How Germany's Hydrogen Boom Stalled

Green hydrogen has the potential to heat millions of homes and keep German industry humming. So far, though, a lack of the environmentally friendly gas and the infrastructure needed to transport it have prevented its wide-scale use.

  SPIEGEL BY CLAUS HECKING, ISABELL HÜLSEN, BENEDIKT MÜLLER-ARNOLD, MICHAEL SAUGA AND GERALD TRAUFETTER, 11.05.2023

The pipe, it seems, just can't get around the seals. On a windy day this winter, hundreds of seals populate the beach at the dune near the island of Helgoland in Germany. They grunt quietly when you get close to them. "Let's keep our distance," says Thilo Thunhorst. "Then the seals don't feel so disturbed."

The animals are a problem for Thunhorst. The 52-year-old is an engineer with Gascade, an energy network operator. On the small island neighboring Helgoland, the company plans to lay a pipeline for the Aquaventus pilot project, one of the most ambitious hydrogen initiatives in the world. After its completion, climate-friendly hydrogen will soon be transported from an offshore wind farm equipped with electrolyzers, to the mainland. German utility company RWE and Shell are among the companies involved.

But not even the pilot project – a single wind turbine with the pipeline connection to Helgoland – is in place yet. The test facility is expected to be up and running in three years – that is, if Thunhorst can get past the seals. Helgoland is surrounded by nature reserves, anchoring zones for tankers and ferries, fisheries and areas which may contain unexploded bombs from World War II.

Thunhorst has to lay the pipeline amid all of that. "If I pay heed to the conservation area, then I have no choice but to run the line through the anchoring zones and the suspected munitions areas," he says.

The only alternative is to cross the dune, the seals' habitat. Or by drilling under the island, an undertaking that would cost several million euros more.

Without Hydrogen, There Can Be No Demand

Welcome to the sobering hydrogen reality. While Germany hopes that it will soon be able to run basement gas heating systems on hydrogen, steel manufacturers are converting their production to the green gas at a cost of billions and energy companies are planning new power plants that will generate electricity from hydrogen, almost everything needed to make the climate-neutral dreams a reality in the near future is still lacking. The environmentally friendly hydrogen is missing, as are the pipeline networks to carry it across the country, not to mention reliable business models.

This plethora of issues has created a chicken-and-egg problem in the industry: So long as there isn't sufficient hydrogen, there won't be demand from customers. And without demand, no one will build a pipeline network, which in turn means no demand.

German Economics Minister Robert Habeck, whose ministry is responsible for the mammoth undertaking, recently complained: "When the Dutch energy minister wants a pipeline to be built, he just calls Gasunie." The state-owned company then sets about getting the work done. In Germany, though, the minister has to deal with 16 long-distance gas network operators, countless municipal utilities and regional network providers, stubborn government coalition partners and powerful lobbying associations.

The hype is thus contradicted by the figures: 44 terawatt hours (TWh) of hydrogen were produced in Germany last year, of which not even 1 percent was produced using climate-neutral green electricity. The rest is "gray" hydrogen and comes primarily from natural gas. By comparison: Last year, Germany required 866 TWh of natural gas for heating, power plants and industry. With the amount of hydrogen that the largest existing electrolyzer can produce each year, natural gas could be replaced in this country for only a half an hour.

There's still a long way to go before green hydrogen can contribute to a secure energy supply. Currently, only 417 kilometers (259 miles) of hydrogen pipelines are in operation across Germany, compared to tens of thousands of kilometers of natural gas networks.

The German government has set itself the bold goal of building electrolyzers with a capacity of 10 gigawatts by 2030. And, indeed, corporations like BP and RWE are planning numerous large-scale plants.

However, final investment decisions are still pending for most of the projects. And that's where things look dire. The United States is currently courting climate-neutral investments with billions in tax subsidies. "Some industries in this country are asking themselves whether hydrogen should still be produced in Europe at all, or whether it would be better to produce it in the U.S.," says Gabriël Clemens, who is responsible for hydrogen and environmentally friendly gases at E.on, a German energy utility company.

