The Exchanges

Q Okay, so then we can fast forward. So Russia invades Ukraine while this stuff is supposed to be getting worked out. Energy markets in Europe enter major crisis mode. What has happened since then?

A Well, there has definitely been an upscaling of ambitions and hopes in the European hydrogen strategies. So we've, we've seen the Repower EU plan by the European Commission, which is the European Commission's plan to reduce European dependency on Russian gas and to accelerate renewable rollout and renewable hydrogen rollout. And particularly what we've seen is the upping of the target from 10 megatons of clean hydrogen by To 20 megatons of hydrogen in 2030, and 10 of that is due to be imported, 10 of that is to be produced domestically. So, hopes are high and ambitions are high, but in terms of actual deployment, we haven't really seen anything. Everything keeps getting delayed by this lack of clarity of regulation.

AI assessment note: “we've seen the Repower EU plan by the European Commission”

Q All right. So let's dig in then on where there is a lack of clarity in the regulation. So what is the actual question? What's the key question at hand and what needs to be decided?

A This is an excellent question. The key question is, what qualifies as renewable hydrogen? And this is not as simple as it sounds. It is not just a question of simply, um, it is not as simple as determining its carbon content, because then the next question that follows is, how do we determine that carbon content? Furthermore, there, there is also optionality Usually, usually when using renewable energy, there's also optionality in terms of, am I going to be using renewable energy for the electrification, which is often more efficient, or will I be using this electricity to make hydrogen, which is typically as efficient? Um, so in other words, if you're diverting clean electrons from direct electrification, you might be actually getting less bang for your buck in terms of emissions abatement. So there are three Things that are, that have been proposed in what's called the Delegated Act, which is an amendment to the Renewable Energy Directive II, and this Delegated Act specifically applies to hydrogen, and the three criterion are one, additionality, which means that every single unit of electricity that's been, that's going to go towards hydrogen production should be from newly built renewable assets. So that's the first criterion. Criterion number two is temporal correlation, which specifies that hydrogen can only be produced within, within a specific timeframe of the production…

AI assessment note: “The key question is, what qualifies as renewable hydrogen?”

Q is true of additionality too, it seems like there's been a movement in Europe where I think initially the, it seemed like the direction, uh, was heading toward more robust, more stringent guidelines, but then the, the energy crisis and the need for expediency has been sort of pushing in the other direction, and so there's been some movement back toward perhaps less stringent guidelines. Am I interpreting that right?

A I'm not, I'm not actually sure that I wouldn't pin it on the energy crisis. If anything, I would pin this, uh, on the IRA derailing, um, derailing European regulatory efforts. And the reason for this is that in the euphoria, um, on, on your side of the pond, Shail, um, upon the IRA's passing, um, that euphoria was seized upon by lobbyists in, in Europe to, to scare policymakers into essentially saying, look, all this, all this hydrogen, The economy that, that we, that we are, um, that, that we are aiming for this leadership that we have today, suddenly it will, all this industry will shift to America because there are far better conditions, far more relaxed rules for producing hydrogen in the US. But I don't think that's necessarily true because, uh, because the rules for producing, uh, for, for claiming these tax credits, production tax credits in the US have not been fully defined, uh, if I understand that correctly. And then number two, um, the difference between Even yearly and hourly temporal correlation, the difference in, in the levelized cost of hydrogen and how that impacts the price of hydrogen is not that much. There has been recently, very recently in September, an excellent paper from the European University Institute and the Florence School of Regulation, which demonstrated that the price difference is to the tune of 10%. That's not really enough to make a whole I…

AI assessment note: “I wouldn't pin it on the energy crisis. If anything, I would pin this... on the IRA”

Q of electrolyzers to low-cost regions, and particularly to China, or can we somehow change the course of history as we build out this new market? That's definitely an active conversation in North America. The IRA has all these Domestic manufacturing provisions within it. This is not just true of hydrogen, true batteries, and other stuff like that, too. Really, for this clear reason, what does it look like in Europe?

