LuIs Romero Día H2 Enagas

Applaud at the end we have Philip Christiani, CIP partner. We also have Christina, the general director of the German energy agency. We also have Michael Conin from the energy department of the US, the director of Thea Paloma ABA, and finally moderated by the financial general director, Luis Romero. Please put your hands together. Thank you very much.

Um, um, thank you very much for inviting me here. It is great to be here in Madrid. I normally work in Brussels. Thank you to everyone here, you know also the other people will understand. Um, so I think that you know already many speakers have said today how hydrogen plays a crucial role in decarbonizing the energy system, and also therefore is a strategic vector for reaching the European Union targets in 2030 and 2050. But the hydrogen sector in our view is not yet very mature. They still have to prove their business concepts. There are also uncertainties regarding supply and demand. There are still problems of social acceptance and as you say bankability. And therefore that's why we believe that public sector support through financing, but most importantly European Union support, can play an important role. It will help to derisk the large infrastructure investments and would also in a way get the hydrogen market off the ground. The European Commission entrusted a number of programs to be instrumented and implemented by the agency. Well, the first one is the Connecting Europe Facility, which can finance either the preparatory stages – we are talking about feasibility, concept, environmental studies – but we can also finance the construction works. And here we are talking more about either the hydrogen transmission, electrolyzers, ammonia reception facilities, and also underground storage places. Apart from the Connecting Europe Facility, which is very much focused on PCIs, we are also managing the Innovation Fund. The Innovation Fund has an estimated volume of 40 billion euros up to 2030, and this is more a program to finance low-carbon innovative technologies which are used in energy intensive activities, processes, also in renewable production, energy, carbon capture use and storage, and so on. And within the Innovation Fund, something that has been mentioned several times, we have been responsible for launching the Hydrogen Bank, the domestic part, and we have just launched the auction where we will try to get the production market on the ground. So this would be my first words on what are the possibilities that we have for financing the hydrogen market. Thank you.

No, thank you, Luis, and let me say thank you first to Enagás for inviting me to this. This is really important and really great to be here. From the US Department of Energy standpoint, sort of how are we looking at hydrogen and what the role is and what the role will be on the finance side. Obviously, part of what we do at the Department of Energy is help set and develop energy policy, and what is the role going to be for hydrogen in terms of part of our energy markets and energy security. What comes with that also is a significant amount of emphasis on developing the technologies that we are going to need to make all of this become a reality. You know, I often joke that we are called the Department of Energy and that's what we are mostly known for, but in fact we like to refer to ourselves really as the Department of Science and Technology, because the real key role and where we are spending a tremendous amount of time and a tremendous amount of financial resources right now is in developing some of the very crucial technologies that I think we will maybe get into a little bit later in the conversation, but being able to develop some of the technologies along the entire value chain in order to make hydrogen a reality in the marketplace. Directly in terms of what's available on financing now, everybody knows obviously IRA plays a role into that. There are actually several pathways within IRA and other funding streams. We have federal money available that we are able to deploy to developing technologies and developing infrastructure. My role on a day-to-day basis at the Department of Energy, and this gives me a somewhat unique perspective of what may be down the road in terms of what's out there on financing, so for about the last 15 years I have been sitting on the Committee on Foreign Investment in the United States. So I've been the senior representative for the Department of Energy on that committee, and my job is to watch all of the inbound investment that comes into the United States, and particularly that that is being invested in technologies and infrastructure. And what I see coming, what I see already starting, is a tremendous amount of interest from the private sector side, whether this is companies that are investing in different parts of the hydrogen value chain, interest in the private equity world, interest in sovereign wealth funds. So I see this opportunity sort of coming down the road of a lot of interest in financing and having more money available, and quite frankly I think that's going to be absolutely necessary. Federal programs are not going to be able to handle all of the financial costs. I mean we are looking at technologies, we are looking at infrastructure development that we are talking different goals 2030, 2040, 2050, we are talking about the need for billions of dollars, billions of euros, in order to make all of this a reality, and a lot of that is going to be coming in from the private sector as well. Thank you.

