WHITEPAPER

TurningtheEuropeanGreenHydrogenDreamintoReality:ACalltoAction

Withoutadditionalregulatorysupport,Europeangreenhydrogen

mayremainthefuelofthefuture

October2023

ByJensBurchardt,EsbenHegnsholt,MogensHolm,FrankKlose,DanielRitter,andStefanSch?nberger

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TheDreamofGreenHydrogen

toBecomeReality?

Greenhydrogenisacriticalelementtoachievingnet-zeroemissions

indispensabletodecarbonizinglargesectorsoftheglobaleconomy.

A

swestatedinour2019publicationTheRealPromiseofHydrogen,low-carbonhydrogenandassociatedsyntheticfuelslikemethanolandammoniaare

Whileabroaderrangeoflow-carbonhydrogencolorswillbeneededduringthe

decarbonizationjourney,afossil-freetargetstatewillrequiregreenhydrogen.Tobe

abletoenablethecontinent’sambitiousclimatetargets,Europe’sgreenhydrogen

marketfinallyneedstoscalewithinthisdecade.

Europe’shydrogenmarketisbeginningtotakeshape…

Afteradecadeofmuchdebate,ameaningfulhydrogenmarketandamultibillion-euro

marketforgreenhydrogennowseemstobeemergingonthehorizon.Agooddealof

thisisdrivenbyaflurryofregulatoryactivityacrossthehydrogenvaluechain:

.Subsidyschemesareemergingtosupportinvestmentsinhydrogenproduction,

suchastheDutchSDE++fordomesticprojectsortheEuropeanHydrogenBankand

H2Globalforimports.

?Infrastructureaccessisstartingtobecomeclearer,asthedevelopmentoffirst

elementsoftheEuropeanhydrogenbackboneisbeingexpeditedinseveralcountries—

withthesupportoftheEUIPCEIscheme.

?Hydrogendemandisbeingstimulatedbyinvestmentsubsidies(suchasforthe

thyssenkruppDRIsteelplant)andbyongoingdiscussionsonconsumptionsubsidies

(suchastheGermancarboncontractsfordifferenceforpotentialindustrialofftakers).

Germanyisalsoplanningauctionsforitsfirsthydrogen-onlybackuppowerplants.

.TherecentlyagreedREDIIIimposesthemandatoryuseofRFNBO(includinggreen

hydrogen)forEUindustryconsumptionbywayofquotas.1Further,acombinedsubtarget

of5.5%foradvancedbiofuelsandRFNBOswasagreedupon,withaminimumrequire-

mentof1%RFNBOssuppliedtothetransportsectorin2030.

Meaningfuldemandisexpectedtoemergeifplannedregulationscomeintoeffect.Several

industrialsectors,primarilycurrentgrayhydrogenconsumers,maybewillingtopayaround

orabove€6/kgforgreenhydrogenbytheendofthedecade.

Refinerieswillcontributesignificantvolumestothisdemand.Despitesomeuncertainty

regardingREDIIIimplementationdetails,2oilplayersarealreadytakingaction.Forinstance,

BPandTotalarewillingtopaya€12.6Bpremiumfor7GWoffshorewindpowergeneration

thatsecuresthemgreenhydrogenatacostabove€6/kg.

Additionalsectorssuchasammoniaandmethanolproductionarealsorelevant,alongwith

theportionofEurope’ssteelindustrycapableofsellingpremiumgreensteel.InGermany

andtheNetherlandsalone,this“high-priceplateau”coulddriveapproximately1Mtof

greenhydrogendemandannuallyby2030,equivalenttoover10GWofelectrolyzercapacity.

Andasdemandistakingshape,soishydrogensupply.Anumberofprojectdevelopersare

currentlydrivingindustrial-scalegreenhydrogenprojectstofinalinvestmentreadiness.Again

inGermanyandtheNetherlandsalone,atotalpipelineof23GWinelectrolyzercapacityby

2030iscurrentlyinplanning,with4GWalreadyatleastintheFEEDphase.

