Policy review

Policy Toolbox
for Low Carbon
and Renewable
HydrogenEnabling low carbon and renewable hydrogen globally
November 2021

Published in November 2021 by the Hydrogen Council. Copies of this document are available uponrequest or can be downloaded from our website: www.hydrogencouncil.com.
This report was authored by the Hydrogen Council.
The report has been compiled both from public sources and proprietary data of the Hydrogen Council.
Its messages have been acknowledged by an Observatory Group, that consists of representatives
from government agencies and academia, as well as associations and companies active in sectors
like regenerative electricity generation, electricity grid equipment manufacturing, electric vehicle
charging, fleet management.

The authors of the report confirm that:a. There are no recommendations and/or any measures and/or trajectories within the report that
could be interpreted as standards or as any other form of (suggested) coordination between theparticipants of the study referred to within the report that would infringe EU competition law; andb. It is not their intention that any such form of coordination will be adopted.

Whilst the contents of the Report and its abstract implications for the industry generally can be
discussed once they have been prepared, individual strategies remain proprietary, confidential
and the responsibility of each participant. Participants are reminded that, as part of the invariable
practice of the Hydrogen Council and the EU competition law obligations to which membership
activities are subject, such strategic and confidential information must not be shared or coordinated –including as part of this Report.

TABLE OF CONTENTS
4

Executive summary

18

Introduction and approach

26

Policy assessment and packages

36

Enabling policies

44

Country archetypes

54

Societal value and values

56

Appendix – detailed policy assessment results and quantification methodology

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Executive
summary

4

Policy Toolbox for Low Carbon and Renewable Hydrogen
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The recent surge in interest by policymakers for low carbon and renewable hydrogen1 reflects agrowing recognition of its important role in decarbonizing the energy system. Hydrogen will playa key role in enabling greater and faster integration of renewable energy in the system and fostering
greater resilience, cost-efficiency, and optimization at the system level. Going hand-in-hand withelectrification, the development of the hydrogen economy is set to enable deep decarbonizationworldwide in an effective manner, allowing countries to meet their climate goals, boost green growth,and create sustainable jobs. Over 30 countries have already introduced hydrogen strategies, while
industry has announced more than 520 large-scale low carbon and renewable hydrogen projects.
While rapid technological learning brings cost competitiveness within reach for some
applications, unlocking the full potential of low carbon and renewable hydrogen (defined in the
Appendix) requires further policy development. Notwithstanding a very large volume of projects
and funding announcements, there remains a significant gap to realize global climate change
mitigation ambitions. The full potential of hydrogen requires direct investment of around USD 700bn
by 2030. Projects and government support worth USD 160bn have been announced already, leaving
a gap of nearly USD 540bn2. For these investments to take place, the industry needs a clear policy
and regulatory framework, and support for scaling up hydrogen solutions, especially during the earlymarket building phase. Coordinating policy and regulatory activity on the one hand with projects andinvestment activity on the other is key for industry and governments to jointly deliver on the sharedclimate objectives as soon as possible.
Countries in Europe and in Asia have been at the forefront of hydrogen economy development.
In the EU, dedicated hydrogen support instruments such as Contracts for Differences (CfDs) and
Carbon Contracts for Difference (CCfDs), designed to provide a ‘push’ for supply and a ‘pull’ fordemand respectively, are already under development. Retrofitting and repurposing the existing gas
infrastructure and building new dedicated transmission and storage systems for hydrogen constitutes
another priority for the industry and policymakers. In Europe, for example, a plan for the developmentof a Hydrogen Backbone connecting large-scale production of hydrogen with demand clusters has
been put forward. At the same time, many other regions have set their low carbon and renewablehydrogen ambitions and are looking at developing the legislative frameworks that would enable theirachievement.
Against this backdrop, this report, provides a practical guide to the full policy toolbox. It is
directed at policymakers and legislators who can use it as a menu of policy tools to deploy when
designing or implementing hydrogen policy and regulatory frameworks. The study is based on anassessment of the performance of hydrogen policies in different stages of market maturity (e.g.,
before and after the technology is commercially viable) and segments of the value chain (e.g.,hydrogen production, mid-stream hydrogen infrastructure and hydrogen use). 48 policies wereshortlisted based on their economic efficiency and effectiveness and mapped to barriers across thevalue chain and over time. These policies were subsequently clustered into policy packages for three
country archetypes: a self-sufficient hydrogen producer, an importer, and an exporter of hydrogen.
Last but not least, we explored the societal value that can be unlocked by countries thanks to thedevelopment of the hydrogen economy, looking at it through the lens of Sustainable Development
Goals (SDGs).
Six key principles for effective hydrogen policy and regulatory frameworks emerged from thisanalysis. It should be noted that all six pillars are equally important and the sequence at which they
appear does not reflect any particular hierarchy.

1
2

See Appendix section Defining low carbon and renewable hydrogen
Appendix 2.1

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6 pillars of efficient policy design for low carbon
and renewable hydrogen
1 Make use of local
strengths & benefit
from cross-bordercooperation
Leveraging local strengths
is an important starting
point in policy design, whichshould be complemented
by cross-bordercooperation and trade to
unlock efficiency gains.

4 Support robust carbon
pricing

Robust regional carbon
pricing mechanisms should
be built up from existing
schemes, and work
together with hydrogenspecific support to drive
efficient and effective
uptake in the longer term,whilst mitigating carbon
leakage.

6

2 Create certainty
through targets
and commitment

To drive down costand attract investment,
governments can create
certainty through legislation,
reducing policy risks andmarket uncertainty.

5 Adopt harmonizedcertification schemes

International standards
and robust certification
systems play a crucialrole in the development of
the hydrogen economy,
enabling cross-border trade
in hydrogen.

Policy Toolbox for Low Carbon and Renewable Hydrogen
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3 Provide hydrogenspecific support
across the value chain

To catalyze and grow newmarkets, hydrogen-specificsupport is required acrossproduction, midstream
infrastructure, and end-use
sectors like industry andtransport.

6 Factor in societal value
and values

Societal value and values
can be factored into policy
decisions. Well-designedhydrogen policies can makea positive contribution toseveral UN Sustainability
Development Goals.

1

Leveraging local strengths is an important
starting point in policy design, which should becomplemented by cross-border cooperation andtrade to unlock efficiency gains.
Hydrogen is a key energy vector to reach net zero emissions globally. As a starting point, countries
seeking to participate in the hydrogen economy are likely to take into consideration•

Countries’ resources and technological endowments (e.g., renewable electricity andnatural gas production capacity; existing gas infrastructure and prospects for repurposing or
retrofitting it to transport or store hydrogen, as well as synergies with CO2 infrastructure) (seeBox 1)•

Local institutional and regulatory frameworks where the energy industry currently operates(while in some jurisdictions the energy sector is fully liberalized, in others it may be verticallyintegrated)

Most commonly, these starting conditions are factored into policy design at the outset.
Based on these premises, we identify three archetypal country groups:•

Self-sufficient countries aiming at producing and consuming hydrogen within their respective
jurisdictions. These countries would need to create the entire value chain: upstream supply,
midstream transmission and storage, distribution, and downstream demand.

•

Exporters would focus on developing export infrastructure and optimizing project locations
to create export hubs in a manner that contributes to the development of the local hydrogen
economy.

•Importers would focus on developing import infrastructure, work with exporters to ensure
they get access to affordable low carbon and/ or renewable hydrogen and develop
downstream applications, ensuring they have control over where hydrogen is used.

At the same time, countries and regions can reap the benefits brought by international cooperationand optimization of cross-border infrastructure. In many cases, cross-border integration can
maximize infrastructure use and improve the overall system efficiency by linking greater production
capacity with larger demand centers. International trade in hydrogen will play a key role in efficiently
matching lower cost supply locations and major demand pools across geographies.

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Box 1

Low carbon hydrogen production: synergies with
CO2 infrastructure
Jurisdictions seeking to unlock their low carbon hydrogen potential can use dedicated policy tools to
incentivize carbon capture and retrofit existing carbon-intensive hydrogen production. For example,
in the UK, private law contracts, similar to CfDs, will be introduced to provide the emitter with apayment per ton of captured CO2.
In addition, many jurisdictions are already considering policy instruments to support CO2 pipeline
network and port infrastructure development (e.g., the EU proposal for TEN-E revision of Dec 2020).
Provision of CAPEX support for multimodal transportation of CO2 can also help avoid stranded assets
in the long term (by way of enabling a switch to transporting hydrogen or ammonia) and unlock
access for CO2 storage in locations where there is no business case for hydrogen pipeline network
development.
The UK’s Carbon Capture Readiness Directive, introduced in 2009, states all planned combustion
plants above 300 MW need to be constructed with space allocated for CCS facilities andinfrastructure. In July 2021, there were calls for this to be expanded to include combustion plants
below the current 300 MW generation threshold.3

38

UK Government, Decarbonisation readiness: call for evidence on the expansion of the 2009 Carbon Capture Readiness
requirements, 2021. https://www.gov.uk/government/consultations/decarbonisation-readiness-call-for-evidence-on-theexpansion-of-the-2009-carbon-capture-readiness-requirements

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2

To drive down cost and attract investment,
governments can create certainty throughlegislation, reducing policy risks and market
uncertainty.
Reducing risk is a vital component of delivering hydrogen at scale, given the high capital cost of many
applications and uncertain investment environment. High policy risk can make investment difficult orraise the cost of capital. De-risking effectively lowers the cost of capital for hydrogen projects, which
both reduces hydrogen costs and hence drives uptake. This not only means decarbonization targets
are more likely to be achieved, but also that the overall transition will be delivered at lower total costs.
Policy risk can be reduced through a package of targets, roadmaps, and reshaped domestic policy
to underpin national delivery:•

Targets for decarbonization of the economy and national hydrogen strategies orroadmaps. Policymakers can reduce policy-related risk through a combination of long-termgoals and short-term targets. Long-term decarbonization goals, clear roadmaps, and enabling
legislation coupled with binding short-term targets for hydrogen deployment, quantified CO2
reduction targets, quotas and standards incentivizing low carbon and renewable hydrogen in
end-use sectors can pave the way for the hydrogen economy. These policy tools help provide
direction and market foresight to the industry. For example, as part of the implementation of
the EU Hydrogen Strategy, the European Commission recently announced its proposal for an
EU-wide 2030 target for a 50% share of renewable hydrogen consumption in industry.4•

Commitment to a schedule of budgets for hydrogen. Where project delivery depends
on subsidies, it is important to provide visibility, ideally for 5-10 years in advance, over the
likely subsidization regime. This could be through a schedule of budgets, commitment of aminimum volume of projects and clear decision rules about how subsidization may changeover time in response to technological developments. Given the multi-year lead times for thedevelopment of many hydrogen projects, this visibility is crucial to reducing risk and making
projects financeable.

•

Correcting market distortions that disincentivize low carbon and renewable technology
adoption. For example, removing subsidies for fossil fuels can make clean technologies,
including low carbon and renewable hydrogen, more competitive.

•

Streamlining policy and removing excessive regulatory barriers, including simplifying
licensing and permitting processes and removing undue legislative barriers for renewable andlow carbon hydrogen production (see Box 2).

4This target is proposed in the framework of the European Commission proposal for the revision of RED II (recast Renewable
Energy Directive) published on 14 July 2021

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9Market risks, such as uncertainty over prices for hydrogen in the market can be reduced byproviding revenue stabilization through government-backed contracts such as CfDs and CCfDs(see CCfD deep-dive). These revenue stabilization schemes– which provide a ‘push’ for supply anda ‘pull’ for demand respectively – are increasingly recognized and adopted as part of a holistic policy
framework for decarbonization encompassing a hydrogen strategy. Examples of these schemes are
already being enacted. For instance, the German government is setting up the H2Global5 initiative
featuring a CfD scheme that enables temporary compensation for the difference between thepurchase price (production plus transport costs) and the sales price (currently the market price forfossil hydrogen) of renewable hydrogen and derived products. It is due to be applied to imported
renewable hydrogen specifically in the initial phase, and it may be expanded to incentivize renewablehydrogen production at the national level. Downstream, several countries are considering introducing
carbon contracts for the difference (CCfDs) for hydrogen covering industrial sectors initially, aiming to
expand it to other end-use sectors in the future.

5

10

H2 Global, https://h2-global.de/

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3

To catalyze and grow new markets, hydrogenspecific support is required across production,
midstream infrastructure, and end-use sectors
like industry and transport. Design of support
could evolve as the market matures.
During the market creation and growth phases, a package of hydrogen-specific support is essential
to attract investment in infrastructure, hydrogen production, and create demand for low carbon andrenewable hydrogen and their products.
A holistic approach to policy design is crucial to unlocking the full potential of hydrogen as an energy
vector. Such an approach should underpin roadmaps and reflect the key role of hydrogen in enabling
faster and greater integration of renewable capacity, greater cost-efficiency and optimized energy
systems. Supply-push and demand-pull measures should be accompanied by efforts to repurpose
and retrofit existing gas infrastructure, and build new dedicated transmission and storage capacity
for hydrogen as appropriate..
This report identified effective hydrogen policy packages from a new, comprehensive evaluation of 12
key policies designed to increase hydrogen adoption. The analysis measured these policies against
six performance criteria, including their ability to deliver first of a kind (FOAK) projects, minimize
societal costs, span value chains and their flexibility of ambition, ease of implementation and easeof bankability. The resulting policy packages are broadly applicable across the value chain. Policy
packages can be tailored depending on policymaker preferences for maximizing efficiency, retaining
control over where and how much hydrogen is produced or maximizing the speed of deployment.
Design of support can evolve as the market matures. During the market creation and growthphases, a package of hydrogen-specific support for the whole hydrogen value chain is essential toattract investment in infrastructure, hydrogen production, and to create demand for low carbon andrenewable hydrogen and derived products. CAPEX and OPEX support, alongside dedicated targets
and quotas for renewable and low carbon hydrogen deployment in end use sectors - industry andtransport in particular - will be crucial in early market and market ramp up phase. Over time, thispackage can and must evolve, exposing developers and investors to more risk and competition, anddriving costs down further.

