RED II green electricity criteria

RED II green electricity criteria

Impact on costs and availability of green hydrogen in Germany

Frontier Economics was recently commissioned by RWE to provide a report on the impact of different criteria for the use of electricity as an input to produce hydrogen via electrolysis (green hydrogen) on costs and available volumes of green hydrogen in Germany.

The recast Renewable Energy Directive (RED II) sets out a framework for the recognition of green electricity-based transport fuels (also referred to as synthetic renewable fuels or RFNBOs). These fuels are based on ‘green hydrogen’ produced from 100% renewable electricity. Green hydrogen is expected to play a central role in the European energy transition and not just in the transport sector. Even though the RED II criteria only directly apply to the transport sector, it will set a standard for “green hydrogen” for wider use in other sectors (industrial processes or the heating sector, for example).

The European Commission will define Union-wide criteria for the use of renewable electricity in a delegated act this year. In our study, we show that these criteria will significantly impact costs as well as available volumes of green hydrogen.

Impact of sustainability criteria on green hydrogen production cost in Germany (example: combination of solar PV/wind)

Under very strict green power criteria, green hydrogen production costs can rise from just below 3 €/kg (lower left part of the graph) to over 5 €/kg (upper right part of the graph). This will also limit the availability of renewable electricity for green hydrogen production at a given electrolyser capacity.

Our findings can be broken down along the three sustainability criteria from RED II: 

  • Additionality (renewable electricity plants that can be used) – Allowing unsupported existing renewables (including plants that have reached the end of their support period) would reduce hydrogen production costs by 1.1 €/kg and increase the available quantities required for a quick ramp-up of green hydrogen production.
  • Temporal correlation (accounting period over which electricity and hydrogen production must be matched) – Longer accounting periods over which fluctuating renewable electricity generation and consumption by hydrogen producers are matched increase the utilisation of electrolysers and decrease costs (up to 1.2 €/kg for an annual compared to quarter-hourly accounting period). Long accounting periods ensure additionality while the emission savings from shorter periods are unclear and likely to be only minor.
  • Geographical correlation (proximity between the production of renewable electricity and the production) – Requiring proximity of electricity and hydrogen production will increases costs and create uncertainty for investors. Locational incentives for electrolysers should be designed in a way to support the market ramp-up of green hydrogen.

As green hydrogen is expected to play an important role in Europe’s transition to a carbon-neutral economy, criteria should be defined in a pragmatic way which ensures the climate protection contribution and limits the additional cost to consumers and the industry.

You can read the report here.

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