewhat complex (including a cancellation policy and increases in the rate at which the emissions cap decreases) the challenge is to achieve predictability of prices. In addition, overlapping policies like renewables targets and phasing out coal now have a direct impact on cumulative emissions under the ETS. There is a good chance that the next revision of the EU ETS will consider increasing the linear reduction factor to put it in line with the 2050 target price floor/ceiling. More predictability of the price of emission allowances would encourage investment in clean technologies and innovation, and extension of the ETS to other sectors like buildings and transport could play an important role. The path towards the EU Green Deal goal will require new regulations, but these regulations should not replace the market but instead should focus on the correction of market failures. R&D is crucial in the energy transition, and more and better targeted public and private financing is needed. Of the global public investment of USD 17 billion, nearly three quarters goes into renewables, nuclear and energy efficiency while storage, network development and hydrogen are under-funded. All the vectors of the energy transition need to be well funded; otherwise the transition will not be complete. A commitment to change demands actions, and one of the most important actions is ambitious funding of energy-related research. A growing share of electricity in final energy consumption is a trend in Europe and the world at large. According to Deloitte, by 2030, a third of new cars sold globally will be electric, and this change will require a substantial investment in grids. The European Network of Transmission System Operators for Electricity (ENTSO-E) estimates that an additional 93 GW of interconnection capacity will be needed in the EU by 2040, 50 GW of which must be operational by 2030. The share of electricity in final energy consumption could grow from the current 23 percent to 40-60 percent by 2050. This means that many industrial and transport sectors need to have other solutions. Steel, cement and chemicals have multidecade investment cycles so new technologies should be applied by the next decade. Climate neutrality by 2050 requires investing in all the avenues that can us take us to this result: renewables; energy efficiency; storage; carbon capture, storage and utilization (CCSU); and grids. At the same time, the portfolio needs to be optimal to make the transition cost-efficient. This means that the use of the “Next Generation EU” recovery fund of EUR 750 billion and the EUR 1 trillion multi-annual financial framework for 2021-2027 should focus on the most difficult sectors to decarbonize, allowing markets and market players to reach for low hanging fruit. There is a serious change in corporate strategies in favor of investing in climate action in a sustainable way, as the license to operate sustainably demanded by civil society and climate change-related risks both lead to this approach. A good example is ENIs Long-Term Strategic Plan to 2050, as it announces fixed 2050 reduction targets of 80 percent of absolute emissions and strong growth of renewables in its portfolio. Recently BP also announced plans to develop 50 GW of renewable generation capacity by 2030 and to raise its low carbon investment ten-fold to USD 5 billion a year.
European ambitions need to be clarified
After agreement on a recovery fund and the next financial prospects, the EU now needs to give clarity to its ambition for 2030. Should it stay at 40 percent less GHG than the 1990 level, or should it increase the goal to 50-55 percent. Both approaches have merit. The current target is well covered by the legislation already adopted, and this decade could be used to prepare for the decarbonization of the most challenging sectors. This would allow the EU to be very ambitious from 2030 to 2040, leaving the last decade for addressing the most difficult issues. Increasing the target would send a signal for society to mobilize and quickly reach low hanging fruit like phasing out coal and achieving a nearly 100 percent decarbonized electricity supply by 2030. Whatever decision is made, it should be made quickly because it will influence investment priorities and the instruments used. Initially, it could be more market-based instruments; later more regulatory approaches will be needed, like an accelerated phase-out of coal. Whatever the target chosen, one issue will need to be addressed urgently: scaling up the production and use of clean hydrogen. Why is hydrogen so important for the EU Green Deal? In 1842, English scientist Sir William Grove developed the first fuel cell which combined hydrogen and oxygen into water and generated an electric current. While there were promising developments later, there has never been a real breakthrough. Interestingly, the US House Democrats’ climate plan mentions hydrogen but stops short of encouraging the necessary large-scale investments. Why will it now be different in Europe? One answer is obvious. To decarbonize industry, the fossil-fuel-based hydrogen mostly produced by reforming steam methane needs to be replaced. Globally, industry is responsible for 20 percent of fossil fuel emissions, and in the EU 70 to 100 million tons of GHG are emitted yearly. Basically, this means that grey hydrogen must be replaced with green hydrogen if the critical problem of
GHG emissions is to be resolved. The expectation is that renewable hydrogen could be a crucial feedstock for clean synthetic fuels like synthetic kerosene for aviation and synthetic diesel for trucks, and it could be used directly in shipping and long-haul transport. It could serve as a feedstock or a fuel depending on the demands of technology. Hydrogen seems to be the silver bullet for the energy transition. It could also serve as an energy carrier and a means of energy storage. A smart integration of the electricity and gas sectors is an important step in responding to the sustainability and cost-effectiveness challenges in the energy sector. With hydrogen this is not only achievable but a clear necessity. In addition, the EU has a very well developed gas network and a first class gas industry. To neglect these strengths would be a big mis-take.