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11One key finding is that the evolution of policy and regulatory measures should be factored into
policy design upfront, providing the necessary policy and regulatory predictability for market
participants and investments. This evolution can be seen in the policies applied to three different
phases of market maturity.
1. Market creation. A full policy package consisting of incentives, de-risking infrastructure, anddownstream demand-pull measures can help commercialize technologies and create demand. The
core elements of a policy package include:•

De-risking infrastructure can reduce costs and unlock private investment. Policy instruments
to achieve this objective include debt guarantees, as well as loans and grants for hydrogenprojects upstream (e.g., hydrogen production) and midstream (e.g., retrofitting andrepurposing the existing gas infrastructure and new dedicated gas infrastructure).

•

Demand creation policies targeting the downstream segment of the value chain include
price support mechanisms (e.g., revenue top-up and stabilization mechanisms) coupled withquotas, targets, and standards for a minimum quantity of hydrogen used in specific market
segments. Tools enabling market-based valuation of the sustainability attributes of hydrogen,in particular robust certification systems, will play a key role in creating consumer trust, pulling
forward demand.

2. Market growth. Moving towards increased exposure to market prices and increasing competitive
tension to drive costs further down:•

Cost reduction can be achieved through designing a delivery mechanism that encourages
competition, such as allocating subsidies through auctions. Countries may choose to holddistinct auctions for low carbon and renewable hydrogen projects based on their policy
choices.

•

As the number of market participants increases and hydrogen uptake gains momentum,hydrogen producers and users should reach economies of scale, thereby reducing costs
further.

•

In jurisdictions where carbon cap-and-trade systems and CCfD schemes are in place, thegap between the strike price required for hydrogen projects and the reference price covered
through CCfDs will gradually decrease, provided that the carbon price becomes more robust.

3. Market maturity. Once investment expenses are recovered and OPEX support is no longer
necessary, revenue stabilization mechanisms can be phased out, and the market can start relying
on robust (most likely, regional) benchmark prices for hydrogen. These benchmark prices would be
supported by carbon prices robust enough to level the playing field for hydrogen solutions, letting
them compete with other low carbon technologies and high emissions counterfactuals, ensuring
efficient resource allocation and minimizing societal costs.

12

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Figure 1
Evolution of policy measures along different stages of market development can be factored in
upfront to unlock the potential flow of investment

Market creation

Market growthMarket maturity

Investment per period,
USD bn1
6,000

5,550

5,000

HydrogenDirectInvestment
Upstream

4,000
Midstream

3,000
1,800

2,000
1,000

Downstream
230

02020-252025-352035 onwards

Market maturity
1. Investment in line with the «Hydrogen for Net Zero» scenario; upstream includes hydrogen production (electrolyzers, CCS
retrofits for blue H2, new SMR/ATR plants), excludes renewables/gas upstream; midstream includes distribution, transmission(shipping, pipelines, conversion etc.) and storage; downstream investments for end-applications (ammonia plants, fuel cells etc.)
Source: Hydrogen for Net Zero

Enabling policies play a key role across all phases of market development (see principle 4 below). In
particular, robust hydrogen certification schemes (evidencing the origin, carbon footprint and othersustainability characteristics of hydrogen production) are key to enable a market-based approach tohydrogen sourcing.

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4

Carbon prices work together with hydrogenspecific support to drive efficient and effectivehydrogen uptake in the longer term.
Robust carbon pricing mechanisms can incentivize hydrogen deployment in the longer term andhelp provide a level playing field for low carbon and renewable hydrogen to compete alongside otherlow carbon technologies. Regional cap-and-trade can build towards a globally linked carbon pricing
regime or regional carbon prices. Interactions between carbon prices and direct incentives canbe managed through policy and market design. While carbon leakage can be prevented by welldesigned carbon border adjustment mechanisms.
Key design considerations for carbon pricing schemes implementation:• Efficient delivery: CO2 prices can play a key role in ensuring competitiveness of hydrogen
applications and bringing them ‘into the money’ with conventional technologies. Cap-andtrade systems across regions have already demonstrated their effectiveness at incentivizing
fuel switching from coal to natural gas. Similarly, carbon pricing can encourage switching insegments where low carbon and renewable hydrogen is closest to being cost-competitive with
the incumbent technology, such as from grey to low carbon and renewable hydrogen in industrial
application, especially if the cost of switching from grey hydrogen to low carbon and renewablehydrogen becomes the key pricing parameter driving cap-and-trade systems6. In establishedmarkets, reinforcing and expanding cap-and-trade systems to cover all end-use sectors as far
as appropriate, can drive cost competitiveness across a wide range of applications7. In somegeographies and sectors, this cost-competitiveness can be achievable by 2030, with heavy duty
trucks, ammonia synthesis process emissions, and urban buses being able to break even withconventional technologies at carbon prices <100 USD/t.
•

Preventing carbon leakage and carbon displacement: Policies that target traded sectors need
to be secured to ensure carbon is not merely «displaced,» putting producers at a competitive
disadvantage. The right policy measures, such as introducing or strengthening carbon pricing,
can propagate decarbonization policy elsewhere. Carbon leakage, where carbon-intensive
production re-locate their production facilities to other jurisdictions that have no carbon price inplace – or where the carbon price is not sufficiently robust – can be addressed through a welldesigned carbon border adjustment mechanism (CBAM) to ensure international competition
and a level playing field for industries exposed to carbon pricing.8•

Evolution at international level: Carbon cap-and-trade systems introduced at national level
and complemented by anti-leakage mechanisms if necessary can pave the way for regional oreven global carbon pricing in the longer term.

•

Potential policy interactions: The combination of direct incentives for hydrogen and carbon
price schemes could create both positive policy interactions and potential policy overlaps.
Best-practice design can ensure that the interactions between direct incentives such as tax
credits, CCfDs, and carbon pricing are accommodated in the schemes’ design and managed
successfully. For example, the Netherlands’ proposed SDE++ scheme is a variable premium
model which applies to a variety of low carbon technologies (including renewable hydrogen,low carbon hydrogen and CCUS) that fades as the market value of carbon increases.

6

BNP Paribas, Deep Decarbonization: green hydrogen, net zero and the future of the EU-ETS, 2020
Part of the auctioning revenues from cap-and-trade systems can be used to address its potential distributional effects, suchas providing financial support to vulnerable households (e.g., European Commission proposal for the establishment of a Social
Climate Fund)BNP Paribas Asset Management, Deep Decarbonization, Green Hydrogen, Net Zero, and the Future of the EU-ETS, (October2020), https://docfinder.bnpparibas-am.com/api/files/FB39FAB1-A279-41CC-9CDD-4D22827359B0

7

8

14

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5International industry standards and harmonizedhydrogen certification schemes play a key rolein enabling market-based valuation of hydrogensustainability attributes, thereby building
consumer trust, stimulating demand, andfostering international hydrogen markets.
Ensuring that policy design at the country or regional level is informed by common international
standards is a crucial prerequisite for the emergence of global, cross-border hydrogen markets.
International standards create a common language for the industry across the value chain andfacilitate the commercialization of hydrogen technologies and hydrogen-based products. A standard
methodology for determining the carbon footprint and other sustainability attributes of hydrogenproduction pathways will play a crucial role in informing the development of harmonized hydrogen
definitions and certification systems. Hydrogen certification systems, in turn, are necessary to build
consumer trust and stimulate demand while enabling cross-border trade in hydrogen and fostering
market liquidity.
Ultimately, international standards and harmonized rules underpinning certification systems are
key to facilitating global trade in hydrogen, efficiently matching supply and allowing the most costcompetitive production regions to be tapped into. In Japan, reduction of the administrative burden
on import from Australia through international standards and certification could generate USD 2bn
of savings in 2030.9 While in the case of Germany, by meeting 50% of forecasted low carbon or
renewable hydrogen demand in 2030 through pipeline imports from Spain, annual savings of ~USD
340mn can be realized.10 Countries with production capacity constraints such as Japan and Korea,
could import cost-competitive low carbon or renewable hydrogen from a range of exporter regions.

910

Appendix 2.6
Appendix 2.5

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Box 2

Removing regulatory and market design barriers
for renewable and low carbon hydrogen uptake•

Lengthy or complex licensing and permitting processes for projects in the jurisdictions
where they seek to operate may constitute a barrier to renewable and low carbon hydrogen
deployment and should be addressed by policymakers.

•

There may be unintended consequences of renewable and/or low carbon-specific hydrogensupport that need to be managed. In some jurisdictions, policymakers are considering placing
stringent obligations on hydrogen producers to qualify the electricity used for hydrogenproduction as renewable (e.g., in Europe, the revised Renewable Energy Directive11 is likely toinclude such a provision). Inflexibility may introduce additional costs and act as another barrier
to deploying renewable hydrogen and derived fuels at scale.12•

It is crucial to modify the existing energy market design to generate incentives for gridbalancing and storage, which renewable hydrogen can provide. This would allow renewablehydrogen producers to compete on a level playing field with other energy technologies relying
on renewable energy and to deliver overall energy system efficiency and optimization by
providing grid balancing and flexibility services.

Box 3Best practices to address methane emissions
Industry players are making efforts to reduce fugitive emissions associated with low carbon hydrogenproduction. A robust international policy at the international level and regulatory framework aimed
at reducing fugitive emissions can help level the playing field at the international level for market
participants, considering the performance of the CCS technologies that the industry seeks to deploy(such as SMR + flue gas CCUS or SMR+CCUS and ATR + CCUS with >95% overall capture rates).

11

The Delegated Acts on Renewable Fuels of Non-Biological Origin (RFNBO) envisaged under Art. 27(3) and Art. 28 (5) of RED
II will set out the methodology for qualifying electricity used for RFNBO production as renewable and the methodology forassessing the GHG emissions savings from RFNBO respectively (both DAs are to be adopted by 31 December 2021).
12
Eurelectric powering people, RFNBOs Renewable Fuels of Non-Biological Origins published in January 2021.
https://cdn.eurelectric.org/media/5182/eurelectric_reaction_paper_on_rfnbos-2021-030-0013-01-e-h-B5F7EAF8.pdf

16Policy Toolbox for Low Carbon and Renewable Hydrogen
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6Societal value and values can be factored into
policy decisions.
Alongside the transition towards carbon neutrality, countries would benefit from considering the fullrange of societal impacts and the benefits that can be unlocked through the development of thehydrogen economy. The hydrogen economy can benefit society delivering on certain UN Sustainable
Development Goals (SDGs), including:•Good health and well-being•

Green growth and sustainable jobs•

Diversity, equity, and inclusion•

Opportunities for indigenous communities•

Sustainable cities and communities

Section E of the report elaborates on the above in more detail.

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Introduction &approach18

Policy Toolbox for Low Carbon and Renewable Hydrogen
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Strong momentum for low carbon and renewable hydrogen reflects a recognition of its vitaland systemic role in decarbonizing the energy system. Over 30 countries have now introducedhydrogen strategies, while more than 520 large-scale low carbon and renewable hydrogen projects
have been announced by the industry, amounting to a total anticipated investment at the time ofwriting of USD 160 bn until 2030. Considering the rapid growth in renewable electricity capacity
foreseen for the decades to come, the flexibility that hydrogen provides can reduce total systems
costs significantly. In simulations of energy systems without existing hydropower and nuclear
power, this flexibility translates into a saving of 10-15% of total power system costs. Looking at wellintegrated energy markets, such as those in the EU, with access to flexible capacity provided byhydropower and nuclear, savings are somewhat lower - 2-3 USD/MWh – but still translate into annual
savings of roughly USD 12 bn13. This points to the key role of hydrogen as the enabler for fasterand greater integration of renewable capacity, as well as greater cost-efficiency and optimization atenergy system level.
Rapid technological learning is bringing cost competitiveness within reach for many projects
and applications. Scaling up projects will further accelerate a downward cost trajectory. Hydrogen
Council research has found that scaling up hydrogen solutions can reduce costs along the value
chain by 45-70%14. In the case of electrolyzers used for renewable hydrogen production, scaling up
can lead to cost reduction of as much as 50% by 2030. Midstream, the maximization of the use ofhydrogen infrastructure could realize a 70% reduction in the cost of transmission and distributionof hydrogen. Downstream, a 45% reduction in the cost of fuel cell stacks could be realized throughmanufacturing scale up (e.g., producing 200,000 units of fuel cell stacks rather than 10,000)15.
Scaling up hydrogen technologies quickly across a wide range of applications can result in earlier
tipping points being achieved for breakeven with conventional technologies.
However, unlocking the full potential of low carbon and renewables hydrogen requires welldesigned enabling frameworks. Despite the current policy and investment momentum for low
carbon and renewable hydrogen, there is USD 540 bn investment gap to meet announced
government targets. Europe, Japan, and Korea are examples of leaders in the development ofdedicated hydrogen strategies. At the same time, many other countries and regions have set out
their low carbon and renewable hydrogen ambitions and are looking at developing the policies andregulations that would enable their achievement. Countries and international organizations, including
IRENA and IEA, recognize the importance of policy frameworks to ensure low carbon and renewablehydrogen can deliver its full potential16. Investment gaps vary by region, with the highest in China andlowest in Japan and Korea (Figure 2).