"We are discussing petty issues in Germany," complains Uwe Lauber, the CEO of MAN Energy Solutions, which builds such plants, and a member of the National Hydrogen Council, an advisory body to the German government. "But what we need to be doing is to build plants now, big plants." He argues that smaller electrolyzers won't make hydrogen any cheaper and will keep the market from taking off.

A Showcase Project

If there is one place that displays both the progress and backwardness in the quest for hydrogen energy in equal measure, it's the Ruhrchemie plant in the city of Oberhausen. It is a convoluted agglomeration of factories and pipe bridges. Air Liquide, a French company, uses it to produce gray hydrogen from natural gas and distributes it across its own 240-kilometer network, the largest in Germany to date. It winds its way largely underground from Leverkusen, a city that is home to major chemicals manufacturing, with a few branches to the Ruhr region. The pipeline is connected to, among other things, a refinery, plastics factories and the ThyssenKrupp steel mill in nearby Duisburg.

By the end of the year, Air Liquide's network is set to become a little bit greener. An electrolyzer is currently being built in Oberhausen that will produce hydrogen using green electricity. It's a flagship project, which even prompted German President Frank-Walter Steinmeier to pay a visit last week.

Although the plant will be one of the largest water electrolyzers in Germany, with a capacity of 20 megawatts, the volume it produces will only be enough to meet one-sixth of the needs of the factories connected to the pipeline. Why isn't the company thinking in much bigger terms?

Green hydrogen is still twice as expensive as gray hydrogen, explains Gilles Le Van, who is the head of Air Liquide's division for industrial customers in Central Europe. High gas prices and more expensive CO2 emission rights have recently made gray hydrogen significantly costlier, but the production costs for the green alternative hinge on the price of electricity. And electricity prices are at a record high in Germany right now.

The capacity of Air Liquide's network is also limited. With a diameter of no more than 30 centimeters, the pipeline is significantly smaller than long-distance gas pipelines, which easily reach 80 centimeters. Le Van is hoping that natural gas network operators will rededicate at least part of their lines to hydrogen so that the Oberhausen project doesn't remain a lone venture.

Can Existing Gas Pipelines Be Tapped?

When Ontras boss Ralph Bahke wants to know whether hydrogen could flow through his pipes in the future, he pulls out a pipe inspection gauge. The device, which is equipped with sensors, looks like a cross between a space probe and a chimney brush. It can be used to measure the finest cracks and damage inside the steel pipes. If the steel is undamaged, the tube is potentially suitable for the fine hydrogen molecules, meaning it is H2-ready.

Ontras, a subsidiary of German energy utility EnBW, owns around 7,700 kilometers of gas networks in eastern Germany. Large plants such as the Leuna Chemical Complex and the Piesteritz nitrogen works are directly connected to the network. Because gas demand is expected to drop dramatically in the next few years, Bahke is aware that he needs an alternative use for his pipelines, like hydrogen.

Bahke has already tested around half of his network for its suitability for hydrogen. And the majority so far would work, at least in principle. It's good news, Bahke says, "because repurposing costs only one-fifth of what it would cost to build a new network."

Nevertheless, hundreds of kilometers of pipelines still need to be built in order to supply the company's customers with hydrogen on a broad scale, in part because some potential customers weren't even connected to the gas network before. Two model projects in the region alone are expected to devour several hundred million euros in investment by 2030. Will it pay off? "We're doing a lot of the upfront work now," Bahke says.

It's unlikely there won't be enough demand. In a survey conducted by the long-distance gas network operators of their customers in 2021, the reported hydrogen demand increased tenfold compared to 2020. The only problem is that very few of them know who can supply them with hydrogen, in what quantities and at what price. And that's a problem for network operators. Because the lines have to be financed through customer-use fees. If only one customer were to use the network in the beginning, then that customer would also theoretically have to pay the network charge on their own, which would be unimaginable. "We wouldn't be able to muster the revenues we would need," says Bahke.

He argues that the state will have to step in as the guarantor in the development of the hydrogen network. Network operators are already discussing one possible solution with Habeck's Economics Ministry: Charges for the new network could be capped initially so that the customers who are the first to use the lines don't get penalized. If there aren't enough revenues, then the government could step in. "Ideally, demand will be so great by then that no public money will be needed at all," Bahke says in support of the idea.

