Inside Germany’s bold bid to build a hydrogen market out of thin air
By Sourced Externally
January 25, 2024
After turning its back on nuclear and coal power, Europe’s industrial powerhouse desperately needs low-carbon fuels, paving the way for a green trade route with Australia.
Twenty-six thousand kilometres away by ship, German politicians, government officials and fuel importers are pinning their hopes on green fuel from renewables-rich Australia overcoming cost disadvantages and helping meet the country’s decarbonisation goals.
While the tyranny of distance means a cargo of Australian LNG rarely finds its way to Europe, but shipments of green ammonia and methanol, powered by Australia’s abundant and cheap solar and wind power, won’t have the same problem, they say.
“People think it’s a fantasy, it’s far away, so it makes no sense,” says Till Mansmann, Innovation Commissioner for green hydrogen at the German Federal Ministry of Education and Research, of the prospect of importing green fuels from Australia.
“But it’s not as expensive as we think … Australia wants to be a renewable energy superpower. So, this is a perfect match because Germany is a superpower in the offtake of energy.”
That’s the theory, but it has yet to be proven in reality – and in a world where rising costs are putting extra pressure on project economics.
“Germany is now even more aware, because of the invasion of Ukraine, that it doesn’t want to repeat the mistakes that it made in natural gas in hydrogen,” says Dana Kirchem from the German Institute for Economic Research, or DIW. “So, we don’t want to be very dependent on one partner, we want to diversify our sources.”
As Europe’s industrial powerhouse turns its back on nuclear power and coal, hydrogen and its derivatives – ammonia, methanol and so-called e-fuels – will all be called on to help meet the nation’s legislated deadline of reaching net zero emissions by 2045.
Australia’s abundant solar and wind generation means many regard it as a viable option for supply, more than offsetting the higher transportation costs compared with closer sources.
“Australia is very far away from a European point of view, but yet, as long as production cost is low, we’re not too concerned about the transportation,” says Philipp Kroepels, director of new energy at Mabanaft, the biggest importer of energy into Germany, which wants to import green methanol from Australia through an import terminal in Hamburg.
“Australia is well-positioned, with lots of sun, way more than in Hamburg … and also much more than in many other European regions, which is why we do believe that Australia has a significant relevance in the energy transition for Europe and also Germany.”
Described by some as the “Swiss army knife” of fuels, green hydrogen can make chemical processes climate-neutral, can be burnt without climate-harming emissions, and can be stored and transported.
The product is made using renewable energy to power electrolysis systems that split water into hydrogen or oxygen. A low-carbon alternative in the form of “blue” hydrogen made from fossil fuels uses carbon capture to minimise emissions, but is regarded by the German government as a short-term alternative at best.
But while countries that are closer to Europe are seeking to export pure hydrogen by pipeline, those further away look set to ship the fuel in other forms such as ammonia and methanol that are less technically challenging to transport. In the case of ammonia, much of it would be converted back into hydrogen for use.
The world’s export industry for hydrogen is starting from scratch – there are no exports of green hydrogen yet. Still, Germany’s decarbonisation strategy relies on it developing and overcoming the technical and economic challenges that have meant the sector has developed much more slowly than was originally hoped.
Russia’s invasion of Ukraine gave hydrogen a big kick forward because it threw Germany’s energy security into doubt, says Jeannette Uhlig, who heads the hydrogen team at the German Energy Agency (DENA).
“Before only a few people talked about hydrogen, but after this process, hydrogen was a big topic,” she says.
“It became clear that hydrogen is one of the main technologies for energy transition and for decarbonisation of industry and of the energy sector.”
Uhlig says Germany’s need to switch away from its biggest gas supplier underscored that the transition to clean energy had to happen more rapidly than the 10 to 20 years originally envisaged.
“It’s not only a topic of energy security and of energy supply, it’s a big topic for industry, for industrial competition, of development in Europe and in Germany,” she says.
Hydrogen v batteries
The thinking around how hydrogen will be used has also undergone a transformation. While the original focus was on using it as a road transport fuel, the lack of alternatives for cutting emissions in major industry sectors such as steelmaking has made industry now the primary target.
“Electrification will be our main tool in decarbonising most sectors,” says DIW’s Kirchem, noting that the physical inefficiency of producing green hydrogen and advances in battery technology means direct electrification makes sense where at all possible.
Most agree that energy-intensive sectors that have few options to cut emissions, such as steel, cement, paper, glass and ceramics, will be one of the most important for the first applications for hydrogen.
DIW expects hydrogen also to play a role in power generation, by converting it back into electricity to cover supply shortages, despite the conversion losses. It also has potential for district heating, although individual home heating is considered a less likely use.