BOSTONCONSULTINGGROUP1

2030greenH2costsincentralEurope

€/kgH2

€5–8/kgH2

>2×

<€3/kgH2

2021

Consensusview

2023

Assetprojects

Realassetprojectsrevealmuchhighergreenhydrogencoststhanpastconsensusviews

Exhibit2:GreenhydrogenwholesalepriceprojectionsinEuropein2023

Drivingfactorsforcostincreaseversuspastconsensusview

Highercapitalcostsresultingin

higherreturnrequirementsfromgreenpowerandelectrolyzerinvestments

Fewerelectrolyzerfull-loadhours,aswholesalepowermarketoffersbet-terpricestowindfarmsmoreoften

Supplychainconstraintsofwind

powerandelectrolyzermanufacturers

Complex“real-life”electrolyzer

systemsincl.BOP,amanycomponentswithlimitedcostreductionpotentialb

Lackinginfrastructurewilllimitavailabilityoflower-costgreenH2pipelineimportsinnext~10years

Structural

Cyclical

a.BOP=balanceofplant

b.Suchaspowerelectronicsorgasconditioning,whicharealreadystandardcomponentsinutility-scaleapplications

Source:BCGanalysis

Costsensitivitytogreenhydrogenproduction

Thecostofdeliveredgreenelectricitystillremainsthelargestfactordeterminingover-allgreenhydrogeneconomics.Asaresultofahighercostofcapitalandstructuralsupplychainchallengesofwindpowersystem

manufacturers,thelevelizedcostofpower

hassignificantlyriseninrecentyearsandislikelytoremainabovepre-crisislevelsduringthisdecade.Also,giventhatgreenhydrogeninmostEuropeancountrieshastobepro-

ducedfromadditionalnon-subsidizedrenew-ables,electrolyzersarecompetingforgreenpowerwithskyrocketingwholesalepricesonthecaptured-powermarket.

Highelectrolyzerutilizationcanbea

majorleverfordecreasinghydrogenproduc-tioncosts—butwillcomeatatrade-offwithgreenpowercostsinmostlocations.Howev-er,byfollowinganintegratedapproachtolocationchoice,renewableelectricityproduc-tion,electrolyzerconfiguration,andpower

marketsituation,hydrogenprojectdevelop-erscanachievesignificantproductioncostadvantagesovertheircompetitors.

Electrolyzersystemcostshavenotdropped

yetandarenotlikelytofallasfastasexpect-

edafewyearsago.

Structuralsupplychainconstraintsonthe

partofelectrolyzermanufacturersaswellas

more-complex-than-expectedsystemdesigns

resultinpersistentlyhighelectrolyzersystem

costs.Updatedassessmentsalsosuggest

limitedcostreductionpotentialformany

componentsalreadybeingusedtodayonan

industrialscale,suchaspowerelectronicsor

gasconditioning.Decreasingelectrolyzer

systemcostscanbeachievedbystreamlined

projectdevelopmentprocessesandcapabili-

ties,closercollaborationacrossthevalue

chain,andscaleintheprojectportfolio.

Optimizingelectrolyzerefficiencycanhelp

pushdownthecostofhydrogenproduction.

However,largeimprovementsinthese

factorswillentailatrade-offwith

electrolyzerCAPEX.

BOSTONCONSULTINGGROUP3

Low-costgreenelectricityathighelectrolyzerutilizationasmajordriversforattractivehydrogeneconomics

Exhibit3:Greenhydrogenproductioncostsensitivities

Baselinevalue

Sensitivity

analysis

2030greenH2productioncost

baselineincentralEurope

6.0€/kga

Delivered(green)electricity(€/MWh)65

Electrolyzerutilization(%)

Electrolyzersystemcosts(€/kW)

ElectrolyzerWACC(%)

Electrolyzerefficiency(%)

55%

1,700

8%

62%

-25/+15

+25/-10pp

-500/+400

±2pp

±3pp

+0.8

-1.3

+0.6

-0.8

+0.5

-0.7

+0.3

-0.3

+0.3

-0.3

a.Realin2023,representativeofcurrentassetprojectcostprojectionsincentralEuropeNote:Electrolyzerlifespanof15yearsandelectrolyzerOPEXof€0.3/kgH2

Source:BCGanalysis

Lower

Hcosts

2

Higher

Hcosts

2

Majorofftakersarethemselvesatrisk.