With the exception of a small project in Bad Lauchstädt, it will be around four years before hydrogen starts flowing through the new Ontras pipelines, in part because they are seeking European Union subsidies in Brussels earmarked for what are called IPCEI projects. These subsidies are intended for projects that are in the EU's interest and deemed to be particularly worthy of support. The processing of the paperwork has been delayed because the European Commission lacks the staff to handle the flood of applications. "We're running out of time," Bahke warns.

To turn the patchwork of regional pilot projects into a national network, the Ontras manager would like to work with the other long-distance gas network operators to design a German start-up network, a kind of highway map for hydrogen. So far, efforts to implement that have collided with the legal situation. Whereas the natural gas network is under the supervision of the Federal Network Agency, which requires suppliers to build and operate pipelines and work together to do so, the hydrogen network has largely been left to the free market so far. Anyone who wants to build a network can do so, provided they have the approval of the regional authorities. At first glance, that looks like a lot of freedom. But German competition law prohibits network operators from colluding. And the Federal Network Agency has so far lacked the legal basis to sign off on the plan for a national network. This is another reason that many plans haven't moved forward.

Since last week, though, it appears that Economics Minister Habeck has come to understand the dilemma. By the summer, the minister wants to amend the Energy Industry Act to enable the rapid development of a start-up network. Habeck initially wants to commission the construction of 1,800 kilometers as part of IPCEI projects. The Federal Network Agency and the operators of the long-distance gas pipelines would also be allowed to design it together. Habeck has also held out the prospect of money to close the financing gap from the initially meager grid fees.

A Fundamental Debate over Hydrogen in Brussels

The hope of companies like Ontras and many municipal utilities to repurpose as many kilometers as possible of their old gas network for future use is by no means universally accepted. Especially not in Brussels, where a lobbying battle is currently raging over an EU directive known as the Hydrogen and Gas Market Decarbonization Package. It is part of the "Green Deal" with which the European Commission wants to transform Europe into a climate-friendly continent.

"If we don't use the gas grid for the energy transition, we'll be shooting ourselves in the foot."

  CARSTEN ROLLE OF THE FEDERATION OF GERMAN INDUSTRIES

So far, hydrogen has played only a modest role in those rules. The Commission's argument: The direct use of electricity – in heat pumps and electric motors, for example – is much more efficient than conversion to hydrogen, a process in which considerable energy is lost. Because the green fuel will be scarce and expensive for quite some time to come, they expect it will only be used in a few industries, such as steel and chemicals, as well as in shipping and heavy-duty transport. The remaining energy requirements are to be covered by green electricity and batteries. That would mean that a large part of the network wouldn't even be needed.

A repurposing of gas pipelines for hydrogen, the European Commission fears, could slow down rather than accelerate the transition to clean energies. This is why the Commission is pushing forward with unbundling regulation that would require gas network operators to hand over their pipes in the long term if they enter into the hydrogen business. Unbundling fits with the assumption that hydrogen is likely to be used primarily in industry and heavy-goods transport: If that is the case, why should private citizens help finance the development of this infrastructure with their gas network fees?

The industry recently protested loudly against the Commission's plans. They argue that the regulation would choke off any incentive to invest in hydrogen networks. Papers published by lobbyists speak of "economic nonsense" that makes it more difficult to achieve the climate targets. "If we don't use the gas grid for the energy transition, we'll be shooting ourselves in the foot," warns Carsten Rolle, head of the energy and climate policy department at the Federation of German Industries (BDI). Germany's second legislative chamber, the Bundesrat, which represents the federal states and has traditionally been sympathetic to representatives of the municipal sector, urged the federal government to push for changes to the proposed regulation.

"As industrial centers, Germany and Europe have no time to lose."

  JENS GEIER, MEMBER OF THE EUROPEAN PARLIAMENT

One person who holds a similar view is Jens Geier, the head of the center-left German Social Democratic Party (SPD's) party group in the European Parliament. The gas industry will have to change, says Geier, who is leading negotiations on the regulation for the European Parliament. "That's why it should also take responsibility for the development of the hydrogen networks," he says. "This is important for the timely supply of energy-intensive industry."

