Hydrogen a Key Focus of New German Government’s Coalition Agreement

Shearman & Sterling LLP

The new federal government has presented ambitious framework conditions for decarbonizing the German economy through hydrogen, aiming to position Germany at the center of a global hydrogen economy. German industry expects further detail in the next months.

The parties to the future German federal government (the Social Democrats (SPD), Greens (BÜNDNIS 90/GRÜNE) and Liberals (FDP)) published their 177-page coalition agreement on November 24, 2021. Climate protection is fundamental to the coalition deal. The new federal government — expected to be in office first week of December after the election of the new chancellor Scholz — is committed to the 1.5-degree target, supports the EU “Fit for 55” program and aims to develop a reliable, cost-effective and technology-neutral path to climate neutrality by 2045 at the latest.

Hydrogen plays a key role, and while further detail will be specified in the coming months, it is clear that Germany — a major proponent of hydrogen-based decarbonization under the Merkel chancellorship — is accelerating its hydrogen policy. The most important impact is on government support for necessary investments, where the government will seek to activate more private capital for domestic transformation projects and German State-owned bank KfW is mandated to play an important role as an innovation and investment agency.

In this short note we summarize the key hydrogen-related aspects of the coalition agreement.

Positioning Germany as a Hydrogen Technology Leader

The federal government is aiming for Germany to become the lead market for hydrogen technologies by 2030 and the coalition partners have agreed that the German hydrogen strategy is to be accelerated in 2022. The goal is a quick market ramp-up. Domestic hydrogen production from renewable energies (i.e. green hydrogen) is given top priority. The coalition also aims to implement domestic electrolysis capacity of 10 GW by 2030, as well as to expand offshore wind production to 30 GW in 2030, 40 GW in 2035 and 70 GW in 2045.

The coalition agreement requires that development of an efficient hydrogen economy and the necessary import and transport infrastructure should be pushed forward as quickly as possible. Hydrogen projects that qualify under the EU’s “Important Projects of Common European Interest” program, in particular, are to be implemented swiftly and the establishment of a hydrogen network infrastructure is to be financially supported. In this regard we note that the Merkel government had already committed to fund EUR 8 billion of investment in 62 projects to trigger further investments in Germany of over EUR 33 billion in total.

The necessity of importing hydrogen to meet Germany’s decarbonization commitments continues to be acknowledged, and the coalition agreement states that when importing hydrogen, the effects of climate policy should be taken into account and fair competitive conditions should be ensured for the German economy.

The federal government will work on a European level to achieve a uniform certification standard for hydrogen and its secondary products, and strengthen European import partnerships. The coalition agreement further supports domestic demand for hydrogen and other green industrial products (including hydrogen derivatives) through mandatory “green public procurement” quotas, further details of which are still to be developed.

Carbon Contracts for Difference and CBAM are Coming

The German government has committed to supporting German industry through the energy transition.

Carbon contracts for difference (CCfDs) that incentivize key industrial sectors (such as steel, cement and ammonia production) continue to be the preferred policy instrument to close profitability gaps with the alternative carbon intensive processes, thereby also supporting demand for green hydrogen in the relevant sectors. This is consistent with the expectations of German industry engendered by the Merkel government but clarity is still pending on the terms of such CCfDs and there is still no specified limit on the amount of funding available. However, we expect that strict criteria for determining the compensation mechanism and conditions for discontinuation of the CCfD program will be implemented. We also anticipate that the basis of the CCfD system will be the principles of the Federal Environment Ministry published in April 2021.

In addition, the government commits to support Europe’s proposed carbon border adjustment mechanism, and expresses an ambition to work towards all states worldwide eventually adopting a uniform minimum carbon price.

Programs such as H2Global (aimed at subsidizing imports of green hydrogen and supporting domestic demand) are intended to be further developed on a European basis and financially supported accordingly. The Federal Ministry of Economics recently committed to provide funds of EUR 900 million for H2Global to balance the offer and demand price for imported green hydrogen for a period of 10 years.

80 Percent Renewable Energy in the Electricity Mix; Gas Infrastructure Investment Must Be H2-Ready

The federal government envisions a higher gross electricity demand in Germany of 680–750 TWh in 2030. It wants 80 percent of this to come from renewable energies. It wants to accelerate the coal phase-out ideally to be completed by 2030 and continues to oppose any role for nuclear power in the energy mix.

At the same time, the federal government recognizes the need to maintain modern gas-fired power plants until security of supply is ensured through renewable energies. However, gas power plants must be built in such a way that they can be converted to be fueled by climate-neutral gases (“H2-ready”).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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