A €1 billion grant from the German state to Salzgitter (FRA:SZG) under the climate, energy and environmental aid guidelines (CEEAG) is another signal of the EU’s commitment to hydrogen.
- Salzgitter received a €1 billion grant from the German government under EU state aid rules, to fund a project to decarbonise steel production using hydrogen.
- The project is expected to contribute to the EU hydrogen strategy and European Green Deal targets by replacing fossil fuel used in steel production with hydrogen.
- The project is outside the EU’s IPCEI ‘Hy2Tech’ or IPCEI ‘Hy2Use’ programs that aim to mobilise a further €25 billion in investments in green hydrogen.
In accordance with the CEEAG, SZG will match the grant from the German federal government and the state of Lower Saxony by co-investing €723 million in a new low-carbon steelmaking process, intended to save 95% of annual carbon emissions once fully deployed.
Salzgitter low- carbon steel making part of AG 2030 strategy
Salzgitter views the EU’s decision to award its Salzgitter Low CO2 Steelmaking program (SALCOS) as a vote of confidence in its sustainability strategy, and also as compatible with European law.
The €1 billion grant will comprise €700 million in funding from the German federal government, and €300 million from the state of Lower Saxony, with a further €723 million to be co-invested by Salzgitter.
The entire amount is expected to be invested in the company’s SALCOS program by end-2025. Salzgitter has not set a net zero target, but has announced an intention to reduce Scope 1 and 2 emissions by more than 50% by 2030.
While the commitment to emissions reduction may be laudable, the science suggests that emissions must be reduced by 45% by 2030 to achieve 2050 targets. Failure to set a net zero target or address Scope 3 emissions means Salzgitter’s climate commitment lacks credibility.
Germany’s €1 billion grant to Salzgitter could not have previously been approved under state aid rules. The EU’s commitment to hydrogen has led to a reorganisation of policy funding frameworks.
EU support for green hydrogen continues unabated
The EU seems to have become the biggest backer of hydrogen as a bloc, having approved €5.4 billion in hydrogen projects with 15 EU states in July 2022, amid questions about the opaque approval process, and about the related technology’s potential to reduce emissions.
The Important Project of Common European Interest framework (IPCEI) enables Member States to boost investment in green hydrogen, despite existing limits on individual state aid for industry.
An amendment to the EU’s Renewable Energy Directive (RED II) increases the bloc’s renewable energy target from 32% to 40% by 2030, which has opened the doors for much optimism and speculation on developing green hydrogen as a fuel source.
Green hydrogen is being positioned not only as a means of fulfilling the aims of the European Green Deal, but as a critical part of economic recovery. The EU intends to mobilise €672.5 billion for a green recovery, part of a wider €1.8 trillion NextGeneration EU Recovery Plan, which together with the EU’s seven-year budget will finance the European Green Deal.
State aid viewed with scepticism
Despite the EU’s position on green hydrogen, there is little public support for the technology.
Consultations on the CEEAG however, published in January 2022, there was little support for low-carbon hydrogen, with 50% of NGOs, 36% of companies, 29% of public authorities and 26% of associations opposed to green hydrogen.
Given the public opposition, the EU decided to use the General block exemption Regulation (GBER) to support green hydrogen projects. This however has caused its own challenges, as the GBER was intended for state aid to small and medium-sized enterprises (SMEs) and was limited to amounts of €500,000 – above that level, approval needs to be granted.
The EU has therefore resorted to the use of the Important Project of Common European Interest framework (IPCEI). The IPCEI has been part of European treaties since 1957 and is intended to support cross-border projects that benefit the EU in a number of ways. These include sustainable growth, jobs and competitiveness, and in its latest update provides an approach which allows states to circumvent GBER aid constraints.
Revised IPCEI rules avoid state aid limits
Under revised IPCEI rules, applicable from January 2022 onwards, the EU proposed all Member States be informed of projects. This is the basis for avoiding accusations of unilateral or bilateral collusion. The revised rules also facilitate the participation of SMEs while remaining aligned with current EU priorities.
Previously, IPCEI rules meant at least four Member States had to be involved in each project to qualify for funding. They were required to deliver economic and social benefits beyond participating Member States and companies, involve co-financing by the companies receiving state aid, and comply with the ‘do no significant harm’ (DNSH) principle.
New IPCEI frameworks focus on hydrogen
The launch of IPCEI Hy2Tech (July 2022) and IPCEI Hy2Use (September 2022) demonstrate the EU’s determination to build out a hydrogen industry.
IPCEI Hy2Tech will deploy €5.4 billion in public funding, and is expected to unlock €8.8 billion more in private investments for the hydrogen value chain. It will involve 41 projects from 35 companies, including eight SMEs, aimed generation, fuel cells, storage, transportation and distribution and end-user applications, specifically in mobility.
IPCEI Hy2Use will complement Hy2Tech by focusing on hydrogen-related infrastructure and industrial applications, including hard-to-abate sectors. The framework will deploy up to €5.2 billion in public funding, an investment which is expected to leverage a further €7 billion in private investment. Hy2Use will involve 29 companies, including SMEs, in one or more Member States, in 35 projects.
Specifically, this approach is intended to reduce the EU’s dependency on the external supply of natural gas, by increasing the supply of renewable and low-carbon hydrogen.
Whether or not the EU’s focus on financing green hydrogen is successful in decarbonising the economy, there are many challenges to overcome.
There are three requirements for success: the first is the rapid acceleration of renewable energy generation, the second is the deployment of large-scale renewable energy storage and transmission, and the third is for large emitters in hard to abate sectors, such as Salzgitter in the steel industry, to set credible and meaningful emissions reduction targets and strategies.