The role for public support in growing ‘green’ hydrogen production

In this article, we look at how the market has grown to-date and what public support for green hydrogen can and should look like, with a focus on the position in France.

A booming market with high demand and potential for decarbonisation

The green hydrogen market is booming. Strong growth and demand is evidenced by the fact there were 522 projects worldwide and over 70 in France as of 2023. Highlighting its significance, a new joint laboratory was established by the French National research center, the CNRS, together with Elogen, and the University of Paris-Saclay in November 2023, to foster innovation in the transition to green hydrogen. This burgeoning interest highlights green hydrogen's role in advancing towards cleaner energy sources, with developers eagerly seeking financing for their production facilities. The sector's financing landscape in France and Europe is rapidly evolving, driven by investments in renewable energy and sustainable technologies.

Bodies such as the International Energy Agency, as well as the Hydrogen Council and McKinsey & Company, predict that the global demand for will grow across multiple sectors until 2050. The main projected segments of demand are:

• industrial processes – historically the main consumers through refining, ammonia, and steel production, this sector's demand is expected to rise with global industrial growth;
• transportation – anticipated to become a major hydrogen consumer by 2030, especially with fuel cell electric vehicles and heavy-duty transport, driven by stricter CO2 regulations and a shift from fossil fuels. This sector is predicted to be the largest demand segment by 2050;
• power generation – hydrogen could play a crucial role in energy storage and electricity generation from renewable sources, with its demand in power expected to increase as renewable energy capacities grow;
• residential and commercial heating – hydrogen's use in heating, directly or mixed with natural gas, is set to expand significantly as efforts to decarbonise heating systems advance; and
• other applications – increased demand is also expected in producing methanol, hydrogenation of fats and oils, and as a chemical manufacturing feedstock, fueled by population growth, urbanisation, and industrialisation.

This demand reflects hydrogen's potential to significantly contribute to reducing CO2 emissions and reliance on fossil fuels. In France, replacing the 430,000 tonnes of annually produced fossil-fuel-derived hydrogen could significantly cut CO2 emissions, underscoring the shift towards more sustainable alternatives in existing markets with high environmental impacts.

Evidence of public and private support

Investments in green hydrogen are surging, backed by the public and private sectors. France and other European nations are prioritising green hydrogen for energy transition towards carbon neutrality. For instance, both France's national hydrogen strategy, which was launched in December 2023, and the EU's Green Deal, highlight the strategic role of hydrogen in reducing emissions and fostering renewable energies. The European Commission is providing regulatory support and financial incentives, including the Clean Hydrogen Alliance, to advance the hydrogen economy.

Significant funding from governments across France and Europe is boosting hydrogen technology research, development, and application. This includes support for 46 projects in France and 80 EU projects via the European Hydrogen Bank, as of late 2023. Public-private partnerships are crucial in scaling green hydrogen technologies, merging efforts from state bodies, industry, academia, and financial entities.

The finance sector's growing interest in green hydrogen, attributable to its sustainability and potential economic benefits, is also notable. Investments are flowing into production projects both in France and internationally. This growth is driven by increasing awareness of climate change, regulatory pressures to reduce emissions, technological advancements, and the expanding availability of renewable energy sources.

While future growth will depend largely on private financing, green hydrogen can and should also be supported by public entities, such as the French state and the EU through financial support and other measures. This will help provide commercial banks and financial institutions with sufficient comfort and foreseeability to finance such projects.

What public support for green hydrogen looks like

Public support for green hydrogen needs to include financial intervention. Measures like grants or subsidies play an important role. The grant of up to €149 million given by the French state to Lhyfe in March 2024 for a large-scale production site in Le Havre is an example of the intervention that will be welcomed by industry.

Public support, however, is not just about funding projects. For France’s part, in setting the objective of being a worldwide leader of renewable hydrogen throughout the supply chain, it has identified four main areas where public support is needed: enacting a proper legal framework; shaping flexible grid infrastructures; decreasing the price of renewable hydrogen; supporting its development.

Public support – finance

In terms of to the “financial aspect” of public support, a degree of intervention is needed to help developers secure offtake guarantees to reduce as much as possible the operational risks. Developers will typically look to secure a hydrogen purchase agreement on as long a term as possible. With the market still in its relative infancy, there are uncertainties to overcome around wrapping up production, pricing, overall production cost with other operational costs into a commercial model that can secure long term offtake. There is therefore an important role for backstop public support to provide comfort as to long-term income.

Public financial support is also important to put developers in a position to offer competitive green hydrogen. While offtakers gain in marketing and communication when advertising they use green hydrogen, fundamentally, they will only shift to green hydrogen if it is available at an acceptable price. According to recent studies, producing a kilogram of renewable hydrogen costs between five and eight euros. More than half of this cost is incurred from the cost of electricity for electrolysers. To be competitive, the price per kilogram of green hydrogen must fall to between two and six euros. The state can also intervene by entering into premium contracts, similar to the ones entered into in wind and solar technologies, to guarantee producers a viable income.

Further public investment, notably in infrastructure, is another important component of public support. In France it is estimated that €24bn of investment is required by 2030 - this requires support from the state.

Public support – law and regulation

A stable legal framework is essential for the growth of the green hydrogen market. This means avoiding discretionary regulations, ensuring clear environmental law directives, and predictable instruction timeframes. Political support should be consistent and not swayed by shifts in public opinion. National regulation consistency is needed, avoiding local interpretations that diverge substantially.

Public support – electricity grid development

Grid reinforcement is important due to the electricity demands of hydrogen production. Addressing peak electricity consumption times and ensuring grid capacity aligns with production goals are critical. This includes collaboration with transportation system operators, like RTE in France, which has emphasised grid enhancement for hydrogen in its investment plans.

Furthermore, the development of hydrogen infrastructure, such as the planned 500 km of electric pipes in France, requires careful planning, funding, organisation, and regulatory oversight. Prioritising investments for hydrogen hubs and ensuring grid flexibility are also vital components. Additional support could also come in the form of incentives for hydrogen production within electricity programs and setting of clear production targets.

How financial and non-financial support measures intertwine

Financial and non-financial supports are interconnected and influence the success of green hydrogen projects. France's call for tender process offers an example of how non-financial considerations, like project capacity limits and selection criteria, can impact financial aspects.

The first period of call for tenders in France is for a maximum capacity of 150 MWe, with a minimal capacity of 30 MWe electrolysers per project and up to five candidates allowed to participate. The result of this is that there are unnecessary constraints on project capacity and that at least one of the five bidders is excluded, meaning they will have incurred development costs and expended human resources and time for nothing.

Co-written by Charles Bressant and Léa Fournier of Pinsent Masons.