EU Commission approves Dutch State Aid for hydrogen production

Late 2020 recorded the publication at European level of significant documents and decisions in relation to hydrogen. In particular, following the Hydrogen Strategy implemented by the Commission in July 2020^[1], on 11 December the Council published its conclusions on the steps to be taken to create a hydrogen market for Europe^[2], on 17 December an Important Project of Common European Interest (IPCEI) was launched with respect to hydrogen, which involves 23 Countries (including Italy), and a few days earlier, on 14 December, the Commission approved the Dutch scheme SDE++ to subsidise greenhouse gas reduction projects, including hydrogen production^[3].

SDE++ scheme

The SDE++ scheme, which allocates €30 billion, demonstrates the Netherlands’ material support towards achieving common environmental targets and substantiates the member States’ serious interest in hydrogen production.

Specifically, this scheme, which will last until 2025, incentivises renewable energy production projects, co-generation, industrial waste heat and heat pumps, electrification of industrial thermal processes and hydrogen production, carbon capture and storage (CSS) for industrial processes, hydrogen production and compost heating.

After only a few months of proceedings, the Commission found the scheme to be compliant with European rules on State aids and, specifically, with the Communication from the Commission with Guidelines on State aid for environmental protection and energy 2014-2020^[4] (the Guidelines), since it is necessary to make investments aimed at reducing greenhouse gas emissions, which otherwise would not occur, albeit in a proportional and limited manner, since the incentives will be disbursed through auctions.

Hydrogen production

As regards hydrogen production, the Commission’s decision is a landmark at European level and shows the approach the Commission intends to follow when it comes to public subsidies for this kind of technology.

There is no longer any doubt that hydrogen production should be materially supported by Europe and by individual member States. As the Council highlighted in its December conclusions mentioned above, there is a need to guarantee subsidies and to provide equal terms for investments, considering that the technology is currently not competitive and, especially, that there exists an insurmountable gap in production costs from one member State to another depending on which energy resources they have access to. However, the debate both at domestic and European level has focussed on the type of hydrogen that should be promoted and incentivised.

In this vein, it is noteworthy the opposition by Austria, Denmark, Luxembourg, Portugal, and Spain on the latest IPCEI; these States clarified that they have taken part in the project only with an understanding that the initiative exclusively refers to green hydrogen, i.e. hydrogen from renewable sources. This is opposed to the view of those supporting hydrogen generated from natural gas, and in general, low-carbon hydrogen (which also includes nuclear power and decarbonised gases), at least short-term in order to establish a hydrogen market.

Furthermore, as regards the SDEE++ scheme itself, within the European Parliament there was opposition against the fact that the Netherlands appeared to propose incentivising hydrogen production by electrolysis also with power from the grid, so not necessarily renewable energy.

In this respect, the Commission approved the measure based on the consideration that hydrogen production will occur at times when power is generated from renewable sources. Indeed, subsidies will be granted only for limited hours of operations and participation in the auctions is allowed only if the projects meet certain flexibility requirements in such a way as to avoid any demands of electricity in the hours in which the latter is not generated from renewable sources^[5].

Indeed, with respect to hydrogen, the measure was approved based on par. 18(a) of the Guidelines, which deems compatible with the internal market aids for going beyond Union standards or increasing the level of environmental protection in the absence of Union standards. Note, indeed, that the Guidelines do not refer to hydrogen production as such but provide for such general category in order to capture, as in the matter at hand, any investments that are not expressly contemplated.

Guidelines review and update

The Guidelines are currently being reviewed and the updated version will become effective from January 2022. The Commission has already announced that current rules on environmental and energy State aid “need further revision in light of new technologies and new types of aid, as well as of recent environmental and energy regulations”. As regards hydrogen, the SDE++ decision expressly acknowledges that including it among investments eligible for incentives is consistent with the current European legal framework and, specifically, with the New Industrial Strategy for Europe^[6] and with the Hydrogen strategy, as part of the Green Deal, which does not exclusively pertain to hydrogen from renewable sources but also to “low-carbon” hydrogen. Hydrogen-related infrastructures are also referenced in the guidelines published by the Commission on 18 February 2021 on State aid as part of the Recovery and Resilience Facility.

This leads us to conjecture that the new Guidelines will expressly mention hydrogen and this will pave the way for incentives for further projects in addition to those eligible to adhere to the hydrogen IPCEI.

^[1] COM (2020) 301, A hydrogen strategy for a climate-neutral Europe.

^[2] Council Conclusions “Towards a hydrogen market for Europe”, 13976/20.

^[3] C(2020) 8773, State Aid SA.53525.

^[4] Communication from the Commission, Guidelines on State aid for environmental protection and energy 2014-2020 (2014/C 200/01).

^[5] The scheme also provides for a cap on the maximum possible subsidy intensity at 300 €/tCO2 and this, in the Commission’s view, will necessarily push the market to reduce average hydrogen production process costs, which are currently higher than such cap.

^[6] COM (2020) 102.

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