European industries need to develop their strategy for hydrogen consumption in 2030

Common Futures foresees a tight domestic supply of renewable hydrogen in 2030 in European regions with large industrial sectors like Germany, the Netherlands, and Poland. This insight is based on new EU policy that imposes a mandatory share of green hydrogen by 2030, and the challenge of realising a massive scale-up of wind, solar and electrolyser capacity ánd the full realisation of a hydrogen backbone across multiple countries. From modelling future hydrogen supply, demand and price developments, we expect that industrial regions will partly rely on import of renewable hydrogen (derivatives) per ship from countries with high export potentials. Although this hydrogen can be produced at relatively low costs, (re)conversion losses and transport costs drive up the supply costs. As a result, hydrogen imported by ship will likely drive up the market price for hydrogen in regions with large industrial sectors in 2030, and increase production cost of hydrogen-consuming industries if they do not take mitigating action.

European hydrogen consuming industry is largely concentrated in Germany, the Netherlands and Poland

Today, hydrogen plays a small but essential role in the European energy system. The European demand for hydrogen added up to around 300 TWh in 2022, roughly equalling the total energy supply of Hungary.¹² Almost all hydrogen is produced from natural gas (grey hydrogen) and consumed in industrial heating processes or as a feedstock for the production of chemical products like plastics and fertilisers. Europe’s largest hydrogen consumers are Germany and the Netherlands, which respectively consume 57 TWh and 50 TWh annually.³,⁴ Poland comes third with an annual consumption of around 25 TWh.

The EC has introduced binding targets for the use of renewable hydrogen in industry in 2030

To stimulate a reduction of GHG emissions from industrial processes, the EC has recently introduced binding targets for the use of renewable (green) hydrogen in industry. Renewable (from electrolysis with renewable electricity) hydrogen can replace grey hydrogen and other fossil fuels in several industrial processes, and thus support the reduction of fossil CO2 emissions in industry. The update of the Renewable Energy Directive, “REDIII”, states that 42% and 60% of the hydrogen consumption must be renewable in 2030 and 2035 respectively.

The binding targets will create a robust demand for renewable hydrogen in 2030

Based on the current industrial demand for hydrogen alone, the targets in REDIII would already create a robust European demand for renewable hydrogen of at least 121 TWh in 2030 and 173 TWh in 2035. On top of that, the future industrial demand for hydrogen is expected to grow beyond the current demand, as the molecules can be used for the decarbonisation of steel production, and the production of renewable shipping and aviation fuels. For example, Germany expects domestic hydrogen demand to at least double by 2030, based on estimations for industrial demand (incl. transport fuels) and power generation.⁵

European supply of renewable hydrogen needs to scale-up massively, and national demand and supply levels may differ significantly

To meet the increase in demand, the European supply of renewable hydrogen needs to scale up from MWs to GWs in just 6 years’ time. The planned electrolyser capacities for 2030 in the EU member states combined add up to ~60 GW,⁶ which could produce ~170 TWh green hydrogen.⁷ However, this is at European level. National production and demand levels will differ significantly. The recent update of the German hydrogen strategy, for example, foresees that 70% of the green hydrogen demand in 2030 is to be covered by imports.⁸ This indicates the need for an interconnected European hydrogen network to allow the balancing of geographical differences. Realising the full development of a hydrogen backbone across multiple countries, while in parallel achieving a massive scale-up of wind, solar and electrolyser capacity in connected exporting countries, before 2030, is a major challenge.

Domestic supply will likely be tight and has to be complemented with (expensive) imports per ship

As a result, the domestic supply of renewable hydrogen in European regions with large industrial sectors will likely be tight, and has to be complemented with the relatively expensive import of hydrogen (derivatives) per ship. Although the hydrogen can be produced at relatively low costs in regions with high export potentials, (re)conversion losses and transport costs drive up the supply costs. Imports per ship are therefore likely to set the price for renewable hydrogen in 2030 and the years thereafter. This can significantly increase production costs for hydrogen-consuming industry, providing a strong incentive to take risk mitigating actions.

Hydrogen-consuming industries can mitigate risks by taking action now

For hydrogen-consuming industries, it is important to be aware of and prepare for the challenges outlined above. Being dependent on market developments could have an expensive price tag. Potential risk mitigating routes can include investing in hydrogen transport, interconnection or production capacity, exploring the (partial) use of alternative renewable energy sources, and bilateral agreements with domestic renewable hydrogen producers.

Any follow-up questions after reading this blogpost? Curious about our hydrogen outlook and price estimation models? Or interested in the support of Common Futures? Please reach out to Kees van der Leun (kees.vanderleun@commonfutures.com).