Well, first of all I would also like to thank you very much for the invitation to this important conference and also to this beautiful city. I think I'm perfectly in line with what has been said before, but I would like to come from a different angle. Germany still has a share of about 25% industrial production in its gross national product, so we do need our industry and we need our industry to be competitive. At the same time, we have set ourselves the target of becoming carbon neutral by 2045, so that is really pretty soon, and it will not be possible without green hydrogen. The same is true for decarbonizing the transport sector, heavy-duty vehicles, airplanes, etc. The same is true for decarbonizing the electricity sector, because we will always need flexible power plants and they cannot be fired with gas, they will need to be fired with hydrogen in the near future just to support volatile renewable energy. Now, industry must be competitive, meaning they need to have competitive energy prices for transportation and also for electricity supply. It is the consumer that pays the price, the price needs to be affordable. That means we don't only need green hydrogen, we need affordable green hydrogen. And when we are ramping up the market, this is going to be a challenge. Of course, we will need first movers, we need to have investments in infrastructure, we need to have investments in technology, and all of this will only pay off in midterm. And this is why I believe, or we as DENA believe, it is extremely important that there is focused and efficient support on the national level, on the European level, but also on the municipal level. I think all levels of our state, levels of government, need to cooperate. And it's also important not only to cooperate and to put money into it, but also to align the supply programs. And this requires close cooperation between the institutions, such as the ministry from Germany, from the United States, even, and also the European Commission and its agencies. Really a realistic approach.

And again, first of all, thank you very much for hosting this and having us here for the discussion today. I think being in this group of TSOs, investors, other interested stakeholders, it's extremely interesting to see how much more realistic the discussion is today than it was only a few years ago. So thank you very much for that. Let me build on the discussion of affordable hydrogen and talk a little bit about three things that we think are essential for this development. The first one we've discussed all morning: this is about the infrastructure. No transformation without transmission, I think we subscribe 100% to that view. The second is a discussion about stability. We've now spent a lot of time developing a set of rules and regulation around clean hydrogen in Europe, and we may not like all elements, but at least now it's a framework that we can work under, we understand it, and by and large it makes sense. And also the US definition has also proven to be within a margin of error sort of the same definition, so that also makes a ton of sense and makes for a level playing field. But the really important discussion about the financing, which is the topic here, and about creating the affordable hydrogen, is to create the offtake. And that is, I think the question was raised earlier, why are we not seeing more FIDs? We're not seeing more FIDs because we don't have the offtake contracts secured yet, because there's still a little bit of a margin between what users are willing to pay and what it can meaningfully be produced at. A few years ago this was a large gap, now it's a very small gap. There's also much more realism with the offtake in Europe, and I think it's really meaningful to start looking at some of the sectors where there is no real alternative to hydrogen. And the sectors where there are no real alternative to hydrogen, that's all the sectors where hydrogen is used as a molecule: it's refining, it is ammonia, it's methanol, it's steel. And these are the sectors that by and large make up the 10% of the or the 25% of the German GDP that you talked about. This is in Duisburg, it's on the Rhine, it's on the Danube, and this is where the hydrogen is needed. And this is just back to the discussion we've had all morning. To close this little gap between producers and the consumers, the European Union has introduced a fantastic concept, it's called the Hydrogen Bank. It has a very intelligent design. I think it also makes sense by and large, it's just a little bit underfunded. So my punchline would be: instead of putting three billion into the hydrogen bank for ten years, let's put three billion in per year for ten years. Thank you.

Well, I think the benefits for becoming a project of common interest has already been mentioned by the vice president in his message this morning. They benefit already from a simplified regulatory framework, they can get accelerated planning and permitting due to more streamlined procedures, but they can also get increased visibility. Which at the same time, giving this European Union label, they will probably attract more investors into that. But of course, as of getting this label, they can apply to the Connecting Europe Facility funding. It's not a guarantee that they will get the funding, but they can apply for it. This is the first condition. And what we are looking in these projects of common interest when they apply and how we are going to evaluate those projects: we are looking for projects that have significant socioeconomic benefits, second that they have great solidarity between member states, that's very important – there is a connection with other member states – but of course that they cannot obtain by themselves sufficient funding in the markets. We come always as a kind of subsidiary principle, that's very important. In terms of funding, what we can expect for the Connecting Europe Facility for energy, we still have 3.5 billion to spend until 2027. It's not all for the hydrogen sector, we don't have a sector envelope, it's all sectors covering energy, but out of the 166 projects of common interest, at least one third are related to hydrogen. So we expect if the projects are mature enough, they are ready enough, that funding will go to hydrogen. That's very important because after 2027, many of the projects that we have seen, the construction is going to be initiated, so probably the funding is going to be necessary in a massive way.

Well, it's a tricky question. For those who are less familiar on how the European Union funds work, we work with what we call the multiannual financial perspectives. So we already know the envelope at 2027, but we will enter soon in negotiations for the next multiannual financial framework which will be from 2028 to 2034. The issue is that there will be European elections this year in June. We will have to see what is the outcome of this European Parliament. What are the composition? Sometimes it also dictates a little bit the objectives and where the parliament wants to put emphasis on. Then we will have a new commission, and therefore only in 2025 the commission will make a proposal to the European Parliament and the Council on where we think that the priorities will be. I personally think, it's my personal opinion, that the European Green Deal is going to stay. I think that nobody will neglect that, and therefore I still think that there will be funding for that. But we cannot finance everything, so we'll try to put the funding necessary but we need many investors, we need the bankers and many others to help in those things. So it's difficult for me to say because there are so many question marks: what are the outcome of the European elections, which would be the European Commission, what other external things could happen that could change our priorities. But I really hope that envelopes will be sufficient to help the decarbonization of the energy system and therefore also for the hydrogen. Thank you very much.