But in transportation, only long-haul aviation and maritime shipping are widely seen as sectors where it makes sense, with batteries now the clear choice for decarbonising car transport. Heavy trucks and trains remain points of contention.
“With time, politicians have now realised that hydrogen will be a scarce commodity and that we cannot simply use it anywhere we like,” Kirchem says. “We have to treat it as a valuable good, and we have to use it very specifically in those sectors that have no electrification alternative.”
Mathias Koch, project manager for hydrogen policy at energy transition think tank Agora Energiewende in Berlin, describes hydrogen as one of the central pillars of Germany’s energy transition, alongside renewable energy, energy efficiency and direct electrification.
Germany is in a singular situation compared with other countries because of the large volumes of hydrogen it needs in different sectors, all within the broader challenge of building a new market from scratch in a regional economy with a liberalised energy sector.
Further complicating the picture is the crisis that hit Germany’s climate spending strategy after a shock court ruling in November that scuppered the government’s plans to repurpose €60 billion ($99 billion), originally earmarked for the COVID-19 pandemic response, for decarbonisation.
A deal reached by the coalition in mid-December provided a potential emergency short-term solution, but parliament is only due to vote on the 2024 budget next week.
Big questions remain about transition spending in future years amid Germany’s self-imposed “debt brake” – a clause written into the Constitution that strictly limits debt levels – although the government has signalled that hydrogen programs will largely be supported as planned.
“The question of funding will be resolved in time … but the objective of being carbon-neutral by 2045 continues to stand; the general need to be more environmentally friendly in the way we use energy continues to stand,” says Daniel Mercer, managing director of Storengy Deutschland, the energy storage arm of France’s Engie Group.
“The objective is that we stopped destroying, basically, the only planet that we have today, in order to just heat ourselves or transport ourselves from A to B – those two activities being the main consumers of molecules today. So, we’ll have to introduce green molecules.”
The political worry is it will be expensive, in an environment where the cost of climate action is under heavy scrutiny. Yet, some say that the volume of the fuel needed by Germany means the cost challenges will be outweighed by political will, given limited domestic capacity for hydrogen production.
“Maybe the next megawatt-hour of hydrogen that you produce here in Germany is so expensive that it’s cheaper to actually import it straight from a place like Australia,” Mercer suggests.
“Once it’s on the ship, we’re pretty convinced that it will come from multiple places. South America, South Africa, Australia, Arabian Peninsula.”
After all, trying to decarbonise using only electrification would need a hugely costly six-fold ramp-up in the pace of setting up power systems, Mercer calculates, describing the task as incredibly difficult to “green” the rest of Germany’s energy supply by 2045, given progress so far.
What form the green molecules will take remains uncertain. Green hydrogen, biomethane, green methanol, green ammonia or liquid organic hydrogen carriers – compounds that can absorb and release hydrogen through chemical reactions – are all in the mix.
But what is clear is that Germany, with its mediocre solar resources and constrained transmission capacity between the windy northern coast to industries further south, won’t be able to produce all it needs, despite plenty of wind power on its north coast.
“We will never be able to transport all the green electrons to the south of Germany where they need them,” says Jan Rispens, managing director of Renewable Energy Hamburg Cluster, a 180-member industry group that regards hydrogen as a big economic opportunity using excess wind power.
“But we also know that even with a doubling or tripling of onshore and offshore wind and other renewables, Germany will never be able to provide all of its primary energy if we include all the industry, and all the mobility, aviation and shipping. The rest needs to come from somewhere else,” says Rispens.
Germany’s national hydrogen strategy envisages domestic demand will reach between 95 and 130 terawatt-hours by 2030, or between 2.9 million and 3.9 million tonnes.
The target for Germany’s own production by that time is 33.33 TWh, from 10 gigawatts of electrolysers producing about 1 million tonnes a year. That 10GW figure was doubled in last year’s revision of the strategy forced by the Ukraine war, but is regarded as ambitious given existing capacity of 62MW, according to utility E.ON.
“They’re overambitious, but there’s a lot to say for formulating ambitious targets,” says Rispens. “If it is delayed by two or three years, it doesn’t matter much, but we need to set ambitious targets to set the right framework.”
Kirchem says almost all the hydrogen projects in Germany that are in concept shape would need to be realised to meet the target, which represents a “big jump” from today. “Domestic production of green hydrogen will be a big part, but imports will be an even bigger part,” she says.
Competition from rival exporters
But aspiring Australian exporters of green hydrogen products to Europe face stiff competition from much closer regions, such as Scandinavia and northern Africa, that will inevitably be more competitive.
Norway, the Baltic States, Tunisia, Algeria and Morocco are all jostling as potential suppliers – but by pipeline rather than by sea.