13

Appendix 2.7
Hydrogen Council, Path to Hydrogen Cost-Competitiveness: a cost perspective, 2020
15
Hydrogen Council, Path to Hydrogen Cost-Competitiveness: a cost perspective, 2020
16
IEA, Global Hydrogen Review 2021, 2021
14

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Figure 2
Investments announced vs. the required investments to meet stated government targets for2030.17
Cumulative investment required1 by region, USD billion, 2030
Gap2

Announced investments 3

200

200
180

150

150

150
100

100

90

160

70
80
50
60

60
20

10

0

Japan & Korea

North America

50
20EuropeChina

1. Excluding downstream investments (e.g., factories, mines) and renewables and CCUS infrastructure)
2. Direct investments only
3. Taking into consideration of the direct investments and the ~USD 150bn of government direct investments
4. Rest of the world
Source: Hydrogen Insights Project and Investment tracker

17

20

Appendix 2.1

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RoW4

Role and value of this report
The report is directed in particular at policymakers and legislators who can use it as a menu ofpolicy packages and tools to deploy when designing or implementing hydrogen policy and regulatory
frameworks in their jurisdictions. The report delivers this by:•

Capturing the evolution of policy design along different stages of hydrogen technology
and market maturity. It demonstrates the role of direct support measures for hydrogen in theearly market building phase. It also shows that the scope for the evolution of these measures
as the market matures over time can be factored in policy design upfront to ensure policy andregulatory predictability for market participants.

•

Setting out policy pathways through country archetype examples that can be used to
inform hydrogen policy and regulation in different national and regional contexts. There isno ‘one type fits all’ policy to unlock low carbon and renewable hydrogen across geographies.
Through the development of multiple policy pathways, the assessment lets policymakers
choose policy packages that best serve their ambitions, preferences, and local and regional
context.

•

Offering insights into the cross-cutting policies and measures that are vital to enablecross border trade in hydrogen, while building consumer trust. These include developmentof international industry standards and harmonized rules to underpin certification systems forhydrogen.

•

Identifying learnings from the deployment of other low carbon and renewable
technologies, considering the success stories in policy design (such as direct support
schemes and quotas for renewable electricity), as well as the remaining policy barriers andchallenges (including those associated with licensing and permitting requirements).

•

Shedding light on the broader societal value of hydrogen policy, including positive impacts
that hydrogen can have along the UN Sustainable Development goals that go beyond carbon
reduction. These include impacts on good health and well-being by reducing air pollution,
developing affordable and clean energy, providing green growth and jobs allowing countries
to continue to benefit from their natural endowments, and others.

Researchers, NGOs, and the wider community thinking about the energy transition and the role ofhydrogen in it may also find this report a useful point of reference on hydrogen policy design.

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CCfD deep-dive
What are Carbon Contracts for Difference (CCfDs)?
CCfDs are government or institution-backed contracts between two parties whereby the beneficiary
is compensated for the difference between the effective CO2 price and the mitigation costs of abreakthrough technology, also known as the ‘strike price’. CCfDs have been considered by theEuropean Commission and member states, such as Germany.

How do CCfDs work?
A CCfD constitutes a hedging instrument for future carbon prices and can help bridge the gap
towards a viable business cases for low carbon and renewable hydrogen projects. CCfDs use
a market specific carbon price as reference, for instance the EU carbon price, and calculate theeffective CO2 mitigation price or ‘strike price’ of introducing low carbon or renewable powered
technologies relative to conventional technologies. CCfDs quantify avoided CO2 between emissionsof breakthrough technology and those of a conventional benchmark and compensates producers forthe difference between the market CO2 price and the ‘strike price’. Subsequently, as decarbonization
efforts progress and CO2 prices increase the subsidy is reduced over time. CCfDs are a flexible
tool which support low carbon and renewable hydrogen production and use, while avoiding oversubsidization.
CCfDs support and subsequently enable the implementation of hydrogen strategies and roadmaps,
including sectoral targets for hydrogen and help accelerating hydrogen uptake as part of broader
decarbonization efforts.

What barriers to adoption in low carbon and renewable hydrogen do CCfDs address?
•

Limited investment due to long payback period and high risk and limited ability to recoup
production costs: In the absence of stable and sufficient CO2 prices, CCfDs increase stabilityof revenues and ensure a minimum price to enable producers to recoup production costs.

•

Low availability and high cost of capital: CCfDs spread and decrease the financial risk of low
carbon and renewable hydrogen investments, thereby incentivizing private investment.

•

Inefficient subsidization of unabated fossil fuels that encourages supply: The introduction of
CCfDs can strengthen existing cap and trade systems and provides a strong signal to themarkets on the direction of CO2 price and expected levels in the long term (e.g., by 2040-50).

•

Low availability, and technical and commercial viability of end use appliance for hydrogen:
Building on innovation-funded pilots, CCfDs can provide continuity between demonstration
projects and commercial scale projects, thereby supporting the commercial viability of low
carbon and renewable hydrogen projects.

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Key design principles and considerations for CCfDs
1. Benchmarking and application
What conventional benchmarks should be used?
•

Since the ‘strike price’ is defined as the currency18/tCO2 for the introduction of emission
abating technologies against a conventional energy or technology benchmark, it will varydepending on the application

There will need to be consensus between public and private sector actors on a consistentmethodology for application-specific benchmarks (e.g., EU ETS product benchmarks)

Should the carbon price reference be on the producer or consumer side?
•

Producer-side carbon price reference may not be reflective of the actual sales price point ofabated CO2 units and could lead to over-subsidization.

•

A consumer-side carbon price reference would ensure harmony between subsidy and theactual sales price and would ensure the “strike” price is adapted to specific end-uses

Should the strike price be adjusted with indexation?
•

Fixed strike price leaves producers managing their input price risks, resulting in higher strikeprices being bid for.

•

Strike prices can be indexed to natural gas prices for low carbon hydrogen and to renewableelectricity prices for renewable hydrogen as significant drivers of production cost, to mitigate
input price risk.

2. Contract duration and evolution of premium
What is the optimal contract length?
•

Longer contracts (minimum 10 years) help provide stability.

•

Clauses providing for regular reviews of the strike price can help avoid over-compensation.

•

Evolution of the strike price should reflect likely higher costs and lower efficiencies incurred byfirst movers.

How should the variable premium be modelled to reflect market evolution?
•

18

Methodology needs to be established to model the variable premium to ensure it effectively
represents the evolution of the hydrogen market and can be applied to different end use
cases.

Currency dependent on the currency agreed upon as part of the cap-and-trade system in question

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3. Governance and predictability
Will the process be governed by national governments or institutions?
•

National governments tend to have the ability to absorb more risk and thereby provide more
funding for CCfDs in the initial phases of market growth•Standardizing the methodology for CCfDs at the international level (e.g., IMF), however, would
support quicker adoption and a greater number of jurisdictions and minimize competition risk

How do regulators ensure consistency and predictability of the regulatory framework?
•

Evolution of the instrument should be factored into the upfront policy design to ensurepredictability for investors and guard against significant regulatory changes (e.g., 5-yearlyreference and ‘strike price’ reviews)•

Regulation needs to be established to ensure projects receiving contracts are not then liable
to receive ETS subsidies or able to sign supply contracts so over-subsidization is prevented.

4. Allocation procedure
Will the allocation procedure occur through auctions or negotiations?
•

In the initial phase of CCfDs, with a limited number of projects and to test benchmarking andapplications, negotiations are most appropriate•

Negotiations should build in transparency mechanisms to avoid information asymmetry on
costs and ensure bidding rounds are set at the appropriate level once allocation moves tocompetitive auctions•

Once sufficient competition (e.g., number of projects) is established, allocation should shift to
auctions to ensure the most cost competitive projects are supported•

In addition to costs, auctions should consider the strategic nature of projects to prioritize
projects which unlock further low carbon and/or renewable hydrogen use (e.g., in strategic
locations near prospective demand clusters). Additional criteria could include avoided
emissions (full life cycle and GHG based) and anticipated volumes of low carbon or
decarbonized products.

•

A pre-selection phase during auctions would ensure projects that are aligned with specificparameters and national priorities are included which comparisons are too broad (e.g.,transport vs power) and overburdening the process where comparisons are too narrow (e.g.,
project by project review). It could be also used to ensure over-subsidization is prevented
through a pre-requisite for projects to be included being that they do not have supply
contracts signed.

What level of project clustering should be used?
•

24

Projects should be clustered on an application basis (e.g., steel or ammonia) to ensurecomparability and avoid overlooking low carbon or renewable hydrogen applications.

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5. Funding options
What financing mechanism should be used?
•High funding requirements means that general tax revenues or ETS revenues would need tobe utilized to meet these subsidy levels required in the short term. More medium-term options
would be applying a climate surcharge on final products with a high share of basic material,
a carbon border adjustment mechanism (CBAM) regime or appropriate quotas and green
purchase obligations.

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Policyassessment &packages

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While dozens of potential policy and regulatory measures could promote hydrogen development,
this report’s policy analysis first helps determine which ones can be deployed effectively
against different market development priorities. This section discusses the major barriers facinghydrogen development at each step of market development: market creation, market growth, andmature market. It then presents 12 key policies to promote market development and the evaluation
criteria used to select them. The section then concludes with three policy packages that provide a
recipe book for policymakers with different explicit or revealed preferences, be it the need to deploy
hydrogen at the most efficient cost, the ability to control the where and how much hydrogen is
produced, or the requirement that hydrogen be deployed as fast as possible.
As the starting point, the policy assessment framework in this report analyzes barriers to
deployment. Figure 3 presents barriers to hydrogen deployment collated from literature review anda survey with Hydrogen Council member. Barriers differ along the hydrogen value chain segments
and market maturity stages. However, some barriers centered around lack of regulatory framework,
standardization, and collaboration are overarching across the value chain and market maturity.
Consequently, the variability in the barriers requires different policies for different segments of thevalue chain and different phases of market maturity, but also these policies need to vary in sync toaddress interdependencies along these two dimensions.

The three market maturity stages each have their own objectives and barriers:•

Market creation objectives: demonstrate viability of full-scale facilities and develop an
industry of multiple project developers, investors, and key value chain stakeholders that
could scale the market. This phase extends from the point of technical readiness (mosthydrogen technologies have reached this point already) to the point at which there is anindustry that have delivered multiple large-scale projects in a country or relevant regional
market.

•Market growth objectives: market expansion and cost reduction. This phase extends fromthe point where the industry has delivered multiple large-scale projects, to a mature industry(see below).

•

Mature market objectives: deploy hydrogen at prices that are competitive with alternatives
and to reach the full market potential of hydrogen. A mature industry is one delivering alarge pipeline of projects with costs comparable or lower than alternative technologies.

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Figure 3
The deployment and financing barriers are concentrated in the first two market maturity phases
Time/maturity
H2 value chain

Market cretation

Market growthMarket maturity

A.1.1 Limited research,development, demonstrationand deployment specific funding

Enabling
policies

A.1.2 Lack of standard methodologies and regulatory body to qualify1 H2 as renewable or low carbon, andcertification systems to support the development of the H2 market at international level

A.1.3 Lack of a regulatory/legal framework defining standards for H2 technologies, applications, and H2derived products

A.1.4 Lack of H2 strategy and societal acceptance as part of broader decarbonisation efforts resulting in
uncertainties around future direction/low sectoral collaboration

A

Upstream
supplyB.1.1 Locked-in to existing
assets and fossil fuels (e.g.,using coal/oil)

B.2.1 Inefficient subsidisationof unabated fossil fuels thatencourages supply, e.g., carbon
pricing

B.1.2 Limited physical access torequired inputs, e.g., renewableelectricity installations

B.2.2 Limited ability to recoup
production costs, e.g., uncertain
volumes and priceB.1.3 Low deployment oftechnology, e.g., electrolysers,
carbon capture and storage

B.2.3 Low availability and highcost of capital

B.3.1. Unstable network andsupply, including insufficient
access to renewable energy andcarbon capture and storage

B.1.4 Limited investment due
to long payback period andhigh risk

B

Midstreamtransmission,
distribution,and storage
infrastructure

C.1.1 Immature and/or
inefficient storage options anddevelopment (incl. liability issues)

C.2.1 Lack of repurposing,
retrofitting or building new
infrastructure, e.g., pipeline,
refueling stations, port facilities

C.1.2 Lack of planning of H2
infrastructure (e.g., transport,
storage, HRS) resulting in delay
in investment decision
D.1.1 Locked-in to existing
assets that do not use H2, e.g.,
fleet

C.3.1 Lack of reliableinfrastructure, incl. last mile
distribution infrastructure
C.3.2 Lack of monetisation of
the flexibility (e.g., buffering,storage) that hydrogen will
provide to the energy system

D.2.1 Limited demand-pull
and uptake of H2 in end-use
sectors, e.g., industry, transport,
buildings

Downstream

C demandD.1.2 Low availability, andtechnical and commercial
viability of end use appliance for
H2, e.g., boilers

D.2.2 Lack of H2 familiarity for
offtakers, causes reluctance toadopt or need long lead timeand cannot reach minimum
viable scale

1. There is also a need for alignment between taxonomies (i.e. how to qualify economic activities as sustainable) to ensure H2
production is compliant
Source: Literature review, expert interviews

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To determine the policy space, the assessment maps a long list of policies on the barriers andgroups these into 12 key policies (see Table 1). Each key policy is a grouping of policies aiming toovercome different barriers. For example, policies like CfDs, CCfDs, FiTs, FiPs, and tax incentives
and credits are grouped within direct support mechanisms. All these instruments provide additional
revenue to projects by providing subsidies and decrease risks around revenue and long payback
periods, making the projects bankable.

