Hydrogen’s role needs to be clarified in Germany’s future energy system and positive support could spur final investment decisions (FIDs) and tackle climate targets, according to a new International Energy Agency (IEA) report.
Currently FIDs are happening too slowly due to concerns about sufficient supply at affordable prices, while domestic production projects in Germany are failing to materialise as they lack strong commitment from offtakers, the report states.
The German government’s previously planned Power Plant Strategy attempted to address this issue by tendering 12.5 GW of new natural gas-fired power plant capacity that could later run on hydrogen. The new coalition government aims to be in place by Easter.
“In this way, the construction of new hydrogen-ready gas-fired capacity could avoid a fossil fuel lock-in that is not at odds with the electricity generation target, as long as the fuel switch takes place on time,” the report notes.
“This indicates that hydrogen will play a role in Germany’s future power system but clarification is needed to what extent, given other competing uses in the next ten years.”
Importantly and uniquely, Germany’s Carbon Contracts for Difference cover not only capital expenditures but also operating expenditures, which has been key to the programme’s successful uptake and deployment.
“Germany should move forward with a hydrogen-specific carbon contract for difference and consider allocating additional funding toward it,” it adds.
In addition to its use in certain industrial sectors, hydrogen can provide seasonal storage and much needed flexibility in Germany’s future electricity system. At a later stage, hydrogen derivatives will play an important role in the form of maritime and aviation fuels. The IEA is, however, less convinced of a significant role for hydrogen in Germany’s wider transport sector, and even less in space heating.
The public sector could play an important role in supporting hydrogen demand by introducing “lead markets” for climate-friendly basic materials, establishing definitions, aligning on standards and criteria for materials produced with renewable or low‑emissions hydrogen.
Public procurement tied to this could create dedicated demand for products such as climate-friendly or low-emissions steel and cement in the early years of market development, when broader demand is limited.
The final price impact on some end-use products that use green materials – such as cars using green steel – is limited, so standards and targeted fiscal measures could promote more private demand, too.
The report advises the government to move ahead with the future electricity market design proposals, including a capacity mechanism, and explain how these planned capacity auctions might impact the need for additional dispatchable generation capacity.