More distant sources reliant on ship transport would also incur extra costs to convert some material back into hydrogen on arrival.
Agora estimates that delivering hydrogen by pipeline from nearby regions could cost less than €1 per kilogram, versus €2 to €5/kg for hydrogen carriers shipped by sea, including reconversion costs. That means imports may only be possible if the political will is there to overcome that disadvantage.
“Ship-based imports will struggle to compete on cost with pipelines from countries such as Denmark, Spain and Tunisia,” Koch says.
“However, given Germany’s need to import substantial amounts of hydrogen as early as 2030, pipelines may not be able to meet this demand alone, so there is an opportunity for partner countries with existing energy infrastructure, such as Australia.
“There may also be a political will in Germany to diversify and include ship-based imports to make its energy supply more resilient.”
Koch says one option is for renewables-rich countries such as Australia to produce energy-intensive intermediate products that can be transported more easily to Germany, such as hot briquetted iron which can feed into existing industrial value chains. That would avoid the high hydrogen transportation costs, make industrial decarbonisation cheaper, and help keep German steelmaking competitive.
While the uncertainty for potential Australian exporters is where the demand will come from to underpin their project ambitions, for many in Germany the much bigger question is around supply sources because they insist that Germany’s needs for hydrogen are locked in.
Agora estimates Germany’s electricity sector alone will need 130GWh of hydrogen by 2035 to fuel about 80GW of capacity.
At DIW, Kirchem is worried about just where that supply will come from to supplement Germany’s already ambitious targets for domestic production of hydrogen. “There’s a lot of uncertainties around which projects will materialise eventually, not only in Germany, but also abroad,” she says.
“We’re talking about 50, 70 per cent of Germany’s hydrogen demand that is supposed to be met by imports. We have all these international collaborations already going on, but there’s very limited influence that Germany can have on how hydrogen projects are developing overseas.
“And there’s global demand, and Germany is just one player in that field. Whether we can actually secure those imports from Australia and be an attractive trade partner, that’s yet to be seen.”
The German government’s import strategy for hydrogen is due out this year, but is not expected to single out specific sources. Still, accords have been struck for various supply deals, with one of the leading ones involving supply of “blue” hydrogen from Norway’s Equinor for German utility RWE.
Germany’s hydrogen partnership with Australia is one of many the government has established as it works to secure its clean energy future, alongside accords with Canada, Chile, Namibia, Saudi Arabia and others.
“We will connect to our neighbouring countries in eastern and southern Europe, especially, and also to the north, maybe to Norway and Scotland,” Mansmann says. “But the amount of energy which can be harvested in this region is big, but not as big as Germany’s needs are. So, we need a much bigger, global economical connection.”
That was the origin for the HyGATE initiative that joined Germany and Australia in June 2021 in a hydrogen innovation and technology program with the aim of supporting projects that could underpin a renewables-based hydrogen supply chain between the two countries. Four projects, including one by ATCO Australia in NSW, Vast’s methanol project, and a Queensland project by Edify Energy, were awarded funding last year.
The initiative also includes examining options for bilateral trading in hydrogen derivatives, using Germany’s H2Global organisation and its innovative market auction process intended to act as a catalyst for the development of green fuels markets.
Australian parties have also shown keen interest in the organisation’s first global auction process for green ammonia, methanol and sustainable aviation fuels that is ongoing and is funded by €900 million of government funds, says HINT.CO chief executive Timo Bollerhey. He adds that the impact of the innovative auction will go well beyond the relatively small volumes that it will support.
The auction for buying green fuels will be followed up with a separate tender process for buyers of the fuel, with HINT.CO acting as a government-backed contracting party to buy and sell. It will use its funding to essentially close the gap between the prices buyers are willing to pay and the costs of producing the fuel, which can be up to double the “grey” price for ammonia, for example.
“What we’re doing is, we are simulating – like an existing market on the supply and on the demand side,” Bollerhey says. “At the moment, there is no market. Everybody says we need a market ramp-up. We say we first need a market.”
He acknowledges that €900 million across three products won’t go far in terms of the volumes it will support, but argues it is an important first step.
The H2Global initiative has found wide favour among buyers and sellers, but some say it is just a “drop in the ocean” compared with the huge size of the “grey” market for fuels and the big gap between production costs and viable sales prices.
“The concept is going in the right direction, but if you look at the overall market sizes and demands, there needs to be much more done on the funding side, and probably this is better as a European joint effort,” says Mabanaft’s Kroepels.
“The current market size of the global ammonia trade is around $US200 billion ($304 billion), at least. And if you want to have green ammonia, it’s double the price. H2Global is equipped with three billion … and we are talking just about ammonia. What about green methanol? Green fuels? It’s not enough.”