Cheapergreenend-productimportspose

asignificantthreattoofftakersinsectorslikeammonia,methanol,andsteel.TheEuropeanammoniaindustryalreadylostsignificant

marketshareduringlastyear’senergycrisis.Atdomesticgreenhydrogenpricesbeyond

€4–5/kg,Europeanproducerswouldhardlybeabletocompetewithgreenammoniaimportedfromregionswithbetter

renewablepowerconditions.Andthisthreatmayonlyintensifyovertime.Astheglobal

hydrogenmarketmaturesandregionswithbetterrenewableconditionsachievesteeperproductioncostdeclines,increasingEuropeanproductionvolumesofproductssuchas

ammonia,methanol,orironspongewillbeatrisk—potentiallydiminishingEurope’s

futurehydrogenmarketpotential.

TURNTHEGREENHYDROGENDREAMINTOREALITY:ACALLTOACTION

€2.8/kg

€2.8/kg

Full

costa

LCOH

Logistics

Ammonia:WillingnesstopayforgreenhydrogendeterminedbyREDIIIandbluehydrogencosts

Exhibit4:Dutchammoniaplayers’willingnesstopayforgreenhydrogenin2030

Domesticproduction

underREDIIIquota

Domesticproduction

outsideREDIIIquota

Importofgreenand

blueammonia

€6.9/kg

Potential

REDIII

penalty

Full

costa

LevelofREDIIIpenalty

(here€450/tCO2)sets

upperWTPboundary

CostofblueH2setslowerWTPboundary

Full

costa

(Partof)EUproduction

underREDIIIquotafaces

riskofdisplacementby

cheapimports

€4.5/kg

€3.1/kg

ATR+CCS

fullcosta

Logistics

Steammethanereforming

Steammethanereforming

“DomesticblueH2”(ATR+CCS)

GreenH2fromSaudiArabia

BlueH2fromthe

UnitedStates

a.CAPEX,OPEX,naturalgas,andCO2costsforsteammethanereforming,ATR,andCCS,respectively

Source:BCGanalysis

Offtakersareunabletocommittolong-termcontracts.Withthecommonmarket

expectationofdecreasingproductioncostsfromnewprojectsovertime,offtakersofgreen

hydrogenareveryreluctanttocommittolong-termcontractsofmorethanafewyears.

Yetwithoutsecurelong-termofftake,earlyhydrogenprojectdevelopersfacetheriskof

strandedassets,undermininginvestmentprospects.Thisdeadlockperpetuatesachicken-

and-eggproblem,preventingthehydrogenmarketfromgainingfastermomentum.

Veryfewgreenhydrogencustomersareabletocommittolong-termofftakecontracts

Exhibit5:Industrycustomers’willingnesstocommittohydrogencontracts(surveywith166participants)

Surveyquestion:“Whatcommitmentperiodforgreenhydrogensupplycontractswouldyou

bemostwillingtoenterinto?”

49%

Only3%ofsurveyparticipants

arewillingtocommitto

31%

17%

2%

greenhydrogencontracts

exceedingfiveyears

Refineries

Processindustries

Chemical,steel,non-iron

metals,buildingmaterials,minerals,andmining

Industrialgoods

Mechanicalindustry,

automotive,paper,glass,andpackaging

1%

0years

Spotmarketonly

<2.5years

<5years

<10years

<15years

Source:Basedonresponsestoacustomersurveywithn=166respondentsinGermanyandtheNetherlands

acrossrelevantsectors;BCGanalysis

Policymakersaren’tdoneyet

Despiteallprogress:UnderEurope’scurrentregulatoryenvironment,domesticgreenhydro-genwillremainthefuelofthefuture.AmbitiousnationalimplementationofEUregulationisneedednowtocreateincentivesthroughoutthehydrogenvaluechain.

