Experience from previous transitions are useful for hydrogen

To give us an idea of how well hydrogen will fare in the future energy supply, we can learn a lot from previous transitions in other sectors such as agriculture, the natural gas sector, housebuilding and the electricity sector. This is the conclusion reached by Daan Hulshof, Machiel Mulder and Peter Perey from Groningen University’s Centre for Energy Economics Research (CEER). The lessons we can learn relate mainly to financial support and protecting public interests.

Society has also faced major challenges in earlier periods of transition. Just after the war there was a lack of food and a shortage of housing. The government lost no time in taking a range of measures to solve these problems, which they did successfully. Discovery of a natural gas field in Groningen in 1959 brought a whole new source of energy for the gas sector, leading to rapid, large-scale changes to the energy supply to reflect the new circumstances. We are currently experiencing another energy transition, moving this time from fossil-based fuels to sustainable sources. This is particularly noticeable in the electricity sector, where the government has been promoting renewable generation from wind and sun for some time.

The situation seems comparable for hydrogen. Many countries are putting their faith in hydrogen for meeting climate targets because it is a versatile energy carrier which does not produce CO₂. Widespread use of hydrogen will not take off on its own, however, especially because it is still quite expensive to produce. An infrastructure for transport and storage still needs to be developed. Producers, distributors and users will have to modify many of their systems and equipment to be able to use hydrogen for heating, transport or as a raw material in industry. In order to make this possible, the government will have to support these modifications in various ways.

We can see from agriculture that a sector can be significantly boosted when minimum prices are guaranteed and production subsidies are granted. However, experience in this industry also shows that continuing such financial support for too long can lead to overproduction which takes its toll on public funds and has a harmful effect on the environment. In short, when government policy is too focused on the interests of one specific sector or technology, there is a risk that the interests of society as a whole will disappear from view. Therefore, it is important to base policy on the primary public interest at all times, which, where hydrogen is concerned, is the reduction of CO₂ emissions.

Designing subsidies requires precision, as we have learnt from our experience with renewable power. Initially, the subsidies were fixed payments for power from wind or sun, without taking into account the precise need for the subsidy, which led to significant overpayments. Smart subsidy design, for example by regularly aligning the amount of the subsidy to market prices, can avoid such situations. Experience gained in the electricity sector also shows that the effectiveness of domestic policies can be reduced by policy measures in neighbouring countries. Boosting the production of renewable power in Germany, for example, made electricity prices fall in the Netherlands, meaning that more subsidies were needed there for wind and solar power. This can also happen with the production of hydrogen: foreign measures introduced to stimulate hydrogen production will drive up the price of electricity, making hydrogen production (also) more expensive in the Netherlands. It would therefore seem more appropriate to promote hydrogen production on a European rather than a national scale.

Furthermore, financial  support does not always lead to more supply, as we have seen in the housebuilding sector. Mortgage interest relief has provided an incentive to homebuyers for many years, but, due to the scarcity in houses, this measure did not lead to more supply but to higher purchase prices. This experience shows that stimulating demand is only meaningful if supply also increases. Applied to the hydrogen sector this means that stimulating demand, for example in industry or transport, will only lead to more hydrogen consumption if more green hydrogen can be produced, i.e. if the production of renewable power also increases. As long as the supply of green power is limited, promoting the use of green hydrogen means that prices will increase, not that more green hydrogen will be produced.

Promoting one particular sector by providing financial incentives can, according to the researchers, also lead to adverse effects elsewhere. In agriculture, this was shown by an increased impact on the environment. Those within the gas sector focused on maximising the yield from the Groningen field; it was only later that they recognised the consequences affecting local Groningen inhabitants. We learn from this that it is important to adapt government targets in good time when such effects occur. Where hydrogen is concerned, if production is boosted this might lead to the construction of many more wind farms which could have negative consequences for other interests both onshore and in the North Sea.

To summarise, the researchers find that if we focus too keenly on one specific business sector, we can lose sight of other public interests. This risk increases as the policy takes shape in close consultation between government and the sector concerned. In the agricultural and gas sectors in particular, government and industry were closely interlinked, meaning that it became difficult to distinguish between private business interests and public interests. To ensure that government policy serves the public interest first and foremost, i.e. reducing CO₂ emissions where hydrogen is concerned, it is important to keep industry at arm’s length and to involve other relevant parties in the decision-making process.

Daan Hulshof, Machiel Mulder and Peter Perey (2021). Giving hydrogen a jump start; lessons learned from Dutch policies in other industries. CEER Policy Paper 9.

Download the research report here (in English).