Table 1The policy space considers 12 key policies
Primary barrier for policy
to overcome

Key policy

Description

Instruments contained

Emission
Trading
Schemes

A central authority caps carbon
emissions and allocates a limited
number of permits to emitters.
Emitters can buy permits in themarket to cover their excess
emissions or sell their excess
permits to generate revenue.
Internalizes social cost of carbon
emissions, making renewable
and low carbon technologies
competitive

Emission Trading
Schemes, including
expansions of existing
schemes to coveradditional sectors

No market for low
carbon technologies

Carbon tax

Levies tax on carbon emissionsof economic activities tointernalize societal cost ofcarbon emissions, making
renewable and low carbon
technologies competitive

Carbon tax

No market for low
carbon technologies

Alternative
revenuestreams

Provides secondary revenue
stream alongside the main
business

Payments for electricity
grid flexibility, (e.g.,grid firming services,buffering, and storage)

No market recoup costs

Direct support
mechanisms(involving
competitive
auctions)

Forms of subsidies to guarantee
investors a higher revenue or
lower operation cost. Increases
revenue certainty and profitability

Contracts-for-Difference(CfDs), Carbon
Contracts-for-Difference(CCfDs), Feed in Tariffs(FiTs), and tax incentives,
such as tax credits,
lower taxes on electricity
and exemptions fromrenewable electricity levy

Limited investment
due to high risk or long
paybacks

Financialsupportmechanisms

Financial support provided bygovernment to projects thatmeet specific requirements.
Lowers upfront investment costs

Monetary support, suchas grants and loans

Low availability and highcost of capital

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Primary barrier for policy
to overcome

Key policy

Description

Instruments contained

Guaranteedofftake

Commercial long-term contracts
where volumes of hydrogenand hydrogen-based products
are guaranteed to be sold toan entity at a fixed price for thelength of a contract. Provides
demand and revenue certainty

Long-term contracts

Limited demand pulland uptake in end-use
sectors

Investment
de-riskmechanisms

Collaboration between agovernment agency and a
private-sector company thatcan be used to finance, build,and operate projects. Lowers
construction and technology risk

Balance sheet support
tools, such as debt
guarantees and equity

Low availability and highcost of capital

Phasing out
of fossil fuelsubsidies

Removal of fossil fuel subsidies.
Makes high emissions
technologies less competitive-

Inefficient subsidizationof unabated fossil fuels

Publicprocurement

Public procurement
requirements added to contracts
to kick-start markets, suchas preferential treatment ofhydrogen and hydrogen-based
products. Creates hydrogen
demand-Limited demand pulland uptake in end-use
sectors

Return on
investment
de-risk

Secures return on investment
for developers by passing costs
down to consumers. Increases
revenue certainty.

Regulated Asset
Base Model (RABM),
availability payments,
minimum revenue
guarantee, futurepurchase commitment

Limited ability to recoup
production costs

Quotas, andtargets

Dictates mandatory emission
reduction/intensity or low carbon
and/or renewable hydrogencapacity targets throughlegislation, can be catch-all
or apply to specific sectors,
introduce quotas for hydrogen/low carbon products to be used
as electricity sources. Createshydrogen demand and supply.

Quotas, targets, lowcarbon and/or renewablehydrogen capacity targets,
emission reduction andintensity targets, targets
for specific sectors
such as transport andindustry; in certain cases,
midstream targets forhydrogen injection into
existing gas grids

Limited demand pulland uptake in end-use
sectors

Standards

Dictates minimum standards
by which industry mustabide. Blending standards
can be applied to mid-stream
infrastructure and emission
performance standards canbe mandated in upstream anddownstream

Emission performancestandards and blending
standards

Limited demand pulland uptake in end-use
sectors

Note: Although policies often address a multitude of barriers, the table refers to the barrier that is most effectively
addressed, considering it as its primary barrier

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These 12 key policies were assessed against six performance criteria to lay out their strengths
and trade-offs. Table 2 describes the six performance criteria used for the assessment and lists
the questions asked to test how a policy performs against each criterion in practice. The questions
assess performance of the policies along the two dimensions used to map the barriers. Ranging fromdelivery of “first of a kind projects” to “ease of bankability”, the six criteria are designed to cover thepolicy characteristics that are most relevant for a new technology that is in its market creation phaseand requires to build a system reaching across upstream, midstream, and downstream. Thereby, theframework provides a basis for comprehensive comparison between the key policies and draws out
their key strengths. The full assessment of all key policies can be found in the appendix.

Table 2Six performance criteria are used to assess policies strengths and trade-offs
Criterion

Description

Questions

Delivers first ofa kind (FOAK)
projects

Success of the policy inincentivizing technology
deployment by providing
sufficient revenue and certainty
to low carbon and renewablehydrogen investments

1. Does the policy provide sufficient revenue or otherbenefits to incentivize technology deployment?

Extent the policy minimizes
societal cost by promoting
innovation, competition, andeconomies of scale, while
avoiding rent creation

4. Does the policy minimize costs and maximize
output (e.g., through innovation/economies of scale)?

Minimizes
societal costs

2. Does the policy provide sufficient certainty to
attract private investment?
3. Is there a track record of analogous policies
incentivizing significant deployment?

5. Does the policy allow for market players to deploy
the most efficient option?
6. Does the policy minimize opportunities for rent
creation?

Spans value
chain

Scope of policy application
to up-, mid- and downstream
without additional efforts from a
policy maker

7. Does the policy automatically apply up-, mid– anddownstream?

Flexibility of
ambition

Extent the policy can beamended or abandoned as
market circumstances change

9. Can the policy be adjusted over time to reflectincreasing maturity?

Ease ofimplementation

Ease of implementation andadministering of the policy
and the level of adversity thepolicy presents and its social
acceptability

10. Does the policy avoid adverse effects for thecompetitiveness of industry, jobs, cost of living, etc.?

Extent the policy addresses risks
to encourage private investment

12. Are the risks of the private sector too large tofinance the project?

Ease ofbankability

8. Can the policy apply up-, mid– and downstream?

11. Can the policy be effective without closely
monitored accounting practices?

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Strong performing policies are then mapped to the barriers at each of the three stages of market
maturity and value chain. These policy packages are shown in the following section for each country
archetype – a self-sufficient hydrogen producer, an exporter, and an importer. The full set of policies
is shown in the self-sufficient hydrogen archetype, given that this is the example where all stages ofthe value chain are relevant in one location. (Figure 4) In assembling the policies across the evolutionof market and technological maturity, the following observations are relevant:•Across the market creation and market growth stages, it is important to maintain long term
certainty over the size of the market, either through decarbonization or hydrogen specifictargets.

•

Alongside direct hydrogen policy, it is important to build a robust carbon price signal at thesame time, starting with regional schemes and then linking them, whilst mitigating leakage
through border tariff adjustments.

•

As the number of players increases in the market growth phase, competition will increase,facilitating cost-effective allocation of funding support. Some countries may decide to
introduce auctions accounting for the sustainability attributes of hydrogen technologies.

•

Alongside hydrogen policy it is vital to expand markets to generate robust market signals
for flexible technologies, as hydrogen can provide low-cost flexibility to the power system.
The full potential of hydrogen can only be reached if these flexibility markets are completed
alongside carbon markets.

Figure 4
Policy roadmap for low carbon and renewable hydrogen
Policy objective

Policy roadmap

Certainty

Emissions targets and hydrogen strategies

Consumer trust

Develop harmonized standards and certification schemes

H2 investment

Market cretation

Market growthMarket maturity

Upstream

CAPEX & OPEX support (e.g.,
CfDs, tax credits), Financial derisking (e.g., grants, loans, andguarantees)

Evolve to increase competition(e.g., auctions - potentiallyseparate for low carbon andrenewable hydrogen - with alarge pipeline of bidders)

Shift incentives to carbon
prices and markets to deliver
investment

Midstream

CAPEX & OPEX support, financial de-risking (e.g., regulated returns, price ceilings and floors fortransmission and distribution networks, subsidies for storage infrastructure and refueling stations)
Blending standards and quotas

Downstream

CAPEX & OPEX support,
financial de-risking (e.g.,
price premiums, CCfDs, freeallocation), Public procurement,
targets/quotas

Evolve to increase competition(e.g., auctions - potentiallyseparate for low carbon andrenewable hydrogen - with alarge pipeline of bidders)

Product labelling
Economy-wide uptake

32

Build robust regional carbon prices

Policy Toolbox for Low Carbon and Renewable Hydrogen
Hydrogen Council

Shift incentives to carbon
prices and markets to deliver
investment

Moving down the value chain, the following design elements of policy packages are important:•

In upstream and downstream, it is important to utilize subsidy efficiently, given the potential
for multiple overlapping instruments. Hydrogen support contracts may be provided both
upstream (such as hydrogen supply contracts CfDs, and/or grants supporting OPEX andCAPEX) and/ or downstream (such as CCfDs). Depending on the jurisdiction, policy makers
may choose to introduce investment and production tax credits. The interaction between
these mechanisms should be managed so they do not overlap. It is also important to manage
the interaction with the carbon price, by setting any subsidy policy against a full effective
carbon price (which may consist of the “market price” for carbon plus additional carbon taxes
if they exist in each jurisdiction). If the full carbon price is not used, over-subsidization may
occur.

•For the midstream, infrastructure (transmission, distribution, storage) should be incentivizedusing regulated returns and learning the lessons from efficient delivery of electricity andgas networks (e.g., with pricing based on improving performance and efficiency over time).
The introduction of price ceilings and floor can also be used to ensure that efficiency isachieved.

•

As for HRS, support on both CAPEX and OPEX are necessary for an efficient development•

Industrial downstream uses of hydrogen may need specific support, such as the use insteel, chemicals, and refineries. The relative advantages of CCfDs, feed in premia or tariffs
should be considered.

•Downstream quotas or targets may be required as additional support to generate demand in
the market creation phase.

Policy packages may also differ depending on whether they prioritize speed or efficiency ofdelivery. More directive policies and regulatory mandates can achieve greater speed, whereas
market-based policies can support more efficient delivery: However, we would recommend
implementing the combination of both packages at the same time for an optimal deployment of
the renewable/low carbon hydrogen sector.

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33

1. A policy package focused on efficiency is best suited for policymakers who prioritize costcompetitiveness of support instruments.19 In early maturity stages, direct support mechanisms,
such as CfDs, FiTs, and production tax credits in upstream, and CCfDs in downstream, provide
revenue certainty and allow investors to cover their upfront investment and operation costs,
making FOAK projects economically viable. In countries where the energy sector is liberalized
and where well-functioning markets in electricity and in gas already exist, policymakers may want
to offer dedicated grants and loans at the initial stage of market development (especially to
projects of strategic importance), and grant temporary exemptions to the existing state aid rules.20
At later maturity phases, exposing market participants to a carbon price while phasing out revenue
stabilization mechanisms (such as CCfDs) will promote competition and innovation, minimizing thesocietal cost.
2. A policy package focused on rapid deployment is designed for policymakers where the priority
is rapid scaling of markets and infrastructure. Standards, quotas, and emissions reduction andintensity targets provide visibility and decrease uncertainties around supply, demand, and prices.
This lowers borrowing costs and provides revenue certainty, making projects bankable. Financial
support mechanisms also lower the initial capital requirements, making FOAK projects economically
viable. Both types of policies are simple to design, implement and monitor, allowing policymakers
to channel resources to the low carbon and renewable hydrogen sector quickly. Due to information
asymmetries and uncertainties around new technologies, policymakers may fail to identify the lowest
cost technology or the one that may dominate the market in the future, possibly causing inefficiencies
and hence higher societal cost compared to the Efficiency packages.
Figure 5 lays out the key policies forming each policy package and how each policy package
performs against the six performance criteria, while emphasizing their strengths.21
Finally, detailed policy design will need to address the specific implementation challenges ineach location. The policy packages address deployment and financial barriers across the low
carbon and renewable hydrogen value chain, but depending on the country context, implementation
challenges may remain. For example, if there are few or no examples of completed low carbon and/or renewable hydrogen production plants in a country, construction and technology risks associatedwith a hydrogen production project may be too high, putting off investors. Policy makers candeploy investment de-risk policies, such as debt guarantees and equity by government, to lower
construction and technology risks and make FOAK projects viable.

19

The focus is on minimizing societal cost. After this objective is achieved, the policies can be designed to allocate the societal
cost between the stakeholders in an economy, such as consumers, firms, and government, as desired. For example, carbon
pricing increases price of products for consumers, decreasing their purchasing power. A government can transfer a part, or all
revenues collected from permit sales or carbon tax back to consumers to cover costs accruing to consumers due to carbon
pricing.
20
For example, in Europe, low carbon and renewable hydrogen projects are eligible for grants and loans allocated through the
Recovery and Resilience Facility, alongside other public funding instruments, such as the EU Innovation Fund. Important
Projects of Common Interest (IPCEI) are granted a waiver of State Aid restrictions with specific conditions.
21
In all policy packages, RABM is used in midstream transmission, distribution, and storage to prevent natural monopolies fromprice gauging users, while providing revenue certainty with known decision rules to promote investment.

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Figure 5
All policy packages address the barriers to low carbon and renewable hydrogen deployment, butthey differ in priorities they meet
Delivers
FOAK
projects

Minimizes
costs

Spans
value chain

Flexibilityof ambition

Ease ofimplementation

Ease ofbankability

Efficiency•

Direct support
mechanisms (e.g.,
CfDs, CCfDs)•

Financial support
mechanisms,(e.g., loans andgrants)•ETS/Carbon Tax•

Return on
investment
de-risk (e.g.
regulated returns)

Rapid deployment•

Financial support
mechanisms (e.g.,loans and grants)•

Standards,
quotas, andemissions
reduction andintensity targets•

Return on
investment
de-risk (e.g.
regulated returns)

Policy assessment responses:

StrongMediumPolicy Toolbox for Low Carbon and Renewable Hydrogen
Hydrogen Council

Weak

35

Enabling
policies

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Policy Toolbox for Low Carbon and Renewable Hydrogen
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The enabling policies are common component to all policy packages. These instruments havebeen identified as essential catalyzers to incentivize hydrogen deployment, support the hydrogensector reach market maturity and enable the development of global, cross-border hydrogen markets.
This section describes the enabling policies and how they constitute the foundation for the threepolicy packages considered in this study, providing specific examples.