Regulationsshouldhelpbringgreenhydrogencoststoofftakersatleastbelow

€5/kg,giventhathighercoststhanthatwouldseverelythreatentheinternationalcompeti-

tivenessofkeyofftakeindustries,particularlychemicalsandsteel—evencomparedtogreenimports.Toachievethis,double-sidedauctioninginitiativesliketheEuropeanHydrogen

BankandH2Globalcouldbeexpandedintheirfinancialvolumeandextendedintheirscopetoalsosupportlarge-scaledomesticprojects.3Toincreasethecompetitivenessofdomestic

projectsintheseauctions,policymakersshouldcontinuegrantingCAPEXfunding(e.g.,IPCEI)forthecomingyearsandconsiderallowinggreenhydrogenproducerstosourcepower

fromnewrenewablegenerationwithstate-backedpriceguaranteeslikecarboncontractsfordifferenceschemes.4Beyond2030,othergreenhydrogencostdecreasestoward€3/kgwill

requireelectrolyzersoperatingatmaximumcapacityatthelowestpossiblegreenpower

costs.TurningthisEuropeanhydrogendreamintorealitywillrequireregulatorstoimmedi-atelyacceleratethedeploymentoflow-carbonpower,grid,andstorageinfrastructure,andtostimulatedemand-sideflexibility.

Upcomingdemand-sideregulationneedstocreatesufficientwillingnesstopay.

Forexistinggrayhydrogenproducerssuchasrefineriesandchemicalcompanies,REDIIIisplanningfirmquotasforgreenhydrogenshares.Togenerateawillingnesstopaybeyond€5/kg,thiswouldneedtocarryheftynoncompliancepenaltiesofaround€450/tCO2.Inparallel,

Europeshouldestablishframeworksthatenableproducersofgreencommoditiestosellatapremium.Forexample,greensteelorfertilizerquotaswouldallowkeygreenhydrogen

offtakerstopassadditionalcostsondownthevaluechain.5Finally,anydemand-sidesubsidyschemesshouldbetailoredtospecificindustries.Forexample,ifGermany’scarbon

TURNTHEGREENHYDROGENDREAMINTOREALITY:ACALLTOACTION

ExactdesignofonlyafewregulationswillstronglyimpacttheEuropeangreenhydrogenmarket

Exhibit6:KeyregulationsneededtoenablethetakeoffoftheEuropeangreenhydrogenmarket

H2supply

BringH2costs

toofftakers

below~€5/kg

Expandfundsfor

H2Global/the

Europ.Hydrogen

Bank(EU)and

SDE++(NL)

ExtendHGlobal/2

theEuropeanHydrogenBank

tolarge-scale

domesticprojects

DecreaseLCOH:

ElectrolyzerCAPEX

funding,RESCfD

forgreenH2pro-

duction,accelerated

deploymentof

RES,powergrids,

anddemand-side

flexibility

m

Refineries

Chemicals

Steel

Power

Raisewilli

REDIIInonco

~€45

Adjuste-mobility

multiplieratoset

conditionsfor

HBE/GHGquotaof>€3/kg

n

0/

gnesstopayabov

tomatchexp

pliancepenalty

tCO

2

Sector-specifisidesub

REDIIIapplicabilityendproducts,

Evaluationof(su

“safetyreserve”v

e€5/kgH2forrelev

ectedsupply

Greensteelquota

cdemand-

sidiesb

alsoonimportede.g.,fertilizer

bsidized)local

olumeproduction

SufficientDRI

CAPEXsubsidies

antvolumes

Incentivesfornew

H2capacity,e.g.,

targetedH2

backuptenders

Financingofthe

gapbetweenH2

andnaturalgas,

e.g.,CCfDs

Useofexisting

mechanisms

tospeed

implementionc

Infrastructure

Createclaritywithinthisyear

NL:alreadyclearperspectivegiven

DE:finishH2

conceptwithin’23asplanned

ImplementH2in

griddevelopm.

