The European Commission Approves a €900 million German Scheme to Support Investments in Production of Renewable Hydrogen Outside the EU

The European Commission Approves a €900 million German Scheme to Support Investments in Production of Renewable Hydrogen Outside the EU

January 22, 2022, Covington Alert

According to a press release issued on 20 December 2021, the European Commission (the “Commission”) approved the German State aid scheme H2Global. This will support investments in the production of green hydrogen outside the EU, which will then be imported and sold in the EU.

Under EU law, State aid is in principle prohibited unless it is declared compatible with the internal market by the Commission. The Commission decision thus constitutes the green light for Germany to implement its initiative. The full decision will be published after confidential information has been removed.

The Scheme

The German scheme’s estimated budget runs to EUR 900 million over 10 years. Its objective is to meet expected increased demand in the EU for renewable hydrogen and hydrogen derivatives, such as green ammonia, green methanol, and e-Kerosone. A special-purpose entity named HINT.CO will manage and implement the scheme, tendering long-term purchase contracts on the supply side and short-term sales contracts on the demand side. The State aid will take the form of Contracts for Difference (CfD), operating a double auction model which will select the lowest supply prices and the highest demand prices, effectively compensating suppliers for the difference between the two. Suppliers will have to comply with sustainability criteria set by the revised Renewable Energy Directive (RED II). The idea is that the scheme’s investments in market development will help to progressively align purchase and sales prices—ultimately rendering the scheme itself unnecessary.

The fact sheet describing the H2Global State aid scheme further notes that “foreign trade partnerships will be established with countries in which green hydrogen can be produced efficiently due to their geographical location” and where “the local energy transition will be supported, and a contribution made to meet the massive demand for PtX [Power-to-X] products in Germany and Europe”. It appears that Germany has already concluded bilateral agreements with Canada and Saudi Arabia.[1] It will be interesting to see in the Commission decision what is meant by “local support”, in particular whether the scheme intends to subsidize only green hydrogen that has already been subsidized outside the EU.

The Commission’s Assessment

To assess the German State aid scheme, the Commission relied on its 2014 Guidelines on State aid for environmental protection and energy, which were revised by a Communication adopted on 21 December 2021. Under the Guidelines, State aid to energy from renewable sources may only be approved if it (i) contributes to an objective of common interest, such as increasing the level of environmental protection; (ii) is necessary, i.e., it addresses a market failure hampering an increased level of environmental protection, such as negative externalities, which is not yet addressed (e.g., through regulatory measures or carbon taxes); (iii) has an incentive effect, i.e., it changes the behavior of the beneficiary, (iv) is proportionate (that is, kept to a minimum); and (v) avoids undue negative effects on competition and trade between EU Member States, so that the overall balance of the measure is positive.

The Commission considered that the aid was aligned with the objectives of the European Green Deal of 55% carbon reduction by 2030 and of carbon neutrality by 2050. In deciding that the aid was necessary, the Commission deemed that carbon prices and other regulatory requirements do not fully cause producers and consumers of energy to internalize the social costs of associated greenhouse gas emissions, as hydrogen from renewable energy sources is significantly more expensive than hydrogen from emission-intensive production processes. It will be interesting to see how the decision addresses the comparison between green, blue, pink, and grey hydrogen and the potential future evolution of regulatory measures that may affect the importation of green hydrogen into the EU. Of particular relevance may be the Commission’s Carbon Border Adjustment Mechanism (“CBAM”) that, as currently proposed, would apply to ammonia (NH3) which is also an important component of fertilizers, making the importation of green hydrogen more economically competitive.

The competitive auction process led the Commission to consider that aid was limited to a minimum, and, because it allows wide participation by suppliers, the aid avoids undue negative effects on competition and trade between EU Member States.

This decision is interesting because it relates to aid granted by an EU Member State for an economic activity that takes place outside the EU. That said, the framework of assessment is not different from the one applicable to aid for activities carried out within the EU, meaning that the Commission verified the positive effects of the scheme on the EU internal market and in particular, its contribution to the achievement of the EU Green Deal objectives, without unduly distorting competition. This conclusion could play a further role in relation to other regulatory measures, such as for instance Regulation (EU) 2016/1037 on protection against subsidized imports from non-EU countries, to reject claims from EU producers of green hydrogen that they are disadvantaged by the subsidized imports of such products.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Antitrust/Competition and Energy Industry Group practices.