Energy

4 1. EXECUTIVE SUMMARY 1.1 Framing the Issue (a) The European Commission (EC) has made clear that renewable hydrogen (RH2) is necessary to meet the decarbonisation targets enshrined in Europe's Climate Law. 1 In 2021 the Fit for 55 package set out binding RH2 usage targets and quotas which will apply from 2030 to enable the European economy to achieve these decarbonisation goals. In 2022, REPowerEU, 2 the European strategy for reducing dependence on Russian fossil fuels, set even more aggressive targets, including RH2 production within Europe of 10 million tonnes / year (plus the same quantity in imports). (b) However, the high cost of RH2, whether produced in Europe or imported, threatens achievement of these objectives. For consumers, RH2 is not sufficiently competitive relative to the non-renewable energy or production processes it needs to replace, because: (i) these do not incur a sufficiently high cost for associated greenhouse gas (GHG) emissions; (ii) RH2 production costs are high and will remain so until the supply chain is scaled-up and the resulting technology improvements materialise; (iii) potential RH2 offtakers are delaying up-take decisions with the expectation that the price of RH2 will decrease (although whether this will in fact occur is debatable given significant supply chain bottlenecks and increasing capital financing costs facing the renewable energy industry in general), a decision which, collectively prevents the industry from achieving early ramp-up and benefiting from economies of scale; and (iv) there is insufficient supply to motivate the midstream and downstream infrastructure and other supply chain investments necessary to incentivise and implement large-scale offtake. (c) Until RH2 becomes cost-competitive, demand will continue to be shaped by policy rather than market forces. This will likely be the case throughout the 2020s and into the 2030s. (d) As with any commercial activity, capital for RH2 production projects in Europe will not be available at sufficient scale or on commercially acceptable terms until there is certainty that revenues from RH2 sales will cover investment, 1 Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 2 REPowerEU: Joint European Action for more affordable, secure and sustainable energy COM(2022) 108 final

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