1. Targets and carbon prices to drive climate market efficiency
Setting an overarching policy target for decarbonization to usher in transformational change.
Overarching decarbonization targets facilitate a country’s energy transition as they send a strong
political signal and guide the short-term and long-term strategies of investors in energy and climate
solutions.
Adopting a carbon price early is the key to creating a market for low carbon technologies, therefore
ensuring competitiveness in hydrogen applications, and bringing them “into the money” withconventional technologies. Cap-and-trade systems across regions have already demonstrated theireffectiveness at incentivizing fuel switching from coal to natural gas. The earlier carbon pricing is
introduced, the easier it will be to calibrate the system in a way that would allow it to deliver a robust
carbon price. Carbon pricing can encourage switching in cost-competitive market segments, suchas from grey to low carbon and renewable hydrogen in industrial application, especially if the cost ofswitching from grey hydrogen to renewable hydrogen becomes the key pricing parameter within thecost paradigms of cap-and-trade systems. In established markets, reinforcing and expanding capand-trade systems to cover all end-use sectors can drive cost competitiveness across a wide range
of applications. In some geographies and sectors, such as heavy-duty trucks, ammonia synthesis
process emissions and urban buses this cost-competitiveness is within reach, being able to break-even
with conventional technologies at carbon prices of <100 USD/t (Figure 6)22. However, some hard-toabate sectors, such as cruise ships and methanol synthesis, may require special requirements.
22

Appendix 2.4

Figure 6
Carbon prices required by sector for breakeven
Carbon prices required by sector for breakeven by 20301, USD/tCO2
Heavy
duty
trucksAmmoniasynthesis
process
emissions

Refining

Forklifts

Trains

Mid-sizelong range
vehicleUrban bus

Regional
trains

Ropax,
ferriesContainer
ship

Industrial
heatingCompact
urban carCombinecycle
turbineLong
range
flights

Methanol
synthesis

Simplecycle
turbineBoiler forbuilding
heating

Short
range
flights

Cruiseship

Blendingof H2<100 USD/t

100-150 USD/t>150 USD/t

By 2030 and with carbon
costs ~100 USD/t, no
additional support required

Need to differentiatecarbonprices by sector
or offer e.g., CCfDs todecarbonize

Hardest-to-abate sectors thattargeted policies to achieve
decarbonization

1. Assumption of average production cost for low carbon and renewable hydrogen of 1.9 USD/kg in 2030
Source: McKinsey & Company analysis

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Resolving internal market distortions can help ensure the competitiveness of new technologies
such as hydrogen. For example, the phasing out of fossil fuel subsidies for exploration in the
upstream and price subsidies for customers downstream could overcome hydrogen’s costdisadvantage.
Putting in place safeguards against carbon leakage and carbon displacement. Carbon cap-andtrade systems or carbon taxes can help generate demand for low carbon hydrogen and derived
products. The right policy measures, such as introducing or strengthening carbon pricing, canpropagate decarbonization policy elsewhere. However, for these benefits to be realized, policies
need to be in place to ensure that carbon is not displaced or even increased, putting decarbonizing
producers at a competitive disadvantage globally. The carbon border adjustment mechanism(CBAM), for instance, seeks to prevent carbon leakage by ensuring higher-cost decarbonizedproduction can compete with lower-cost, carbon-intensive production from other jurisdictions. The
prospect of a CBAMs is likely to incentivize more jurisdictions to adopt carbon regulation, which
would help generate a price signal for the uptake of low carbon solutions, including hydrogen.23

2. Roadmaps to underpin national delivery
Adopting a national hydrogen strategy or a roadmap to provide direction and market foresightto the industry. Adopting a dedicated hydrogen strategy or a roadmap defines how a country
will unlock the potential of a hydrogen economy to reach its overarching decarbonization targets.
It provides a policy vector and increased visibility to the industry on future market conditions andprojects that are likely to be favored. Importantly, national strategies and roadmaps allow countries
to define the milestones for advancing hydrogen deployment, detailing how hydrogen can play asystemic role in an integrated energy ecosystem, by way of enabling coordinated planning andoptimization of the energy system, across infrastructures and end use sectors.
Many countries around the world have already announced their national hydrogen strategies
and roadmaps. From Japan and Australia to Chile and the EU, countries and regions around theworld have been drawing up hydrogen strategies and roadmaps laying out ambitious plans for thedevelopment of their respective hydrogen economies. Japan has been a hydrogen front runner with
its commitment to develop world’s first ‘hydrogen society’ with the country’s Hydrogen Strategy
launched in 2017, followed by the Strategic Road Map for Hydrogen and Fuel Cells published
two years later. Australia’s National Hydrogen Strategy from November 2019 aims to position the
country’s hydrogen industry as a major player by 2030 and details national coordinated actions withthe objective to build a hydrogen export industry valued in the billions.24 In South America, Chile’s
Green Hydrogen Strategy from November 2020 sets the goals of producing the cheapest renewablehydrogen in the world by 2030 and becoming one of three largest hydrogen exporters by 2040.

23

24

38

BNP Paribas Asset Management, Deep Decarbonization, Green Hydrogen, Net Zero, and the Future of the EU-ETS, (October2020), https://docfinder.bnpparibas-am.com/api/files/FB39FAB1-A279-41CC-9CDD-4D22827359B0
Australia’s National Hydrogen Strategy (2019), https://www.industry.gov.au/data-and-publications/australias-nationalhydrogen-strategy

Policy Toolbox for Low Carbon and Renewable Hydrogen
Hydrogen Council

3. International standards and hydrogen certification
Harmonized international regulations, codes, performance, and safety standards create a common
language for the industry across the entire value chain and facilitate commercialization of hydrogentechnologies and hydrogen-based products. Creating harmonized consensus-based international
standards also facilitates sharing of good practice amongst countries, which, in turn, enables cost
optimization and ensures safety and quality performance for end-users.
2.1 Hydrogen sustainability characteristics, certification systems and definitions
International standards constitute a key prerequisite for the development of the hydrogenvalue chain and global hydrogen markets, as they create consumer trust and facilitatecommercialization of hydrogen technologies and hydrogen-based products.
In particular, standard methodologies for life cycle analysis (LCA) assessment of GHG emissions
associated with hydrogen production, alongside other sustainability attributes are crucial to inform•

Thresholds for qualifying hydrogen as low carbon (in tCO2eq/tH2 or gCO2/MJ)•

Aligned taxonomies used for qualifying economic activities, including manufacture ofhydrogen, as environmentally sustainable25•

Common standards to underpin international certification systems for hydrogen•

Harmonized international hydrogen definitions

Certification systems for hydrogen are key to facilitating the deployment of hydrogen at national
level, stimulating demand, and enabling cross-border trade in hydrogen. The developmentof international rules and standards that would underpin country-level and regional certification
systems is necessary to enable the use of and trade in certificates evidencing the renewable/ lowcarbon origin of hydrogen (based on its production pathway), its carbon footprint (based on the
LCA assessment of GHG emissions footprint of the production pathway) and other sustainability
attributes (including the use of water, land, and rare earth metals). Subject to country-specific policy
and regulatory provisions, certificates evidencing the sustainability attributes of hydrogen could be
used for compliance purposes to count hydrogen towards decarbonization targets and/ or targets forrenewables production/ consumption in end use sectors.
Together with common standards for calculating the carbon footprint and other sustainability
attributes of hydrogen, certificate systems for hydrogen can enable transparency and consumer
trust at international level, as well as inform consumer choices thereby stimulating demand forrenewable and low carbon hydrogen in end use sectors. Ultimately, such certificate systems would
foster the development of a competitive cross-border, global hydrogen commodity market.
The economic savings that can be realized through implementing these systems and establishingregulatory coherency are significant for countries that will be reliant on imports. For example, inJapan in 2030, assuming <70% of hydrogen is imported from Australia, savings of USD 2 bn can berealized through the minimization of import costs that would be enabled through agreed standards
and certification removing regulatory ‘red tape’. (Figure 7)26

25

The EU Taxonomy Regulation and the Taxonomy Climate Delegated Act (DA) provide a classification system for environmentally
sustainable economic activities. The provisions under the DA regarding manufacture of hydrogen allow for low carbon hydrogen
manufacture to qualify as an economic activity with substantial contribution to climate change mitigation as long the activity
complies with the life cycle GHG emissions savings requirement of 73.4% for hydrogen resulting in 3tCO2eq/tH2 and 70% forhydrogen-based synthetic fuels
26
Appendix 2.6

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39

Figure 7
Domestic production costs in Japan and the price from importing renewable hydrogen from
Australia including the additional costs that could be absorbed in a ‘worst case’ distribution pricescenario

Australia to Japan imports

Domestic production costs in Japan 1 and price of importinghydrogen from Australia2,3 as well as the additional costs that
could be absorbed
USD bn cost of production and imports 4
Total cost
Additional5

7,000 kmJapan domestic

+ 2bn
USD

Japan imports

Japan domestic renewable hydrogen production is unable to meet
2030 demand, with >70% anticipated to be met through imports.
In a ‘worst case’ price scenario where international standards are
not deployed to realize the lowest technological costs and remove
legislative ‘red tape’, an additional 2 bn USD may be absorbed.

1. High uncertainty in cost of dehydrogenation («cracking»)
2. Currently at pilot scale and requires infrastructure investments, uncertain cost and scale of LH2 shipping
3. Assumes large-scale infrastructure and ships for all carriers
4. Assuming 3 MT Japanese demand in 2030 with ~70% imported from Australia
5. Assuming a ‹worst case› price scenario for imports
Source: Hydrogen for Net Zero & Hydrogen Council, Cost Roadmap Report

Relevant intergovernmental and private sector-led initiatives are well underway – those will play
an important role in informing the development of dedicated ISO standards for hydrogen. Theintergovernmental initiatives, in particular, those led by the International Partnership for Hydrogenand Fuel Cells in the Economy (IPHE) on methodologies for calculating GHG content of hydrogenproduction pathways as well as on certification play an important role in building international
consensus on these matters. Looking at the existing industry-led projects, the CertifHy project inEurope constitutes an emerging good practice in creating a comprehensive certification system forhydrogen covering both guarantees of origin and supply certificates.
Going forward, it will be crucial to ensure that the relevant findings of these initiatives feed into thedevelopment of dedicated international standards for measuring and certifying the sustainability
attributes of hydrogen (building on the existing ISO 14060 family of standards and ISO 14040).
These standards could in turn be used as a reference point in the emerging legislative framework forhydrogen across jurisdictions globally.

40

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3.2 Performance and safety standards: the role of ISO and IEC
Based on national stakeholder input, the International Organization for Standardization (ISO),
the International Electrotechnical Commission (IEC) and such regulatory bodies as the United
Nations Global Technical Regulations (UN GTR) and the International Organization of Legal
metrology (OIML) develop international consensus-based standards and regulations respectively.
These global SDOs play a key role in developing international standards and guidelines for hydrogentechnologies (ISO/TC 197) and fuel cell technologies (IEC/TC 105).
As discussed above, International (ISO and IEC) component standards are necessary to eliminate
global barriers to trade and international projects, paving the way for the emergence of a competitivehydrogen industry and well-functioning cross-border hydrogen markets.
In practice, this requires making sure that a hydrogen component (such as a hose or breakaway
device) or an assembly (such as electrolyzer or reformer or dispenser) meets the commonly
accepted design and testing criteria and thus can be deployed across the globe without additional
bureaucratic burden, which would otherwise lead to increased costs. Installation requirements of
those components or assemblies (such as, for example, separation distances) can differ acrossjurisdictions, but their design and testing requirements should not.
Since ISO and IEC standards are developed by the broadest spectrum of international stakeholders,
they become “super” standards and constitute a reference point for the component standards andother relevant legislative initiatives introduced at national level. This consideration leads to at least
three following implications:•

National component standards including those that served as seed documents for thedevelopment of international standards should be prepared with a view to having theirrespective design and testing requirements harmonized with the international standards.
Essentially, national standards should constitute harmonized adopted international standards,
where the only deviations are references to specific relevant national standards andregulations and climatic conditions, where justified.

•

National legislation and installation codes should recognize international standards or theirnational harmonized adoptions as the only / preferred listing or certification components
standards•

National installation codes should not contain any design or testing requirements related
to components and assemblies and focus solely on the installation requirements. They
should also explicitly reference available international component standards or their national
harmonized adoptions for design and testing requirements.

It should be noted that there are numerous ISO and IEC Technical Committees besides ISO/TC 197
and IEC/TC 105 that are critically important for the broad market penetration and commercializationof hydrogen and fuel cell technologies. The work of the ISO/TC 207 Environmental Management
should also be noted as it develops key foundational guidelines for measuring sustainability elementsof hydrogen technologies.

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41

4 Training and Education programs
4.1 Overcoming skills barriers
Training and educational programs on the value and safety of renewable and low carbonhydrogen can help overcome information and skills barriers. General education programs onhydrogen technologies can inform new generations about hydrogen and its role in a net zeroeconomy and play an essential role in building up fundamental skills for hydrogen.
Training programs can upskill existing workforce with applied skills needed by the hydrogen sector
as economies transition to net-zero and hydrogen and can play a key role in addressing just transition
concerns. For example, the Green Jobs Act of 2007 in the United States provides grants to states toadminister renewable energy and energy efficiency workforce development programs. In Australia,
the Queensland Government has set up a renewable energy training facility to provide courses andapprenticeships.

4.2 Hydrogen safety training
Hydrogen safety education and training is essential for safe deployment, operation andmaintenance of hydrogen and fuel cell equipment. Hydrogen safety training can be classified in two
main categories: awareness training and professional training.
Awareness training is suitable for the broadest groups of stakeholders starting from interested public
like first adopters of HFC technologies to all types of professionals involved in all different aspects ofhydrogen technologies.
Awareness training normally covers general/ basic aspects hydrogen properties and emergency
response.
Specialized targeted professional training can be differentiated for the following categories ofprofessionals:•

Hydrogen technicians and gas / pipe fitters, including lab use•

Design engineers•

Installers•

Operators of hydrogen production and utilization equipment•

AHJs and engineering personnel interacting with AHJs to obtain approvals•

First responders

42

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Hydrogen Insights Report 2021
Hydrogen Council, McKinsey & Company

43

Countryarchetypes

44

Policy Toolbox for Low Carbon and Renewable Hydrogen
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Countries will participate differently in the hydrogen economy and start with different natural
resource endowments (e.g., availability of renewables and natural gas resources) and infrastructure
endowments (e.g., availability of well-developed gas infrastructure networks that can be repurposed/
retrofitted and salt caverns). This study sets out an archetype-based approach to illustrate how
countries with certain characteristics can successfully deploy hydrogen policy.