A Yeah, that is an excellent question. Actually, funnily enough, we are sort of already having the, or witnessing the entrance of Chinese electrolyzers into Europe, but not in the way that, I think, not in the way that solar went. So what we're seeing is one of the largest producers of electrolyzers today, John Cockrell. Uh, or rather Cockrell Jingli is going to build a factory in Belgium. Now, Cockrell Jingli is a joint venture between John Cockrell, a Belgian manufacturing company, and a Chinese electrolyzer manufacturer. So it's really interesting that we're seeing these factories actually being built in Europe now. So the supply Chinese Europe based on Chinese technology. And who would have, who would have thought, you know, you would have, you know, two years ago, you would have heard that Chinese electrolyzers have cardboard separators, which disintegrate after three hours of operation, but that's not true. And then, you know, two years ago when Bloomberg and EF came out with their, came out saying Chinese electrolyzers are super cheap, nobody, nobody believed it. Um, and yet we're going to be, we're going to manufacture Chinese electrolyzers in Europe. Now, as to the question whether all of it will go like solar did, um, That is an insanely hard question, and I think that's, like you said, Shail, people are asking that question. I don't think there is a clear answer just y…

AI assessment note: “we are sort of already having the, or witnessing the entrance of Chinese electrolyzers into Europe”

Q we are likely to be a hydrogen exporter, uh, potentially. Europe, obviously different contexts. So what's the, what's the thinking there around producing hydrogen within Europe versus importing hydrogen? And I guess as a coda to that second question, where are we in figuring out how we're going to be importing hydrogen? What the hydrogen carrier might be? Where it's going to be coming from? All those kinds of questions.

A One of the things that, I mean, good major import targets, um, are out there for signaling. I think the, the, the issue we will run into is that hydrogen is very expensive to transport. So I think the way it will be split is that when hydrogen needs to be produced for hydrogen's sake, for, for end users that require, in other words, for end users that require hydrogen, Whether that's heavy trucking, whether that's, uh, steel, direct reduced iron, um, whether that's the chemical industry, well, some of the chemical industry, that, there is an appetite to produce that within Europe to ensure the continuity of European industry. There are, there are strong vested industrial interests to produce hydrogen locally. On the other hand, um, there are certain molecules that, of course, some of the transport options for hydrogen, things like ammonia, or methanol, or even hot-bricketed iron, these things can be produced abroad and imported into, into Europe, so I think we will, in the end, see some industrial shift out of Europe, just because it'll be, some countries have natural competitive advantage in, in, in access to cheaper renewable resources, and thereby, Making their hydrogen production costs lower. Um, and it makes sense to import finished products rather than hydrogen.

AI assessment note: “the issue we will run into is that hydrogen is very expensive to transport.”

Q For what purpose? Like, what, what, what would it matter whether you qualify a particular hydrogen qualifies as renewable hydrogen or not?

A Yeah, yeah, of course. Uh, so the European Union has this thing called the RED, or Renewable Energy Directive, which sets renewable energy targets for all the sectors of the economy. Uh, we're currently on number two, which was implemented in 2018, but, of course, hydrogen had its big moment, big break in 2019 with the publication of the EIA report, and then the EU's hydrogen strategy followed in 2020, and then various other countries, 20 plus countries since then, Have adopted national hydrogen roadmaps. So the problem was that this, this new molecule, hydrogen, was not really accounted for in the Renewable Energy Directive. There was no regulatory clarity on how to deal with it, with this molecule, on how to even, on what even qualifies as renewable hydrogen. So the European Commission came out with a plan saying, we're going to release a delegated act where we're going to specify the conditions where your hydrogen qualifies as renewable energy. And this renewable hydrogen then counts towards official targets, which are binding, and number two, it qualifies you for subsidies.

AI assessment note: “counts towards official targets, which are binding, and number two, it qualifies you for subsidies”

Q the problem that the more you do, the more you add complexity. Um, I want to talk about a couple of the other components that you talked about, but, but first let's just, so where are we today? Do we have this guidance? When is it supposed to come? And when are we going to start to see these final investment decisions on all these projects that have been announced?

A So that's the, uh, the irony is that, that, um, Due to the, well, ok, so let me roll it back for a second. Um, no, we don't. We don't have any regulatory clarity still. Everything is being delayed. And everything is being delayed by this lack of regulatory clarity, and I actually think it's a little bit ironic because the hydrogen lobbying organization in Europe, which was a very strong critic of additionality and temporal correlation, in pushing that line, once the IRA came out and the, and the, these voices were joined by more voices within the industry, that suddenly Europe risks becoming irrelevant. They got more than they bargained for it, because the European Parliament then voted on an amendment to the Renewable Energy Directive that, um, that, um, that effectively would strike down the delegated, the proposed Delegated Act a year or two after its passing. So there would be no point in passing the Delegated Act if a year or two later it would be just struck down by Parliament. It's, uh, yeah, so now we have no clarity, um, and we, we want, it's, yeah, everything has been delayed because of that, and we probably won't see new regulation. Well, I hope we will see new regulation soon. What's going to happen right now is we will, that the European Commission, the European Council, and the European Parliament now go into what's called a trilogue with their negotiating, negoti…

AI assessment note: “no, we don't. We don't have any regulatory clarity still. Everything is being delayed.”