Implications for cost-competitiveness of misalignment in hydrogen certification: a case study of exports from Australia to the EU

Abstract

Certification schemes are emerging globally to establish emissions credentials for hydrogen. In 2023, the European Union's (EU) delegated regulations supplementing the Renewable Energy Directive II (RED II) codified when on-grid renewable electricity used in electrolytic production can be categorised as ‘renewables based’. This determines which hydrogen is eligible towards EU climate targets, and could impact industry development. While prior analyses have focused on implications for EU producers, the EU's expected hydrogen demand means this policy will affect international exporters. The reliance of RED II rules on electricity market features such as bidding zones may create challenges for certification alignment in overseas electricity markets.

We investigate the implications of misaligned hydrogen certification by considering the case of Australian exports to the EU. Our analytical framework links a techno-economic cost model with a simulation model to explore two scenarios: 1) when only Australian off-grid electricity is recognised as renewables-based, and 2) when Australian renewable electricity used in grid-connected electrolysis is recognised as creating renewables-based hydrogen. We find that on-grid could be cheaper in the near-term, but off-grid is consistently cheaper in the longer term (2030–2040). Certification misalignment is unlikely to affect cost-competitiveness in later years, but could affect early industry development.