There are three main archetypes:
1. Self-sufficient hydrogen producers: a country with either sufficient endowment of renewablesources for energy generation, including the physical space required, has potential to serve its own
renewable hydrogen demand, and/or natural gas combined with CCUS to produce low carbonhydrogen2. Hydrogen exporters: a country with sufficiently high endowment of renewable sources and/or ofnatural gas combined with CCUS, can produce low carbon or renewable hydrogen, and export it toserve international demand.
3. Hydrogen importers: a country with limited renewable and low carbon technological endowments
or natural gas resources may find it more cost effective to import renewable and/or low carbonhydrogen from third countries. A country that currently imports natural gas has a natural gas
infrastructure in place that can be repurposed to import, transport, and store hydrogen, lowering thecost of switching to hydrogen.

As described in the earlier chapter, there is a broad range of other factors that influence
policy preferences. For example, the institutional context can impact the policy preferences ofpolicymakers, for example whether there is a preference for market driven solutions (to achieve
more efficient outcomes) or a preference for more control and direction (to achieve more directed
outcomes). The descriptions of how the policies are implemented draw out the implications ofdifferent policy preferences.

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45

The recommended policies have similar objectives across the different phases of market maturity:•

Market creation: Recommended policies provide financing to help with high upfront capitalcosts (such as grants, loans, and equity) and/or guarantee a revenue premium (such as
CfDs, FiTs, FiPs and CCfDs). Complemented with balance sheet support tools (such as debt
guarantees and equity), these policies make early investments bankable and support thedevelopment of a project pipeline, bringing down costs as a result.

•Market growth: The policies providing support with upfront capital cost and revenue
premium evolve, increasing exposure to market signals by reducing optimizing the level ofsubsidization through auctions. Countries may choose to hold distinct auctions for low carbon
and renewable hydrogen projects based on their policy choices. OPEX support may remain
necessary in this phase (e.g., exemptions from taxes and levies to decrease the cost ofelectricity used for renewable hydrogen production). Policies need to expand across multiple
sectors to generate the demand necessary for cost reductions to be realized. As can be seen
through reductions in electrolyzer capex, these cost reductions are only achieved through the
deployment of renewable hydrogen in multiple sectors, acting to unlock more demand (Figure8). Further to this, appropriate market design plays a key role in ensuring the value of flexibility
to the energy system provided by low carbon and renewable hydrogen is signaled correctly.
Encouraging the carbon price signal to become more robust and cover more sectors helps tocomplete the pricing framework.

•

Mature market objectives: All policies providing investment and revenue support are phased
out. Carbon prices are robust enough to level the playing field for hydrogen and let it competewith fossil fuels, as well as with other decarbonization solutions, ensuring efficient allocation of
resources and minimizing societal cost.

Figure 8
Electrolyzer capex and demand by sector, USD/kW27
Electrolyzer capex1
USD/kW2 fully installed system3
Installed capex

2,800

PEM

SOEC

Alkaline

1,600
1,400
1,200
1,000
800
0
2020
Hydrogen deployedin ammonia andrefining+ roadtransport, steel& methanol

25+ power,
maritime &aviation

Electrolysis
deployed4, GW

2030

1. 2020-2030 modelled
2. USD/kw of hydrogen produced
3. Medium electrolysers (4000 Nm3/h). Electrolyser capex defined as sum of; indirect costs, building capex, transportation tosite, installation and assembly capex, system capex
4. Equivalent global demand
Source: Hydrogen Insights Project and Investment tracker

27

46

Appendix 2.3

Policy Toolbox for Low Carbon and Renewable Hydrogen
Hydrogen Council

Archetype 1:
Self-sufficient hydrogen producers
Self-sufficient hydrogen producers need to enable the entire value chain: upstream supply,
midstream transmission and distribution and downstream demand (Figure 9).

Figure 9
Self-sufficient hydrogen producer archetype
Policy objective

Policy roadmap for low carbon and renewable hydrogen

Certainty

Emissions targets and hydrogen strategies

Consumer trust

Develop harmonized standards and certification schemes

H2 investment

Market cretation

Market growthMarket maturity

Upstream

CAPEX & OPEX support (e.g.,
CfDs, tax credits), Financial derisking (e.g., grants, loans, andguarantees)

Evolve to increase competition(e.g., auctions - potentiallyseparate for low carbon andrenewable hydrogen - with alarge pipeline of bidders)

Shift incentives to carbon
prices and markets to deliver
investment

Midstream

CAPEX & OPEX support, financial de-risking (e.g., regulated returns, price ceilings and floors fortransmission and distribution networks, subsidies for storage infrastructure and refueling stations)
Blending standards and quotas

Downstream

CAPEX & OPEX support,
financial de-risking (e.g.,
price premiums, CCfDs, freeallocation), Public procurement,
targets/quotas

Evolve to increase competition(e.g., auctions - potentiallyseparate for low carbon andrenewable hydrogen - with alarge pipeline of bidders)

Shift incentives to carbon
prices and markets to deliver
investment

Product labelling
Economy-wide uptake

Build robust regional carbon prices

Policy Toolbox for Low Carbon and Renewable Hydrogen
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47

Upstream: For upstream hydrogen deployment, the key challenge is to unlock investment inrenewable and/or low carbon hydrogen production. The key elements of the policy package are:•Incentivizing hydrogen supply can be achieved by way of deploying financial support
instruments such as grants, loans, and guarantees to help de-risk investment, supporting
first movers. These instruments also play a critical role in the development of integratedhydrogen projects (hydrogen valleys) and hydrogen projects of strategic importancenecessary to pave the way for market take off.

•

In addition, a suite of policy measures can be used to provide OPEX support for projects
in the market creation and market growth stages. Introducing exemptions from electricity
taxes and levies would help substantially decrease the cost of electricity used for renewablehydrogen production as long as market distortion is avoided.

•

OPEX and CAPEX support for low carbon hydrogen could be introduced in the form of tax
credits for emissions captured using CCS - 45Q in the US constitutes a good example ofsuch a system of carbon tax credits. In the EU, a scheme for carbon removal certificates that
could be tradeable could be adopted in 2023.

•

Revenue stabilization mechanisms such as CfDs and FiTs upstream could be used toincentivize both renewable and low carbon hydrogen – subject to policy choices – and canevolve to feature competitive bidding processes.

•

In addition to direct support measures, carbon pricing can play a key role. As the market
develops and reaches maturity, robust carbon prices can play a key role in driving private
investment across the economy making hydrogen fully competitive with other energy sources.
Appropriate market design will also be key to ensure the value of flexibility to the energy
system provided by low carbon and renewable hydrogen is signaled correctly.

Midstream: The key challenge is to secure investment in retrofitting and repurposing of the existing
natural gas infrastructure and in new dedicated hydrogen infrastructure. The key elements of thepolicy package are:•48

In the market creation phase and market growth phase, blending can allow avoiding stranded
assets and high capital costs. For example, the proposed revision of the TEN-E Regulationin Europe would allow that repurposed networks can be used to transport or store a predefined blend of hydrogen with natural gas or biomethane during a transitional period (until
31st December 2029) during market creation and growth. However, blending will be limited
to a certain percentage. Retrofitting of existing natural gas assets or even new pipelines will
be necessary. Selected projects will have to demonstrate how, by the end of this transitional
period, these assets will cease to be natural gas assets and become dedicated hydrogenassets. The assessment of candidate projects will also ensure that the assets are designed inview of creating dedicated hydrogen assets by the end of the transitional period. The purpose
is to gradually decarbonize this sector and by increasing the share of renewable gases in thepipelines and/or building dedicated H2 assets (transmission, storage, distribution).

Policy Toolbox for Low Carbon and Renewable Hydrogen
Hydrogen Council•At the same time, building new dedicated infrastructure will also be key to connect theclusters of demand with supply and help hydrogen play its role in enabling energy system
integration. Guaranteeing returns through a regulated asset base model can, for instance,
spur private sector investment into large infrastructure projects.

•

When the market reaches maturity, the regulated returns model would remain in place toensure infrastructure providers are operating competitively and efficiently. Also, at this stage,ancillary services such as a buffering and storage can enable hydrogen as a flexible energy
vector and provide alternative sources of revenue that replace financial support policies.

Downstream: They key challenge is to provide funding and allocate it efficiently between off-takers
while making hydrogen-based products competitive in the market. Key elements of the policy
package are:•In the market creation phase, direct support can encourage early hydrogen market adopters.
For example, offering a price premium to steelmakers that are starting to use hydrogen as
an input would compensate for higher operational costs. Financial support can help reduce
financial risks of large upfront capital investments required for hydrogen use projects.

•

Public procurement, targets, standards, and quotas policies, including incentives, can kickstart markets strategically and provide visibility to downstream users on the direction of low
carbon technologies. Canada’s Clean Fuel Standard and the California Low Carbon FuelStandard are examples of supply-side mechanisms.

•

As the market enters the growth phase, the importance of carbon pricing grows, and direct
support mechanisms may evolve to expose hydrogen users further to market signals. For
example, early incentives can be replaced by CCfDs and be awarded through an auction
system. In the mature market phase, policymakers can fully withdraw support and a carbon
price should remain in place to continue to foster innovation and investment in low carbon
technologies.

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49

Archetype 2:
Hydrogen exporters
Exporters have to focus on developing export infrastructure and unlocking efficient production
projects that can complete on the international market, as well as striking agreements with offtakers(Figure 10).

Figure 10
Hydrogen exporter archetype
Policy objective

Policy roadmap for low carbon and renewable hydrogen

Certainty

Emissions targets and hydrogen strategies

Consumer trust

Develop harmonized standards and certification schemes

H2 investment

Market cretation

Market growthMarket maturity

Upstream

CAPEX & OPEX support (e.g.,
CfDs, tax credits), Financial derisking (e.g., grants, loans, andguarantees)

Evolve to increase competition(e.g., auctions - potentiallyseparate for low carbon andrenewable hydrogen - with alarge pipeline of bidders)

Shift incentives to carbon
prices and markets to deliver
investment

Midstream

CAPEX & OPEX support, financial de-risking (e.g., regulated returns, price ceilings and floors fortransmission and distribution networks, subsidies for storage infrastructure and refueling stations)
Blending standards and quotas
Financial support (e.g., grants, loans and guarantees)

Downstream
Offtake agreements with importing countries to lock in a long-term hydrogen supply

Economy-wide uptake

50

Build robust regional carbon prices

Policy Toolbox for Low Carbon and Renewable Hydrogen
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Upstream: Policymakers may want to coordinate project locations to ensure co-location
with transportation hubs and infrastructure. Financial support under bespoke contracts gives
governments control over size, timing, and location of investments. For upstream H2 deployment,
direct support on both CAPEX and OPEX (e.g., CFDs, tax credits, grants, ….) should be put in place.
Midstream: Policies are aligned with those recommended for a self-sufficient archetype, exceptthat policies for an exporter country should allow policymakers to exert higher control over thecoordination of midstream infrastructure projects. Financial support for new infrastructure andretrofitting and repurposing of the existing assets, as well as provisions for blending, whereappropriate, give policymakers the flexibility to channel resources towards sections of theinfrastructure network they consider strategic to transport hydrogen and access export markets.
Downstream: A hydrogen exporter will typically start serving domestic off-takers to develop its
hydrogen production capabilities, and to achieve this objective, the State could implement legislative
measures incentivizing local demand. However, to start engaging in export activities, offtakeagreements should be in place with destination countries. These agreements guarantee suppliers arevenue stream and help make projects bankable by lowering borrowing costs.
Exporters may also benefit from CfD schemes introduced by importing countries (such as the CfD
scheme for renewable hydrogen envisaged by the German government in the framework of the
H2Global initiative).

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51

Archetype 3:
Importers
Importers have to focus on developing downstream markets for hydrogen and hydrogen-based
products and securing hydrogen supply from overseas (see Figure 11).

Figure 11
Hydrogen importer archetype
Policy objective

Policy roadmap for low carbon and renewable hydrogen

Certainty

Emissions targets and hydrogen strategies

Consumer trust

Develop harmonized standards and certification schemes

H2 investment

Market cretation

Upstream

Offtake agreements with exporting countries to lock-in a long-term hydrogen supply

Midstream

Market growthMarket maturity

CAPEX & OPEX support, financial de-risking (e.g., regulated returns, price ceilings and floors fortransmission and distribution networks, subsidies for storage infrastructure and refueling stations)
Blending standards and quotas

Downstream

CAPEX & OPEX support,
financial de-risking (e.g.,
price premiums, CCfDs, freeallocation), Public procurement,
targets/quotas

Evolve to increase competition(e.g., auctions - potentiallyseparate for low carbon andrenewable hydrogen - with alarge pipeline of bidders)

Shift incentives to carbon
prices and markets to deliver
investment

Product labelling
Economy-wide uptake

Build robust regional carbon prices

Upstream: the key challenge is to secure hydrogen supply from international markets. Offtakeagreements with exporting countries can lock-in a long-term hydrogen supply to reduce supply
risks and costs. Bilateral agreements and CfD schemes can help securing hydrogen imports at acompetitive price.