planandincentive

regulation

Ensureinitial

publicfunding

andplanningand

decisionssimilarto

GermanLNGact

Goals

Regulatoryinstruments

contractsfordifferencetenderswereindustry-agnostic,acompanyaimingtoshiftfrom

naturalgastohydrogen-basedsteelproductionwouldhavetocompeteagainstacompany

electrifyingitsheatgenerationatamuchlowercost.Inpractice,thiswoulddecelerate

decarbonizationeffortsinallindustrieswheredecarbonizationiscomparativelyexpensive

anddrasticallylimitshort-termhydrogendemand.

Thedevelopmentofhydrogeninfrastructuremustnotbedelayed.Tocreateinfrastruc-

tureclarityforproducersandofftakersalike,policymakersneedtoimposeambitiousplanning

throughgridagencies,createfavorableinvestmentconditionsthroughincentiveregulation

andpublicfunds,andprioritizetherapiddeploymentoftransportandstorageinfrastructure.

ConnectingEUindustrialcenterswiththelowest-costhydrogenproductionsitesshouldbe

apriorityforthedecadeahead.

a.Topreventthemarketfrombeingfloodedwithcertificateswhene-mobilityscalesup

b.E.g.,throughtargetedclimateprotectionagreementsinGermanyandcontinuedrolloutoftailor-madeagreementsintheNetherlandsc.ClimateprotectionagreementsandpowerplanttendersinDE,SDE++,andtailor-madeagreementsinNL

Source:BCGanalysis

3.Suchpublictenderschemeswouldalsohelpalleviatethe“contractdurationdilemma.”

4.InmanyEuropeanpowermarkets,wholesalepriceswillexceedthelevelizedcostofrenewablepower

productionduringmanyhoursinanygivenyearthroughoutthisdecade.Withunsubsidizedrenewables,

thiswillresultinlowelectrolyzerutilizationandhencehighergreenhydrogenprices.Greenhydrogen

producedfromrenewablesitesundera(nominally,butnotfactuallysubsidized)carboncontractsfor

differenceschemewoulddecreasethecostofinvestedcapitalandresultincheapergreenhydrogen

productionwhilestillprovidingprojectdeveloperswithreasonablereturns.

5.SuchRFNBOquotaswouldneedtobeaccompaniedbystrictproductcertificationrulesforbothdomestic

andimportedgoods.

BOSTONCONSULTINGGROUP7

Hydrogenplayersshouldalsoembraceaction

Theabsenceofdecisiveregulationshouldnotpreventhydrogenplayersfromtakingaction.Theemerginghydrogenmarketisararemarketopportunity.Thequestionisnotwhetheritwillflourish,butratherexactlywheninthecomingyears,where,andhow.Proactivitywillempowerhydrogenplayerstoseizeimmensepotentialandestablishaleadingpositioninthistransformativemarket.

Marketplayersshouldembracerisk-takingandgetarobustpipelineofhydrogen

projectsFID-ready.Thiswillrequireriskingsignificantdevelopmentexpenditure—butfor

thelikelyrewardoffastercapabilitybuildup,privilegedaccesstothemostpromising

offtakers,strategicpartnershipswithequipmentmanufacturers,andhighercredibilitywithkeyregulatorybodies.Inearlieremergingindustrieslikeoffshorewindandelectromobility,earlymovershavereapedlastingdividends.Hydrogenseemstobethesame.

Thecostofgreenhydrogenneedstofallfaster.Playersshouldpushtostreamlineproj-ectdevelopmentandscaleupcollaborationswithelectrolyzerOEMsandEPCs.Theyshouldalsoreemphasizetechnicalandeconomicintegrationbetweenelectrolyzersandrenewablegenerationassets,oftenrequiringclosecollaborationacrossbusinessunits.

Producersshouldreassesstheirtargetcustomerbase.Theemergingregulatory

env