In August 2022, the US Inflation Reduction Act (IRA), the largest investment in climate and energy US history, was signed with the aim of stimulating investments in clean technologies, including green hydrogen and eFuels. The support is granted as tax credits that work as a stable supply-sided support for a fixed period.
In the EU, in contrast, support for eFuels is currently based on a range of measures, most of which are demand-side oriented. As a reaction to the IRA, the EU Commission has laid out measures in its’ proposed Net-Zero Industry Act that are mainly based on reducing bureaucracy, but do not include additional financial support for technologies or producers.
Frontier Economics was commissioned by the eFuel Alliance, Stihl AG and Porsche AG to analyse challenges and options for eFuel support in the EU in the light of the US IRA. Core part of the study were workshops with stakeholders from the eFuel industry.
The main challenges raised by these stakeholders regarding the EU support landscape for eFuels include:
- the complexity of the regulatory framework, which is scattered across many individual measures;
- the substantial regulatory risk (e.g. due to short timeframes in regulation and the transposition of EU directives into national law); and
- the substantial revenue risks for producers, as the European eFuel support is mainly based on demand-sided measures (e.g. via quota obligations for energy consumption). With these instruments, uncertainties arise which is especially relevant during the market ramp-up phase.
The challenges eFuel producers currently face in the EU could be alleviated
- by measures that reduce the cost difference between fossil and renewable fuels, such as reduced energy taxation on renewable fuels as suggested by the European Commission within the proposal for a revision of the Energy Tax Directive (ETD);
- by de-risking measures (which could include e.g. the extension of auctions for offtake-agreements such as those provided by the European Hydrogen Bank (EHB) and H2 Global); and
- by measures that contribute to reducing the complexity of the regulatory framework (as those proposed within the Net-Zero Industry Act).
Please click here to read the full study.