52

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Midstream: Hydrogen importers will require financial support from policymakers to coordinate
investments and rapidly develop storage and transportation infrastructure that enables hydrogento reach domestic markets. If countries already import natural gas from abroad, allocating funding
for retrofitting and repurposing of the existing infrastructure is essential. In the case of low carbonhydrogen, introducing blending standards and quotas can be applied to repurpose existing
infrastructure. Building out this infrastructure, such as pipelines, has the potential to realize savings
for importing countries. For example, in Germany, if 50% of forecasted 2030 demand for low carbon
and renewable hydrogen is met through pipeline imports through a new, or ideally a retrofitted,
pipeline from Spain, annual hydrogen cost savings of ~USD 340 mn can be realized28. (Figure 12)
Downstream: Policymakers can follow the proposed policy pathway for self-sufficient archetype
countries to foster the use of hydrogen and hydrogen-based products across the economy. In
addition, importing countries with a more dispersed demand will require larger financial support
as smaller end users have limited financial resource to cover large upfront investment costs whenswitching to hydrogen. In these instances, policymakers might choose to supplement financial
support with public procurement, standards, and quotas to direct specific sectors where its morecost effective to switch to hydrogen and demonstrate early feasibility. As the market growth phase isentered, these policies can cover a wider range of sectors.
28

Appendix 2.5

Figure 12
Cost of meeting Germany’s 2030 hydrogen demand
Costs of meeting Germany hydrogen demandin 2030, USD/kg

Pipeline1 from Spain to Germany

Domestic production cost Germany
Production cost Spain
Transmission cost Spain-Germany

2.27
0.59

1.89

1.30

Production
OnshoreCost atcosts intransmission destination
Spainpipeline

Production
cost inGermany~340 million
Potential for European Hydrogen Backbone

savings with 50% imports2

1. Pipeline 70 bar, 50% utilization, 80cm diameter
2. Assuming 2030 demand of 1.8MT with 50% domestic production and 50% met through pipeline imports from lowest cost
renewable production site in Spain
Source: Hydrogen for Net Zero, Hydrogen Council, European Hydrogen Backbone July 2020

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Societal value
and values

54

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Societal value and values should be factored into policy decisions. Alongside the transition
towards carbon neutrality, countries would benefit from considering the full range of societal
impacts and the benefits that can be unlocked through the development of the hydrogen economy.
Well-designed hydrogen policies could have a positive contribution to several UN Sustainability
Development Goals, including:•Good health and well-being: Eliminating the burning of fossil fuels for transport, coalplants, and household uses lowers air pollution, which has been linked with improved healthoutcomes, especially in children, the elderly and those living in poorer and more vulnerable
communities.29 If targets for low carbon and renewable hydrogen deployment are achieved,
displacement of fossil fuels by hydrogen is forecasted to realize an annual CO2 abatement of
0.7 GT CO2e in 2030, equivalent to USD 23 bn in an annual healthcare savings.30•

Green growth and sustainable jobs: The development of the hydrogen economy canprovide critical jobs for workers associated with industries that are most likely to be
impacted by the energy transition (e.g., fossil fuel extraction). Industry estimates that the
US could build 700,000 jobs in the hydrogen sector just by 203031. This can also benefit
regional communities, including protecting the rights of indigenous and offering them newopportunities through employment and new business creation.

•

Diversity, equity, and inclusion: Public private dialogue on the diversity, equity, and inclusion(DEI) dimension of hydrogen economy development is emerging.32 Both governments andindustry have the opportunity to use the learnings from the development of the establishedindustries to ensure that DEI constitute integral elements of hydrogen economy developmentfrom the outset. Continued public-private cooperation on this matter and further research inthis area remain essential.

•

Opportunities for indigenous communities: Canada’s national hydrogen strategy constitutes
a best practice example of a hydrogen strategy that recognizes and actively seeks to unlock
the opportunities that the development of the hydrogen economy can bring to indigenous
communities, offered through employment and new business creation. It also recognizes
the need for the local hydrogen economy to grow hand in hand with industry’s strategic
partnerships that emphasize environmental protection, cultural recognition, community energy
planning aligned with traditional values, economic development, and project participation.

•

Sustainable cities and communities: Hydrogen infrastructure can not only provide cities
with access to renewable transport and heating, it also provides resiliency in cases whererenewable electricity production is insufficient due to poor conditions or natural disasters.

29

World Health Organization. “Health consequences of air pollution on populations” 2019.
https://www.who.int/news/item/15-11-2019-what-are-health-consequences-of-air-pollution-on-populations
30
Appendix 2.9
31
Hydrogen and Fuel Cell Technologies Office, Hydrogen Shot, https://www.energy.gov/eere/fuelcells/hydrogen-shot
32
At the time of writing of the present report, this topic has been addressed in the framework of the Hydrogen Shot Summit

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Appendix

56

Policy Toolbox for Low Carbon and Renewable Hydrogen
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Defining low carbon and renewable hydrogen
There are currently no common standards for defining renewable and low carbon hydrogen. This is aconsequence of the lack of international standard methodology for calculating the carbon footprint ofhydrogen production pathways and thresholds for qualifying hydrogen as low carbon that would beapplied, for example, across taxonomies for sustainable finance and hydrogen certification systems. Thisissue is explored further in section D on enabling policies in the report.
In the present study we use the terms renewable, low carbon and grey hydrogen, whereby•‘Renewable hydrogen’ refers to hydrogen produced from energy sources of renewable origin.
For example, i) hydrogen produced through water electrolysis with electricity of renewable origin
used as feedstock; and/ or ii) hydrogen produced through the gasification of sustainable biomass
which is then reformed or pyrolyzed (if the CO2 is sequestrated the hydrogen produced can bequalified as carbon-negative). Defined thresholds for qualifying hydrogen as renewable (in tCO2eq/
tH2 or gCO2/MJ) need to be put in place.

•‘Low carbon hydrogen’ refers to hydrogen produced from energy sources of non-renewable
origin with a carbon footprint below a defined threshold. For example, i) hydrogen produced
using natural gas as a feedstock with SMR or ATR coupled with CCS; ii) hydrogen produced
through pyrolysis of natural gas into hydrogen and solid carbon; iii) hydrogen produced throughgasification of coal with CCS; iv) hydrogen produced through electrolysis using electricity of
non-renewable origin as feedstock. Defined thresholds for qualifying hydrogen as low carbon (intCO2eq/tH2 or gCO2/MJ) need to be put in place.

•‘Grey hydrogen’ refers to hydrogen produced using fossil fuels as feedstock, mainly throughreforming of natural gas or the gasification of coal.

Detailed policy assessment results
Two dimensions define the low carbon and renewable hydrogen market within the policy framework:
the value chain and the stage of market maturity. Figure 13 details the description and desired outcomeof each step of the value chain and market.
Figure 13
Barriers to hydrogen market outcomes are assessed along two dimensions

Dimension

H2 value
chain

Time/
Maturity

Step in value chain/Stage

Description of each step in value chain/
Desired outcome of each stage

A. Core enablers acrossthe value chain

Overall enablers for an H2 value chain from production through tousage

B. Upstream supply

Produce H2 from natural gas reformation or carbon-free electricity
electrolysis

C. Midstream
distribution

Compress, store, liquify H2 and transport via trucking, shipping, or
gas/H2 network to end users

D. Downstream
demandUse H2 as an energy source, key sectors include transportation,industry feedstock, industry energy, power generation, and building
heating and power

1. Early market building
technology readinessH2 energy is at TRL1 9, and there is a steady stream of full scale
projects to prove viability and deliverability with government or private
funding and support

2. Market take-off andincreasing penetration

Globally and across key sectors, there is a steady pipeline of at-scale
projects by mature developers that are funded and progressing to
FEED or beyond

3. Mature market withdiversified growth

H2 energy is at CRI2 5 and is 2-5% of global energy use, projects
reaching completion with minimal government intervention andcompete for capital as established investments

1

Technology Readiness Level, ARENA, 2014 and Straub, 2015; 2 Commercial Readiness Index, ARENA, 2014 and Straub, 2015
Source: Vivid Economics

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The questions are answered based on real examples of policy implementation, economic theory,and expert insights. Answers dictate the RAG (Red, Amber, Green) color rating assigned to a key
policy. Figure 14 presents the color ratings assigned to the key policies for six performance criteria.
The assigned color ratings are as below:•

Red: “No” as a response to all questions listed under the criterion. The policy is rated as
Weak.

•

Amber: “No” as a response to at least one of the questions listed under the criterion, and therest of the responses are “Yes”. The policy is rated as Medium.

•Green: “Yes” as a response to all questions listed under the criterion. The policy is rated as
Strong.

Figure 14
The 12 key policies are assessed against six performance criteria and assigned an RAG rating
Performance criteria
Delivers
FOAK
projects

Policies

Minimizes
societal
costs

Spans
value chain

Flexibilityof ambition

Ease ofimplementation

Ease ofbankability

1. Alternative revenue streams,
e.g., grid firming services

2. Carbon tax

3. Direct support mechanisms, such as
CfD, CCfD, FiTs, and tax incentives

4. ETS

5. Financial support mechanisms,
such as loans and grants

6. Guaranteed offtake

7. Investment de-risk, e.g., balance sheet
support - debt guarantees, equity

8. Phasing out fossil fuel subsidies

9. Public procurement tokickstart markets
10. Return on investment de-risk, e.g.,
RABM, availability payments, minimum revenue
guarantee, future purchase commitment
11. Quotas & targets

12. Standards

Policy assessment responses:

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StrongMediumWeak

1.1.1 Alternative revenue streams
Criteria

Alternative revenue streams, e.g., grid firming services

Delivery of
FOAK projects

Red – Does not address financial barriers; revenues are not enough to achieve economic
viability.

Minimizes costs

Red – Does not provide any incentives for competition and innovation.

Spans value
chain

Red – Limited to upstream supply

Flexibility of
ambition

Red – No flexibility as the market decides demand for and price of the service.

Ease ofimplementation

Green – Does not need close monitoring. It decreases the total cost of operating a grid
system, benefiting all market participants.

Ease ofbankability

Red – Does not address financial barriers faced by the private sector

1.1.2 Carbon tax
Criteria

Carbon tax

Delivery of
FOAK projects

Amber – Levels the playing field for low carbon and renewable hydrogen. Similar policies
exist, but they have not performed well due to low carbon prices and lack of hydrogenspecific instrument, as ETS is applicable to a range of technologies.

Minimizes costs

Green – Promotes competition and innovation. The market finds the most efficientsolution that minimizes the societal cost (assuming all market failures are addressed).

Spans value
chain

Green – Creates incentives upstream, midstream, and downstream, so the government
does not need to put in extra efforts to apply the policy at all stages of the value chain.

Flexibility of
ambition

Green – Can be easily modified as the market matures, and conditions change.

Ease ofimplementation

Amber – The cost of the policy can be redistributed across market participants. It is easy
to implement and monitor like other taxes. However, public acceptance of environmental
taxes could become an implementation barrier

Ease ofbankability

Red – Levels the playing field for low carbon and renewable hydrogen but does notprovide any hydrogen-specific benefits to the private sector. Other policies needed tomake projects bankable.

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1.1.3 Direct support mechanisms (involving competitive auctions)
Criteria

Direct support mechanisms (involving competitive auctions)

Delivery of
FOAK projects

Green – Offers revenue certainty and subsidies, increasing projects’ economic viability.
Similar policies have been applied in Germany and the UK among many others.

Minimizes
societal costs

Green – Promotes competition and innovation and finds the lowest cost through auctions.

Spans value
chain

Amber – Needs to be applied at all stages of the value chain to be effective across thevalue chain.

Flexibility of
ambition

Green – Easy to exit, and new contracts can be issued whenever there is a new auction
round.

Ease ofimplement-ation

Green – The cost of the policy can be redistributed across market participants throughlevies. It does not require a complex system to be in place and does not distort themarket in terms of competitiveness.

Ease ofbankability

Green – Makes projects bankable creating a consistent revenue stream and providing
subsidies to the private sector which encourages the private sector to invest.

1.1.4 Emission Trading Schemes

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Criteria

Emission Trading Schemes

Delivery of
FOAK projects

Amber – Levels the playing field for low carbon and renewable hydrogen. Similar policies
exist, but they have not performed well due to low carbon prices and lack of hydrogenspecific instrument, as ETS is applicable to a range of technologies.

Minimizes
societal costs

Green – Promotes competition and innovation. The market finds the most efficientsolution that minimizes the societal cost (assuming all other market failures are
addressed).

Spans value
chain

Green – Creates incentives upstream, midstream, and downstream, so the government
does not need to put in extra efforts to apply the policy at all stages of the value chain.

Flexibility of
ambition

Amber – Although the requirements for ETS can become stricter over time, adjusting thecap is overall a lengthy process, which can take more than five years.

Ease ofimplement-ation

Amber – The cost of the policy can be redistributed across market participants, but thesystem is tedious to install, watch and maintain.

Ease ofbankability

Red – Levels the playing field for low carbon and renewable hydrogen but does notprovide any hydrogen-specific benefits to the private sector. Other policies needed tomake projects bankable.

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1.1.5 Financial support mechanisms
Criteria

Financial support mechanisms, such as grants and loans

Delivery of
FOAK projects

Green – Lowers the upfront capital investment and borrowing cost. Similar policies are
already successfully implemented around the world, also for hydrogen deployment.

Minimizes costs

Amber – Information asymmetries and technology uncertainties may prevent policy
makers from achieving most efficient outcome. Interventions may distort competition andstall competition, creating opportunities for rent creation. Well-designed auctions may
address some of these concerns.

Spans value
chain

Amber – Its impact is limited to the value chain component it is applied to, but they canbe applied at all stages.

Flexibility of
ambition

Green – Can be adjusted in every financing round. It also is easy to phase out without
adverse effects on the market.

Ease ofimplementation

Green – Can be financed through taxes and levies, while the burden can be redistributed
across market participants. It is easy to set up and can be effective without closely
monitoring.

Ease ofbankability

Green – Lowering upfront capital costs, it reduces risks and encourages the private
sector to finance deployment

1.1.6 Guaranteed offtake
Criteria

Guaranteed

Delivery of
FOAK projects

Green – Provides revenue guarantee. Analogous policies have been successful in forincreasing renewables update in China, and similar policies are under way for hydrogen in
the US and India.

Minimizes costs

Amber – Information asymmetries and technology uncertainties may prevent policy
makers from achieving most efficient outcome. Interventions may distort competition andstall competition, creating opportunities for rent creation. Well-designed auctions may
address some of these concerns.