I don't know whether we are going to go so far away as Philip is saying. I can give you a little bit more the perspectives in the next coming months. So yes, we launched this auction in November. We will know the results internally more or less on the 8th of February, but we will not publish the final result probably until April. We need to go through the valuation of projects. This is the first time that the European Commission and its executive agency has launched this kind of auction. For us it was a kind of a pilot project. So it will very much depend on the results of this auction, how much interest. We have just put the instrument, now we have to say okay, you bidders come and let us know if you are ready for this. This project has to be in operation in five years time at the latest, so we have to see what the results are. We will also have to throw some lessons learned if there is anything that we should change in the way that we have launched these terms of reference for this auction. And then if there is sufficient interest and we think that things are going well, we hope to launch another one in the autumn. The amount will very much depend on seeing if there are projects which are ready to bid and they have not obtained our support because we have exhausted the budget. But I would also like to say that we cannot do anything ourselves. The European Union money is an envelope, it is restricted, it is what we have. But in this auction we have also worked with Germany. Germany has also put money on the table, 350 million. And what they do is that we use what we call auction as a service, by which the agency is doing the evaluation of all the projects, we do the ranking, and then with the money that we cannot finance after the ranking, the additional money Germany will put into German projects located in Germany to finance hydrogen. And this is an option which has been also open to all the member states. So we hope that if this is a success, that many other member states will join the European Union money and then we can make it bigger. Thank you very much.

Sure. So that's going to be necessary in a particular focus. You know, I see this as one of the carriers at the Department of Energy right now. So we are leveraging our national lab complex. We have 17 national labs around the country, several of those labs are working very specifically at solving and working on some of the technology areas. And as Christina mentioned, one of the things we have to do, and technology plays a role here in order for all of this to be competitive in the market, we've got to get better at some of the technology. Technology becomes part of that solution into making markets more competitive. So we're spending an enormous amount of time looking at some of the technology solutions and how we're going to get better at things like storage. We're working on things with turbine materials, combustion technology. Electrolyzers is going to be a big part of that. So we're spending lots of time and energy, lots of thoughtful people trying to find better solutions that get better technology out into the marketplace. This is also an area where there's a tremendous amount of cooperation and I think opportunity in cooperation with Europe as well. I mean, this is sort of a tradition of what we do in the science and technology development sphere within the department, is working through our national labs, working with companies, working with governments. So I see a lot of opportunity there. I think, as a regulator in the foreign investment space, technology is always one of those areas we watch very closely too, so that's actually going to be part of the conversation. I mean, one of my major roles is working with partners and allies in Europe is one of the main focuses. Where I am working with my European counterparts that review foreign investment, technology is one of those areas we talk about all the time. And there clearly is a significant amount of technology that still needs to be developed in the pipeline of things that are going to be necessary. And you just look at the emphasis that both the United States and certainly Europe are putting on the hydrogen market as being part of the equation on energy security. So it rises to that level of significance. And I think what comes with that is that from a regulator standpoint, we're going to be very cognizant of what is happening in terms of investment going into infrastructure, but particularly investment going into technology development, to assure that there are adequate controls on where that technology ends up. I always like to use the example that we were probably not doing a significant job at adequately controlling technology as foreign investment was coming into the US in the solar market. So we essentially lost control of a significant portion of technology because we just allowed that technology to be bought up, transferred offshore, and now we're living the reality of being overly reliant on single sources of solar technology in order to fulfill clean energy needs in the US. We don't want to repeat that in the hydrogen market when we're at this early stage of trying to develop this great new possibility in clean energy solutions. We just want to be cognizant as we move along, and obviously we'll be attracting all kinds of investment, and rightfully so. I think a lot of that investment will need to come from foreign sources, but we just want to be cognizant of what is happening to make sure we don't lose control of any of that in the process. Thank you.

Yeah, well, so that's actually the perfect example. So we actually have this history and precedent of being able to cooperate in the LNG market. So it's just perfectly natural that as we are developing all of the answers in the hydrogen market, we have this precedent for being able to cooperate and work together. So I see a particular opportunity to be able to do that. I think one of the areas for sure is the ability to be able to share technology. We have entire separate offices within the Department of Energy that are just looking at technology commercialization. And as you know, we internally within our national lab complex and as a federal agency develop some of these new technologies. Getting those out into the commercial sector, making those available for commercialization, is a whole another part of what we do, and an area where there's a long history of that kind of cooperation between the US and Europe. So many, many opportunities there. Thank you.

