ABOUT THIS REPORT
In 2020 IRENA published an initial report focusing on green hydrogen policies: Green hydrogen: A guide to policy making (IRENA, 2020a). It outlines the main barriers to the uptake of green hydrogen and the key pillars for effective policy making. It also creates a framework for discussion about green hydrogen policy making. The green hydrogen value chain, from production to consumption, consists of multiple elements that are interlinked with the broader energy sector. Each of these element can face specific barriers and challenges. IRENA, therefore, conceived a series of reports focusing on these challenges and the options to overcome them. The IRENA report, Green hydrogen supply: A guide to policy making, examines the policy options to support the production of green hydrogen by water electrolysis, its transport, and the options for storage (IRENA, 2021a).
PRIORITY SETTING IN GREEN HYDROGEN POLICY MAKING
Technically, hydrogen can be used in many different sectors, as shown in Figure i.1. However, despite hydrogen’s great potential, it must be kept in mind that its production, transport and conversion require energy, as well as significant investment (IRENA, 2021a, 2020c). As a result, its extensive use may not be in line with the requirements of a decarbonised world, where energy consumption and capacity deployment will have to be carefully managed. In particular, the production of green hydrogen requires dedicated renewable energy that could be used for other end uses. Indeed, indiscriminate use of hydrogen could then slow down the energy transition. This calls for priority setting in policy making.
To complement the assessment, when electricitybased alternatives are available the electrical efficiency pathway metric can be used to assess how much more electricity the use of hydrogen would entail compared to direct electrification. This can inform policy makers on the estimated additional power capacity needed to power a certain sector with green hydrogen (examples are in Figure i.3). Furthermore, in considering this aspect, industrial applications have a better outlook than distributed applications. Green hydrogen could still be a preferred option in industrial heat applications, notwithstanding the higher power capacity needed, because of other considerations (e.g. energy density, cost, technology maturity and existing assets).
THE EXPERIENCE IN THE POWER SECTOR
Policy making for the energy transition in the industrial sector can look to the cumulated experience of the power sector, where many policies have successfully enabled once niche technologies to become the default option for investors. At the same time, the sectors’ different nature should be remembered. In particular, the energy transition in the power sector has been initiated by new actors participating in the power sector with new technologies, like solar photovoltaic (PV) and wind energy. Electricity is largely produced within the same country it is consumed; import and export are limited by interconnections, mostly under long-term contracts, and electricity is only exchanged with neighbouring countries. Finally, in the power system the participation of smaller actors with limited production, down to self consumers, is possible.
POTENTIAL GREEN HYDROGEN USES IN INDUSTRY AND RELATED BARRIERS
CURRENT STATUS AND POTENTIAL USES
Current hydrogen supply for industrial uses can be separated into three distinct pathways: captive, merchant and by-product hydrogen (Connelly, Elgowainy and Ruth, 2019): • Captive hydrogen is produced by the consumer for internal use and is the most common method for large hydrogen consumers. • Merchant hydrogen is generated in an external production facility and delivered to large-scale and retail hydrogen consumers. • By-product hydrogen is produced in another process where it is not the primary product; it can be consumed as captive hydrogen or sold as merchant hydrogen. In Europe captive hydrogen production is the most common option, comprising around two-thirds of all hydrogen production (FCHO, 2020). Hydrogen is currently used in oil refineries to remove impurities and upgrade heavy oil fractions (see Box 1.1), as a feedstock for chemical production (such as ammonia and methanol), and as a reducing agent3 in iron making. Industry demand for hydrogen was 87.1 Mt in 2020 (Figure 1.1).
The consumption of green hydrogen in the steel industry is currently limited to demonstration projects. Similar to the chemical industry case, hydrogen consumption would be at sufficient scale to justify the co-location of electrolysers and steelmaking plants without the need for infrastructure to transport hydrogen.
Industries need heat for various processes. Industrial heat can be classified as high, medium or low, with high-temperature heat above 400°C, medium-temperature heat between 100°C and 400°C, and low temperature heat below 100°C. Many decarbonised solutions exist to produce lowand medium temperature heat without resorting to hydrogen (IRENA, IEA and REN21, 2020). Hydrogen combustion produces high-grade heat that meets almost all heavy industrial applications (Figure 1.3).
More than 85% of industrial heat is consumed in iron and steel, chemicals and cement. Around 95% of the high-temperature heat is currently provided by the combustion of fossil fuels or combustible by-products (IEA, 2019). Small amounts of biomass are used in specific sectors, such as in the pulp and paper industry. Electricity can also be used for high temperature heat, generating heat via resistance, infrared, induction, microwave and plasma heating (Agora Energiewende and AFRY, 2021; Madeddu et al., 2020). The advantages of electrical heating include its capacity for precise temperature regulation and lower maintenance costs. Given that the performance factor of high-temperature heat from electric heating is at the very least comparable to burning hydrogen from electrolysis (0.5-0.9 for electrical heating vs 0.55-0.8 for hydrogen burners), power-to-heat technologies should be considered as the first choice, before green hydrogen.