Spans value
chain

Amber – Particularly appropriate for upstream supply and downstream demand.

Flexibility of
ambition

Green – Can be adjusted in every financing round.

Ease ofimplementation

Green – Can be financed through taxes and levies, while the burden can be redistributed
across market participants. It is easy to set up and can be effective without closely
monitoring

Ease ofbankability

Green – Providing revenue guarantee, it reduces risks and encourages the private sector
to finance deployment

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1.1.7 Investment de-risk mechanisms
Criteria

Investment de-risk mechanisms, e.g., balance sheet support, debt guarantees, equity

Delivery of
FOAK projects

Red – Address technology and construction risk but does not lower initial capital
investment or provide revenue guarantee.

Minimizes costs

Red – May not incentivize the most efficient technology due to information asymmetries
and uncertainties around technology

Spans value
chain

Amber – Needs to be applied at every stage of the value chain to be successful.

Flexibility of
ambition

Green – Can be adjusted in every financing round.

Ease ofimplementation

Amber – No need for close monitoring. It may create adverse competitiveness effects aspolicymakers may fail to endorse right technology and project.

Ease ofbankability

Green – Eliminates construction and technology risk for the private sector.

1.1.8 Phasing out of fossil fuel subsidies

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Criteria

Phasing out fossil fuel subsidies

Delivery of
FOAK projects

Red – Does not provide sufficient revenue and revenue certainty and does not lower
upfront capital cost.

Minimizes costs

Red – As a fossil fuel specific policy, it does not provide direct incentives to investors inhydrogen deployment.

Spans value
chain

Green – The policy does automatically apply to all stages of the value chain.

Flexibility of
ambition

Green – Policymakers can make changes easily to reflect changing market conditions.

Ease ofimplementation

Green – Solves a market distortion and thereby increase the total surplus. It does notneed close monitoring.

Ease ofbankability

Red – Risks to the private sector in financing new hydrogen projects remain largely
unchanged.

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1.1.9 Public procurement
Criteria

Public procurement to kickstart markets

Delivery of
FOAK projects

Amber – Provides revenue guarantee to all hydrogen producers but not to specificprojects. Analogous policies have been adopted in France, Australia, and Norway.

Minimizes costs

Green – Incentivizes competition and innovation to lower costs, as producers will stillcompete to offer the lowest price to win a procurement round.

Spans value
chain

Amber – The policy is particularly appropriate for downstream demand, but it can apply
across the value chain.

Flexibility of
ambition

Green – Can be adjusted and exited easily to reflect changes in the market.

Ease ofimplementation

Amber – Higher costs are likely to be passed through to end users, decreasing
households purchasing power. It can be effective without close monitoring.

Ease ofbankability

Red – Does not cover risks to the private sector looking to invest in a project.

1.1.10 Return on investment de-risk
Criteria

Return on investment de-risk, such as e.g., RABM

Delivery of
FOAK projects

Green – Provides revenue certainty and enough return to cover investment and operation
costs. Similar policies have been successful to incentivize investment in midstream
projects.

Minimizes costs

Green – Because the return is fixed, firms innovate and increase efficiency to lower theircosts and increase their profits, but these policies can distort the market and increases
the societal costs if policy makers set revenue levels too high (creates a rent for owners ofthe midstream infrastructure) or too low (stalls investment).

Spans value
chain

Amber – Particularly appropriate for midstream distribution. They do not automatically
apply to all the stages of the value chain andFlexibility of
ambition

Green – Policymakers can adjust returns over time.

Ease ofimplementation

Amber – Easy to implement without close monitoring, but the policies can distort themarket and increases the societal costs if policy makers set revenue levels too high(creates a rent for owners of the midstream infrastructure) or too low (stalls investment).

Ease ofbankability

Green – Risks around returns are reduced to the point that the private sector isencouraged to finance new projects.

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1.1.11 Quotas & targets
Criteria

Quotas & targets

Delivery of
FOAK projects

Amber – Analogous policies have been successful in providing additional certainty toprivate investors, but these do not address financial risks associated with a project.

Minimizes costs

Amber – Creates incentives to innovate, but command-and-control policies may fail toreach the most efficient outcome as the tech and timing endorsed by these may not be
the most efficient ones.

Spans value
chain

Amber – Policies do not automatically apply to all the value chain stages, but they can
extend to all value chain components.

Flexibility of
ambition

Green – Over time, policymakers can adjust policies easily to reflect the changes in themarket’s circumstances, for example by introducing stricter targets.

Ease ofimplementation

Amber – It is easy to implement and needs no close monitoring. However, commandand-control policies may distort the market, resulting in higher societal costs that are likely
to be passed through to consumers.

Ease ofbankability

Amber – quotas provide certainty to the private sector which might encourage them tofinance projects, but financial risks remain high due to the potential lack of revenue, return
guarantees, etc.

1.1.12 Standards

64

Criteria

Standards

Delivery of
FOAK projects

Red – Standards have been successful at incentivizing deployment, but they do notprovide revenue and revenue certainty and do not lower upfront capital cost

Minimizes costs

Amber – Create incentives to innovate, but command-and-control policies may fail toreach the most efficient outcome as the technology and timing endorsed by these may
not be the most efficient ones.

Spans value
chain

Amber – Policies do not automatically apply to all the value chain stages, but they can
extend to all value chain components.

Flexibility of
ambition

Green – Over time, policymakers can adjust policies easily to reflect the changes in themarket’s circumstances, for example by introducing stricter minimum standards

Ease ofimplementation

Amber – Command-and-control policies may distort the market, resulting in higher
societal costs that are likely to be passed through to consumers. It is easy to implement
and needs no close monitoring.

Ease ofbankability

Amber – Standards provide certainty to the private sector which might encourage themto finance projects, but financial risks remain high due to the potential lack of revenue,
return guarantees, etc.

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We also performed the assessment on the policy packages for efficient delivery verses rapid
deployment.

Efficiency
Criteria

Efficiency

Delivery of
FOAK projects

Green – Direct support mechanisms and return on investment offer revenue certainty andsubsidies., while the auction design can increase competition. Similar policies have been
applied widely.

Minimizes costs

Green – Promotes competition and innovation. The market finds the most efficientsolution that minimizes the societal cost (assuming all other market failures are
addressed).

Spans value
chain

Green – ETS spans the value chain, whereas direct support mechanisms can be used in
upstream and downstream.

Flexibility of
ambition

Amber – Direct support mechanisms can be amended in every financing round but
adjusting an ETS the cap is overall a lengthy process, which can take more than five
years.

Ease ofimplementation

Amber – ETS and return on investment de-risk might be harder to implement andmaintain, whereas distributional impacts can be alleviated with policy design, such as
allocating ETS revenues back to consumers through subsidies or decrease in other taxes.

Ease ofbankability

Green – Direct support mechanisms and return on investment de-risk provide revenue
certainty, lowering risks faced by the private sector.

Rapid deployment
Criteria

Rapid deployment

Delivery of
FOAK projects

Green – Financial support mechanisms lower the upfront capital investment andborrowing cost. Similar policies are already successfully implemented around the world,
also for hydrogen deployment.

Minimizes costs

Amber – Standards, quotas and targets and financial support mechanisms create
incentives to innovate, but command-and-control policies may fail to reach the mostefficient outcome as the tech and timing endorsed by these may not be the most efficientones.

Spans value
chain

Amber – Policies do not automatically apply to all the value chain stages, but they can
extend to all value chain components.

Flexibility of
ambition

Green – Over time, policymakers can adjust policies easily to reflect the changes in themarket’s circumstances, for example by adjusting the level of the financial support or
introducing stricter targets.

Ease ofimplementation

Green – Command-and-control policies may distort the market, resulting in higher
societal costs that are likely to be passed through to consumers, while the burden can beredistributed across market participants with policy amendments. They are easy to set up
and can be effective without closely monitoring.

Ease ofbankability

Green – The package provides upfront capital financing and certainty about the sizeof the market. Risks are reduced to the point that the private sector will finance new
projects.

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Methodology and assumptions for quantifications
Quantification

Methodology & assumptions

Sources

2.1 Investment
gap

Difference between announced investments by governments/
companies and the forecasted demand

IEA, ‘Net Zero by 2050’, 2021

Investment demand includes Hydrogen production (soelectrolyzers, CCS retrofits for blue H2, new SMR/ATR plants),
Distribution and transmission (shipping, pipelines, conversionetc.), storage tanks, and end-applications (so ammonia plants,
fuel cells etc.) based on•

H2 demand for Net Zero•

Investment costs•

Investment multipliers

Hydrogen Council, ‘Hydrogen
insights update’, 2021
Hydrogen Council, ‘Hydrogen,Scaling Up’ report, 2017

Breakdown by value chain

2.2 Electrolyzer
capex cost down

Sectoral energy demand
Calculation of cost reduction based on•External projections•

Investment multipliers•Market segmentation

IEA, Energy tech Perspective,
2017
Hydrogen Council member
opinionHydrogen Council, ‘Path tohydrogen competitiveness: acost perspective, 2020
Hydrogen Council, ‘Hydrogen,Scaling Up’, 2017

2.3 Carbon pricerequired by
sector for 2030
breakeven

Application of different carbon price sensitivities to a H2 industry
application matrix

2.4 SpainGermany pipeline
imports

Total 2030 hydrogen demand in Germany;1.8 MT

Average of low carbon and renewable hydrogen production costfor 2030 assumed at 1.9 USD/kg

Pipeline of 70 bar, 50% utilization, standard 80cm pipeline
Efficient renewable production site in Spain with production
costs 1.1 EUR/kg
FOB; 0.5 EUR/kg
Total import price; 1.61 EUR/kg (incl. compression costs)
Domestic production cost Germany; 1.91 EUR/kg

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McKinsey analysis

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Hydrogen Insights Supply &Distribution modelQuantification

Methodology & assumptions

Sources

2.5 Japan importcosts from
Australia

Japan demand 2030; 3MT

Hydrogen Insights Supply &Distribution model

Assumption 70% imported from Australia
Renewable H2 production cost in Australia 1.5 USD/kg
Import costs including phase change and shipping

Hydrogen Council, Path tohydrogen competitiveness: acost perspective, 2020

Range of import prices for 2030 from the model. From thisrange the assumption was made that the lowest cost importscenario would be where regulation and certification havebeen implemented. In this scenario importing should realize
lower costs as there would be less regulatory ‘red tape’ andcost reduction benefits are a result of this. The upper end of
the import cost range was assumed to represent a scenario
without regulation and certification thereby additional costs
being absorbed due to logistical irregularities. Calculated as theaverage upper import price limit for the LH2, NH3 and LOHC.
Lowest potential total import cost;1.5 USD/kg Highest importcost; 2.57 USD/kg

2.6 Energy
systems cost

Assuming a fully renewable energy system
Difference between scenario where full electrolyser flexibility
assumed and another where the load is fixed and there is no
response to market signals modelled

McKinsey PowerSolution
modelling

Project-specific power system modelling (for net-zero city projectin the Middle East)
Power savings modelling for the EU
EU 2030 generation 3920 TWh (some curtailment andtransmission losses) and demand (load and electrolysis) of 3860
TWh

2.7 Job creation
through ahydrogen economy

Assumption 54,545 jobs per MT hydrogen/12 jobs per million
revenue in advanced industries

McKinsey Global Energy
Perspective, 2021

Assuming 2050 hydrogen demand of 675 MT

Hydrogen Council, ‘Scaling Up’,
2017

2.8 Emission
abatement
healthcare savings

Emission reduction benefit of hydrogen

IRENA, ‘REmap 2030’, 2014

Economic benefits through the mitigation of air pollution fromfossil fuels: USD 1.9-4.6 per GJ & CO2 mitigation benefits of USD
3-12 per GJ

McKinsey Global Energy
Perspective

Calculate the total economic benefit of this globally through theamount of CO2 predicted to be abated in 2030 as a result of low
carbon and renewable hydrogen deployment
2030 abatement; 0.68 GT
Total economic benefit calculated through the volume of fossil
fuels anticipated to be displaced and replaced by hydrogen

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GLOSSARY
ATR

Autothermal reforming

CAPEX

Capital expenditure

CBAM

Carbon border adjustment mechanism

CCfD

Carbon contracts-for-difference

CCS

Carbon capture and storage

CCUS

Carbon capture, use and storage

CfD

Contracts-for-difference

CO2

Carbon dioxide

CO2eq

Carbon dioxide equivalent

DRI

Direct reduced iron

DSO

Distribution system operator

EC

European Commission

E-fuels

Electrofuels (synthetic fuels)

ETS

Emissions trading scheme

EU

European Union

FCV

Fuel cell vehicle

FiP

Feed-in-premium

FiT

Feed-in-tariff

FOAK

First-of-a-kind

GGR

Greenhouse gas removal

GHG

Greenhouse gas

GO

Guarantees of origin

IATA

International Air Transport Association

IMO

International Maritime Organization

ISO

International Organization for Standardization

LCA

Life cycle analysis

LNG

Liquified natural gas

OIMLInternational Organization of Legal Metrology

OPEX

Operating expenditure

PPA

Power purchase agreement

PPP

Public-private partnership

PV

Photovoltaics

RABM

Regulated Asset Base Model

RED

Renewable Energy Directive (EU)RES-EElectricity from renewable energy sources

RFNBO

Renewable fuels of non-biological origin

SMR

Steam methane reforming

TEN-E

Trans-European Networks for Energy

TSO

Transmission system operator

TW/GW/MW/kW

Terawatt, gigawatt, megawatt, kilowatt (unit of power, 1 Watt = 1 J per s)

TWh/MWh/kWh

Terawatt hour, megawatt hour, kilowatt hour (unit of energy, 1 Watt-hour = 3600 J)

USD

United States Dollars

VAT

Value-added tax

WTO

World Trade Organization

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November 2021
© Hydrogen Council