In the Dutch Climate Agreement, renewable (and/or eventually low carbon) hydrogen is been considered essential to decarbonise the society. However, a support market mechanism will be required to compensate the higher costs of the production and/or consumption of this renewable type of energy compared to traditional fossil alternatives. In this paper, existing voluntary and mandatory schemes that are used to introduce renewable energy in the electricity, gas and transport fuel sector are assessed in order to address lessons and critical points of attention that should be taken into account in the way hydrogen could be supported and introduced effectively. Two voluntary schemes (the Dutch RES-E GO’s by CertiQ and Dutch green gas GO’s by Vertogas) and two mandatory schemes (the Dutch fuel blending obligation and the Norwegian-Swedish electricity quota) are assessed based on pre-determined characteristics in order to compare the reliability of these schemes, the tradability of certificates, the accumulation of support, the effects on deployment, the way the schemes are introduced and the perceived risks.
The generalized lessons and points of attention that can be concluded from the assessment are the following:
Guarantee of reliability
- The reliability of the scheme could become endangered when too large differences exist between the administrative and physical reality. Moreover, certification systems intend to see things black and white: ‘green products’ and ‘not green products’, while sometimes consumers perceive differences in the level in which several products are green. When the right information is provided at the certificates, these differences in ‘greenness’ will be priced in voluntary systems since these prices depend on the willingness-to-pay of a consumer. Due to the mandatory consumption of certificates in the mandatory systems, it is experienced less likely that voluntary higher prices will be paid for certain products if cheaper options are available. When an undesirable amount of a typical technology would be established, we have seen in the Dutch fuel blending scheme that sub-quota targets can be used to deal with ‘differences in greenness’ between products.
- The more diverse the use applications of certain resources are and the more complex the value chains of those resources, the more complex it will be to prevent the system from fraud or outcompeting the use of the same resources in other sectors. Such issues are especially seen with biomass in the existing schemes, but similar issues could be expected with other resources that have one or multiple of these characteristics as well (e.g. scarce renewable electricity that is desired to be used in multiple sectors for decarbonization).
Tradability of certificates
- When schemes allow international trade, it should be considered that differences in the existence of the stimulated technologies (e.g. a lot of renewable electricity available in Norway) and the way technologies are stimulated among countries (e.g. countries that stimulate biomethane use buy certificates and countries that stimulate biomethane production export certificates) will have large impact on the import and export of certificates.
- It should be considered that the combination of production subsidies and voluntary GO schemes could lead to ‘leakage’ of national support financed by taxes that are used for carbon reductions claimed by other countries, when large shares of certificates are exported. The Norwegian-Swedish electricity quota is an example how the costs for support can be distributed proportionally between end-users.
- Generally, the more uncertainty is perceived in business cases or the commodity and certificate markets, the more likely it is that market players will prefer long term agreements for the purchase of renewable energy. This is especially seen in renewable electricity markets where stable fossil generation will be replaced by intermittent solar PV and wind generation.
Allowance in cumulation of support schemes
- In the voluntary schemes, the certificate revenues and subsidies could be accumulated. Since two years ago, only revenues for the wind and solar PV GO’s are taken into account in determining the level of SDE++ subsidy.
- In the mandatory schemes, it was seen that production batches with subsidized ‘resources’ or ‘inputs’ could not be used to comply to the Dutch fuel blending quota. In the Norwegian-Swedish electricity quota scheme, it was seen that with a clear distinction in purpose between ‘tracking’ and ‘support’ certificates, revenues for both Quota Certificates and Guarantees of Origin could be obtained.
Effects on investments and deployment
- In both assessed voluntary schemes, the certificate prices have a small contribution in closing the unprofitable gap of the renewable energy production technologies. In these cases, the subsidy was the largest contributor to close the unprofitable gap of the business case. While in both mandatory schemes, the certificate prices had a large impact in closing the business case of additional renewable technologies.
- The SDE++ is effective in deployment for technologies that decrease carbon emissions against relatively low costs, as the subsidy is only used for the most cost effective carbon reduction technologies. For technologies, such as biomethane, which are considered essential but are relatively high in costs per reduced ton of CO2, the deployment will be limited as long as more cost effective technologies are available. For decarbonization of specific sectors, both mandatory schemes that were assessed reached their goal of renewable energy use.
Introduction of schemes
- All four assessed schemes are legally embedded by the national governments. The voluntary schemes were implemented by companies 100% owned by the electricity and gas TSO’s and the mandatory schemes were implemented by governmental authorities. Also, the voluntary systems use advising councils consisting of producers and consumers while the mandatory systems do not use such formalized councils to obtain input from the market parties.
- In three of the four assessed schemes, international trade of certificates has been developed at a later stage to increase the market liquidity and cost-effectiveness deployment of renewable energy capacities.
- One of the major risks perceived in support schemes is the risk that subsidies paid by national taxes will leak away towards other countries. The assessed mandatory schemes had more clear geographical boundaries and did not include different national support schemes connected via international exchange of certificates. Moreover, the leakage risks are lower in the mandatory schemes, as ‘the user pays’-principle was used.
- Especially for the mandatory schemes, the speed of introduction is a very important factor to consider. In both assessed schemes there were no reports that the level of the target rose faster than supply could be developed. Thereby, buy-out prices were used in both schemes.
Based on the comparisons between the assessed schemes, it could be concluded that the voluntary schemes assessed mainly focus on the deployment of the most cost effective carbon reduction technologies, while the mandatory schemes give more guidance and security that certain types of end-use applications or sectors could become decarbonized. The voluntary schemes have uncertainty in the actual deployment (depending on how much deployment can be supported with the determined budget), while the mandatory schemes have more uncertainty in the costs calculated towards the end-users. The advantage of ‘the user pays’-principle via the same mechanism, is that subsidies cannot ‘leak away’ due to differences in national policies. However, more careful attention should be paid to the introduction and the perceived reliability of the scheme.
With regards to the implementation of a hydrogen admixing scheme, all lessons concluded above are essential to take into account with regards to considerations of the systems design and desired purposes. Obviously, although analysed carefully, the experiences based on assessed energy admixing regimes are not fully interchangeable and comparable with the situation and purposes that a hydrogen admixing policy could have. The assessment is a case study, and the case of hydrogen will differ with its own characteristics. However, the generalized lessons can be taken as critical points of attention that should be used and analysed further when it comes to the question of how renewable hydrogen can be introduced to decarbonize the energy system.
Dit project is medegefinancierd door TKI Energie uit de Toeslag voor Topconsortia voor Kennis en Innovatie (TKI's) van het ministerie van Economische Zaken, onder referentie nummer TKI2020-HyDelta.