POLICIES TO PROMOTE GREEN HYDROGEN IN INDUSTRY
The energy transition calls for the phase-out of fossil fuel-based technologies used to produce basic materials and the adoption of low-carbon technologies. As the previous section has shown, there are multiple barriers to overcome and individual investors, when they are not required to do so, have no clear incentive to deploy green technologies, in particular where these technologies are not competitive with incumbent processes. Some investors may see a long-term advantage in becoming first movers, but even in these cases deep decarbonisation of the processes may be hard to achieve without a change in the enabling environment.
For the world to achieve net zero carbon emissions by 2050, investment in green materials and progress along the learning curve must start as soon as possible. New measures will be required to overcome the policy and cost barriers that impede the conversion of traditional material industries, support the creation of a green materials and a green goods market, and overcome carbon leakage (Figure 2.1).
Policy makers, historically, have heavily influenced the course of industrial activity. Government actions have routinely improved workers’ conditions and reduced environmental impacts, and affected other aspects of industrial life. Government actions have included imposing environmental limits on
or changes to production processes that would not otherwise have been taken into consideration, support for change, and requests to modify production processes and goods themselves to achieve national objectives.
In fact, when published national hydrogen strategies describe actions to support green hydrogen, they also presents the options governments are considering to support industrial decarbonisation (as well as hydrogen use in other sectors), complementing measures announced in other policy documents and policies already adopted (IRENA, forthcoming) (Figure 2.2).
GREEN (HYDROGEN) INDUSTRIAL POLICIES
Industrial policy can be defined as the variety of policy interventions aimed at guiding and controlling the structural transformation process of an economy (Bianchi and Labory, 2006). Industrial policy became less popular in countries where neoliberalism emerged as a dominant theory. It was seen as an inefficient government practice to control the private sector (Johnstone et al., 2021). However, the need for an economic recovery after the 2008 financial crisis enabled a ‘renaissance’ of industrial policy making in many parts of the world, including in regions where a that embraced the idea of a minimal role of the state in the market (Ahman, 2020; Alami and Dixon, 2019; Ciurak, 2011; Johnstone et al., 2021).
Green hydrogen will bring major GHG emission reductions to industry. However, in many cases this benefit is not reflected in commodity output prices, reducing the economic incentive to produce green products. By internalising the carbon externalities in the form of either an emissions trading system
(ETS) or a carbon tax, policy makers can assist in valuing this benefit, closing the economic gap with fossil fuel pathways. Investment in low-carbon technological innovations, including green hydrogen, can be stimulated by carbon pricing. But to support green hydrogen investment, carbon pricing would need to cover the cost gap between green and grey materials (Figure 2.3).
Moreover, they generate significant revenue flows that can be used to boost investment in renewable energy and energy efficiency, to align infrastructure and the general economy better with climate goals, or be deployed in support of a fair transition strategy. Revenues from the policy can also be earmarked to support technology demonstrations and close the economic gap for the first few plants using green hydrogen.
A BCA tariff can be “flat” – meaning it would be the same for a given imported good10 – or it can be based on the actual carbon content – meaning the tariff would consider the actual emissions in the life cycle of the specific good. The application of a carbon content-based tariff at the border may have important implications for green hydrogen-based products, as shown in Figure 2.6. A flat tariff would naturally benefit the more cost-competitive solution, regardless of the process used and the emissions incurred. An imported product produced with green hydrogen could not compete within the region that has a flat BCA tariff. By contrast, a carbon contentbased tariff would be lower for green products and higher for blue or grey products, incentivising carbon reduction during manufacture (Euractiv, 2020).
cannot result in treatment that is less favourable than the treatment of comparable goods produced domestically. However, WTO case law suggests that a BCA would be allowed if it were based on the carbon content of a product rather than on the goods’ country of origin; moreover, the GATT exempts certain cases from obligations where they are based on environmental protection (Acworth, Kardish and Kellner, 2020; Cosbey et al., 2019). Policy makers will also need to determine whether the scheme adjusts for domestic exports, meaning a carbon cost rebate for exported products to level the playing field in countries with more relaxed carbon policies. However, domestic export rebates reduce abatement incentives in the more exportoriented industries, shielding domestic production from actual carbon costs. Export rebates also put the entire concept of a BCA at risk, since its reason for existing is to push to reduce emissions that have a global effect (Acworth, Kardish and Kellner, 2020; Cosbey et al., 2019; Mehling et al., 2019; PMR, 2015).
CREATING THE MARKET FOR GREEN PRODUCTS
Although there is a growing interest in the production of green hydrogen, the demand for goods manufactured using green materials is lagging, as they are more expensive than their grey counterparts., Governments have a variety of actions that they can take to generate sufficient demand and create a market for green products, such as sustainable public procurement and quotas. These measures will require ecolabelling, meaning a scheme to measure, validate and trace the carbon content of the green materials or goods.
There is growing global awareness of the effects of climate change. As a result, many governments have adopted suites of policies to start decarbonising the energy sector, the main source of GHG emissions. Policies have been so far mostly focused on the power sector. The next challenge for policy makers will be to focus on the whole energy system, which includes the manufacturing facilities producing basic materials such as steel, chemicals and refined fossil fuels. Global emissions from these industries have been increasing, notwithstanding the ever-decreasing costs for renewable energy, in contrast to the commitments made in Paris to limit global warming and the IPCC recommendations.