Setting EU targets will not be enough to harness the potential of bio-methane and hydrogen
Europe stands before an astounding decarbonisation potential with renewable gases and hydrogen. But unless strong regulatory measures are put in place, these won’t have sufficient access to the market, thereby putting at risk their potential to contribute to the EU’s decarbonisation objectives, CERRE experts say in a new report.
The in-depth CERRE study explores the economic outlook for renewable gases and hydrogen and makes proposals for an optimal regulatory framework. The study confirms the market potential of bio-methane and hydrogen in the EU but finds that the current production cost for both ranges from two to five times the current price of natural gas in the wholesale market. In the absence of support, this cost difference will likely impede their competitiveness.
The authors provide recommendations to help unfold their potential in light of Europe’s decarbonisation objectives. “Despite massive production potential in Europe, it is very unlikely that renewable gases and hydrogen will properly work their way through the market unless adequate support is put in place”, explain the authors of the study. “If European policy makers want to make the best use of the decarbonisation potential brought by hydrogen and renewable gases, they must think beyond EU targets and introduce cost-effective support schemes, increase their access to the grid, reinforce the transparency and interoperability of Guarantees of Origin and measure the impact of these policies over time”.
1. Set EU targets for bio-methane by 2030 and 2050 and review them by 2028
Policy makers should set European-wide targets to help renewable gases and hydrogen enter the market. The bio-methane EU market share should reach 10% by 2030 and between 30% and 50% by 2050, depending on the pace at which EU natural gas demand falls. In addition, the report considers that natural gas sourced hydrogen based on CCS technology is the most cost-effective solution to date. Indeed, renewable electricity-sourced hydrogen may hardly be competitive in the short run, due to the expected scarcity of renewable electricity in the system and the limited time for which electricity prices are sufficiently low. The authors also recommend that all hydrogen produced by 2050 should be carbon-free. Finally, these targets should also be enshrined in the design of National Energy and Climate Plans to ensure their success.
2. Guarantee the traceability of renewable gases via a certification system
Standards for renewable gases should be set at European level, making certificates for the Guarantee of Origin (GOs) interchangeable between Member States and ensuring compatibility with the ETS. Furthermore, the report recommends evaluating the transparency and market liquidity of the current mass-balancing approach which is used in the international trade of GOs.
3. Facilitate access to the gas infrastructure for renewable gases producers
Renewable gases facilities could be given a discount on fees for fixed network costs for accessing the gas network. They may also be given priority access in case of congestion.
4. Introduce support schemes to level the playing-field
The authors note that bio-methane and hydrogen would have greater chances to compete in the market with a strong CO2 price signal. They recommend that policy makers create production support schemes to foster the demand for renewable gases and hydrogen. These instruments should be competitive, tender-based, and incorporate mechanisms to adapt to cost developments.
“The study shows that there is much more to be done than just setting targets for renewable gases and hydrogen. It is also about how we will redefine the potential integration and coupling between gas, electricity and other sectors in Europe in the next decades”, concludes Máximo Miccinilli, CERRE’s Director for Energy.
ABOUT THE AUTHORS
José Luis Moraga is a Research Fellow at CERRE, Professor of Microeconomics at the Vrije Universiteit Amsterdam and Professor of Industrial Organization at the University of Groningen. He also teaches ‘Regulation and Competition Policy’ at Amsterdam University College. He is Co-Editor of the International Journal of Industrial Organization, and Associate Editor of the Journal of Industrial Economics.
Machiel Mulder is Professor of Regulation of Energy Markets at the University of Groningen, since 2013. He is an expert in network industries economics and regulation, in particular the energy industry. He is also Director of the Centre for Energy Economics Research (CEER) at the Faculty of Economics and Business (FEB) of the University of Groningen. From 2007 to 2013, he was the Deputy Chief Economist at the Netherlands Competition Authority (NMa).
Peter Perey holds an MSc in Economics from the University of Groningen. He specialized in Energy Economics and is currently a researcher at the Centre for Energy Economics Research at the Faculty of Economics and Business of the University of Groningen.