Potential, expectations, and difficulties
Producing renewable hydrogen is quite simple. Electrolysis of water using renewable energy and steam reforming sustainably produced biomethane produces renewable hydrogen. The real challenges are the cost and scale of production. The production of fossil-fuel-based hydrogen has an average cost of EUR 1.5 per kilogram; the production of renewable hydrogen using electrolysis costs EUR 2.5-5.5 per kilogram. Expectations are that the cost of electrolyzers will halve by 2030, renewable electricity costs will decline further and the price of carbon will substantially increase. These developments should help increase the competitiveness of renewable hydrogen in the coming years. Because of hydrogen’s lower volumetric energy density, transporting it will be more expensive than natural gas. For security, a strong retrofit of existing pipelines will be needed
and in some cases dedicated new hydrogen pipelines will have to be built. Scale is another headache. Achieving a 100 percent renewable electricity system would require at least a doubling of renewable energy system (RES) capacity, but the expected increase in the share of electricity in the final demand and dedicated capacities for renewable hydrogen production will create a huge demand for renewable electricity. Improved energy efficiency will help, but not enough, and while there are expectations that imports will help, this is still uncharted territory. It is difficult to make any forecast at this stage. A helping hand could come from low-carbon hydrogen (blue hydrogen) produced from natural gas and using CCS. The technology is well known and the impact of the carbon price could make this a cost-efficient option compared with grey hydrogen. Hydrogen produced with pyrolysis from natural gas is also an interesting option. With improved methane emission regulation and voluntary actions on the part of industry, there is improved knowledge of the real GHG emissions in the natural gas value chain. Rigid regulation and technological development are decreasing fossil methane emission intensity. Increases in the price of carbon and a reduction in the cost of renewable hydrogen will mean that society is not locked into fossil fuels any more than necessary. It would be a mistake to ignore this option.
Large scale production and use
The EU’s Hydrogen Strategy is attempting to find the right balance between the need to develop largescale clean hydrogen production and use despite the current limited experience with hydrogen. There is a clear need for renewable and lowcarbon hydrogen and for financial support to accelerate developments. The Carbon Contracts for Difference program, Horizon 2020 projects like developing 100 MW electrolyzers, and Invest EU’s Strategic European Investment Window are important tools to accelerate such developments. International activities, in particular with the African Union and Ukraine, are envisaged as a first step towards having 10 million tons of renewable hydrogen produced beyond the EU borders by 2030. The expectation is that the same amount will be produced in the EU by 2030, starting with one million tons already being produced by 2024. The main vehicle for further development is the European Clean Hydrogen Alliance, which was launched in July. The response from industry in the first month has been quite good, with 120 companies joining. Less pronounced have been the responses from public bodies and research institutions. Their active participation in the Alliance is of crucial importance because nearly all the EU Member States anticipate measures to promote the use and supply of clean hydrogen. Germany has adopted a very ambitious hydrogen strategy, and the Alliance could multiply efforts at different levels in the EU to create a wave of innovations and investments to decrease costs and increase scale. Nevertheless, without market forces it is impossible to imagine a success. Germany’s strategy expects the development of a clean German hydrogen market by 2023, but it would be better to have a European market. Integrating different markets is never easy and in this case many important issues, like definitions and guarantees of origin, need to be agreed to beforehand. It is also important to see the creation of the hydrogen market in the context of the development of the EU electricity market and technological development of the scale of utility electricity storage. Without doubt, clean hydrogen is a key to the transformation of the global energy system, particularly in industry, transport and buildings, and it is also an accelerator of renewable power deployment. By committing itself to carbon neutrality by 2050, the EU has taken the lead in the fight against climate change. It is crucial that in the process of achieving its Green Deal goal, the EU creates technological tools and regulatory experiences that can be replicated in other parts of the world. The production and use of clean hydrogen could be a most important transformative experience.
The author: Andris Piebalgs
He is a Professor at the Florence School of Regulation in the European University Institute. His work now focuses on the decarbonization challenges in the energy sector. He is the Chairman of the Board of Appeal of ACER. Before coming to FSR, he was was EU Commissioner for Energy and EU Commissioner for Development.
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