In February, members of the European Parliament decided that distribution network operators controlled by municipal authorities should be permitted to transport hydrogen without major restrictions. It was a victory for the gas industry, but only a temporary one. That's because the European Council, which represents the member states, still has to approve the regulation, and it remains controversial there. France, for example, couldn't care less about preserving the German gas network. The government in Paris wants to protect its own electricity sector. In a country with 57 nuclear power plants, electricity had traditionally been more important than gas for energy supply. If Paris had its way, nuclear power would flow directly to electrolyzers located near the factories, eliminating the need for any large hydrogen pipelines.

The gas lobby fears that consensus for that opinion could also develop in Germany. The reason behind that is a recently published paper by the think tank Agora Energiewende, which had been headed for years by Patrick Graichen, the state secretary responsible for the issue at the Economics Ministry, which is led by the Green Party. The Agora study sees no future for more than 90 percent of gas distribution networks in Germany. Instead, it states, the "orderly and timely decommissioning" is a central task of the transition away from natural gas to other technologies for heating.

If, on the other hand, the phase-out were postponed, it would lead to the stranding of up to 10 billion euros in assets. In the end, these costs would be borne by consumers, who, according to Agora's philosophy, should in the future get their heating primarily through heat pumps or district heating.

EU parliamentarian Geier is proposing a compromise. "The EU should put regulation of competition for the hydrogen economy in the hands of individual member states." Then each country could decide for itself which regime best suits its energy system. "As industrial centers," he says, "Germany and Europe have no time to lose."

The German Heating Illusion

E.on executive Gabriël Clemens doesn't want to wait that long. He has been talking to some of his customers about building electrolyzers on site, even if small plants are significantly less efficient than those on a gigawatt scale.

Clemens points out that a supraregional transmission network would be of little help to most German companies. "Small and medium-sized enterprises, the core of the German economy, are connected to the distribution networks." He is thinking primarily of businesses that require high temperatures – glassworks, foundries or ceramics manufacturers, for example. The intricate distribution network would also be needed to realize some politicians' hope of potentially supplying every private boiler room with hydrogen in the near future.

"Hydrogen in the building sector is a niche topic."

  STEFAN SCHÖNBERGER, BOSTON CONSULTING GROUP

In contrast to the long-distance gas network, where several pipes run parallel along many routes, the distribution network consists of only a single pipe in many places. Adding hydrogen in these locations is considered a waste of the scarce energy carrier. However, operators such as E.on could only convert entire network sections to 100 percent hydrogen if all connected consumers were able to handle it. Most gas heating systems currently installed allow at most a 20 to 30 percent admixture of hydrogen. And that's not even mentioning the lack of efficiency in the field. "Hydrogen in the building sector is a niche topic," says Stefan Schönberger of the consulting firm Boston Consulting Group.

Despite all the difficulties, E.on has formed partnerships with companies from Canada and Australia to bring hydrogen – in the form of ammonia, for example – to Europe. Ammonia is a compound of hydrogen and nitrogen that can be transported by ship and train and cracked, or broken down, into pure hydrogen on site. "So there are a lot of possibilities, even without pipelines," Clemens says.

Time-Consuming Approval Processes

Meanwhile, on the island of Helgoland, Thunhorst, the engineer, looks out over the sea and points to an imaginary point in the distance where the pilot wind turbine will one day stand. It will be built as far away as possible and close to existing wind farms "so that it is less visibly noticeable," Thunhorst explains. After all, they don't need protests from locals on top of everything else.

In addition to the seals, Thunhorst has already identified the next problem. A few steps away from the possible landing point of the pipeline on Helgoland, he points to a curly plant on the side of the road. "Real sea kale," he says. "It's protected by nature conservation laws." Before digging can be done here, a biotope type mapping must be done that shows protected plant and animal species in the area.

The pilot project alone requires four permitting processes, with each demanding hundreds of pages of expert opinions. For the full Aquaventus project, five additional permitting processes would be needed. Even in the best-case scenario, that would take years. They are already considering shifting the focus away from Helgoland, across the North Sea.

And why did the planning start so late in the first place? "People believed in cheap natural gas," Thunhorst said. No one could have imagined that one day it would just suddenly stop flowing. Himself included, he says.