Take a step back. I think it is necessary to explain the mechanism a little bit. Our TSOs have submitted a draft comprising around 9,700 kilometers of pipelines for our core hydrogen network, and that will probably require investments of 20 billion euros until 2032. So that is really a lot of money. It is clear that at the end of the day these investments shall be made by private investors. It is not the task of the state, the public sector, to provide for that infrastructure. And at the end of the day it shall be recovered from the users, the offtakers. However, it is also clear that to ramp up the market, you cannot immediately ask your one, two, three, four offtakers to take a corresponding share in the infrastructure investments. This is why the plan is to set the grid charges at a level which in the beginning is much lower than would be required by investment costs, but which is expected to be higher in the course of time than required by investment costs. So there's an equalization over time, and the difference shall be booked to a so-called amortization account. It's even in German a difficult word. Which will probably be at KfW, the German Development Bank, but that has not been finally decided yet. So the amortization account in the beginning will have a deficit, and over time it's supposed to be continued until 2055. It will fill up because the gap will turn from negative to positive. However, it's a risky business, and investors do take risks, but they need to have a feeling for the direction they're going. So the state will be securing the amortization account if it carries a deficit by 2055. The government will pay 76% of the deficit, and the private sector will carry a contribution of 24%. So the big question of course is at which level will the prices, the charges, be set, to be affordable in the beginning and not excessive in the end. And that will be decided by our regulator, which has a leeway in this respect. But they will re-evaluate the tariffs in a three-year modus.

Well, H2 Global is a double auction concept which has a purchase auction side and a sales auction side. So you tender hydrogen import purchase contracts from outside the European Union, and then you also tender hydrogen sales contracts within the European Union, not only to Germany, German companies, but also to other European companies. And the government is bridging the gap there. The government does not have an influence on which mode of transportation is being used by the bidders, but of course that will be part of the calculation of the bidders. And since auction always makes the most cost-efficient offer the winner, it is very possible that pipelines, at least when you come to the stage where gaseous hydrogen is being tendered, will be competitive. And of course it does have an indirect effect because when you offer and succeed in offering the transportation of hydrogen through pipelines, because it's cheaper, for the operator of the pipeline it gives a certain incentive to go ahead.

So we have a global perspective just to start somewhere. We are funding five projects in Europe in Denmark, Norway, Spain, and Portugal. We're funding five projects overseas in Australia and Oman, in Morocco and Chile, and a large project in the US. And that provides a little bit of a global perspective. It's very consistent with what was presented by the Austrian gentleman just before the break by the way. And if we look at Europe, if we look at the 20 million tons of hydrogen that we will probably eventually need, whether it's 2030 or 2040 is a matter of smaller consequence. We think there are three places where we can get this hydrogen. It's most likely the North Sea, it's most likely the Baltic Sea, and it's most likely from Iberia. And this is not to say that we cannot get 10,000 tons here and there in Germany and 10,000 tons here and there in France, but if we're going to produce millions and millions of tons of hydrogen, it can only come from these large locations where we have the opportunity to produce an abundance of electricity. There may be a fourth option, that's probably North Africa, we also saw that in the Austrian analysis, but this is roughly what's needed. And if we look at the economics of these places, Iberia is most likely the most cost-effective, and it's most likely the most cost-effective because of the relatively low prices and costs of solar and wind installations in Iberia. What's really needed on the short run is the discussion that we've now spent almost a full day on, which is the pipeline infrastructure in Spain. Without the pipeline infrastructure, we will not have the transformation. There are a few locations on the Iberian Peninsula where this is not the case, Cádiz maybe, one in Portugal, maybe a few other places in southern Spain, but in reality we need to produce the molecule here to get it to the German industry or the French refineries or similar locations to get this going. The other benefit of this is that with this approach we're starting with the heavy users, and we will need the heavy users to be partakers in this discussion to finance the pipeline systems and to make sure that the KfW account does not go too much into deficit.

So as I said, I think the hydrogen bank mechanism is a fantastic mechanism. It's competitive, it's focused on money that makes a ton of sense. I think the hydrogen bank, I said, I think it's underfunded. If I look at what's needed and what we need, then it is underfunded. And it's not because I think we should have an aspiration to have three euros per kilogram in support. In my mind that's just an unhealthy incentive that we're creating. We should remember that we're doing this to give the industry a notch in the right direction, not to create an unhealthy support system for the long run under the industry. And I think that would be the important perspective to look at projects that have industrial scale and have industrial economics to move the processes forward.