Kroepels says Europe needs to play a strong role in supporting the import of green fuels as a counterweight to the United States’ significant support for the production of green hydrogen through the Inflation Reduction Act.
Mabanaft intends to branch out from importing ammonia at its New Energy Gate terminal in Hamburg – which is targeting start-up in 2026-27 – to other fuels, and is scouting worldwide for supply sources. Since May, it has had a tentative plan to import solar-powered green methanol from Australia through an accord with Nasdaq-listed Vast.
Just what premium buyers are prepared to pay for green fuels is still uncertain, but Kroepels points to increasing pressure from sectors in Europe, including electric vehicle manufacturers and retailers, for low-emissions shipping and trucking of the materials used in their products.
“Our customers are still assessing how much can they afford and how much can they pass on to their end customers,” he says. “But what we are seeing is that the pressure in certain segments is rising to decarbonise. That’s why we do remain optimistic: it may take a bit longer at the end, possibly, but the ultimate objective has not changed.”
In the meantime, preparations are afoot to receive and distribute the hydrogen and derivatives when they arrive. Plans were unveiled in October for a 10,000-kilometre hydrogen grid, costing about €20 billion, to connect supply and import points with users and storage facilities by 2032.
Financed by private grid companies but underpinned by government guarantees, the grid will partly adapt existing gas pipelines and is envisaged as the first stage of a Europe-wide transport system for the fuel.
The regulatory front is also throwing up challenges, with Mabanaft still in the process of securing development approval for its terminal project, while the Port of Hamburg has yet to approve the import of ammonia into the city port strategically located near the mouth of the Elbe.
“Importing ammonia to Hamburg is simply new. Nobody has done it so far. I think it’s fair to assume that the authorities will take a very comprehensive look at it,” Kroepels says, adding that Mabanaft’s examination of the marine hazards of bringing in ammonia tankers down the Elbe to its terminal threw up “no red flags”.
Engie and Storengy also do not downplay the safety hurdles yet to be crossed.
“Safety will be an issue with new gases because there’s going to be a first time to whatever we’re doing with them, and that has to be thoroughly well-prepared,” says Mercer, who suggests methanol may remain a “niche solution” given the risks involved with handling it.
When hydrogen arrives in Europe, the ability to store it will be important to smooth out the supply of clean energy, part of the infrastructure needed to balance swings in production and consumption of both green electrons and molecules. Storengy is among companies in northern Europe planning to use natural underground salt domes to create caverns to hold hydrogen under pressure until it is needed, for industry or for reconversion into electricity. Similar storage systems have been running in Germany for several decades for gas.
“The storage of hydrogen in salt cavities will be key to allowing the energy system of Germany and other countries to transition away from fossil fuels, and in the case of Germany, also away from nuclear,” says Mercer, describing hydrogen as “the battery of the renewable power system”.
The size of the caverns and the energy density of compressed hydrogen means the system offers energy storage at a much bigger scale than is possible through batteries, adds Engie’s key account manager for industry in Germany, Thomas Grundler.
Meanwhile, the growing realisation of the costs involved is fuelling debate over whether Germany faces a potential exodus of heavy industry in favour of cheaper imports of products not facing the same energy impost – but with a politically painful loss of jobs.
DIW’s Kirchem says the issue of deindustrialisation is much more a political question than an economic one because in some cases it would clearly be cheaper to import products than to make them in Germany fuelled by green hydrogen.
“In terms of the economics, the answer is really easy: Let’s just import everything because it’s cheaper,” she says. “It then becomes a political question of, on the one hand, how much are German jobs worth in Germany, and then, how much is it worth to have somewhat industrial independence in Germany?”
But historically, Kirchem notes, Germany has never been a country with particularly low energy prices, and the threat of deindustrialisation may not be as high as industry sometimes makes out.
Still, for politicians such as Mansmann, the threat is real and underlines the importance of securing competitive supplies of hydrogen and its derivatives, including from Australia, where he is confident ultra-low renewables costs will support the economics.
But for him at least, the significance of hydrogen stretches much further, with the fuel offering the potential to leave behind the oil and gas market’s troubled history of energy “blackmailing”, whether in the 1970s by OPEC in the oil crisis, or more recently with Germany’s dilemma over Russian gas.
“I’m very optimistic that it’s finally possible to replace this not very good fossil market by a much better renewable energy market … with many more players and a lot of countries delivering more energy than we have today, and this in a sustainable way,” he says, pointing to the potential for regions like Africa that suffer energy shortages and poverty to leave those issues behind.
“Hydrogen is the key to that, to that future.”
The writer visited Germany on a research trip hosted by the German Federal Foreign Office in co-operation with the National Press Club of Australia.