Seoul vs Berlin approach to hydrogen stimulus: A case of contrast
This week as been quite intriguing in terms of global sovereign support to jump start the hydrogen economy. On one hand South Korea has announced first of it's kind tender to convert coal fired power plants to co-fire with ammonia and to partially co-fire with hydrogen in natural gas based power plant. The tender also allows for allocation to completely hydrogen based power generation using regular turbines or fuel cells as well. On the other side of the globe, Germany has approved a bill to enable faster supply side reform of the hydrogen and ammonia ecosystem. On one side the German sovereign support has been focusing on easing the supply side of the hydrogen ecosystem while South Korea on the other hand has initiated the first effort to realise the diffcult commercialization challenge of co-firing technologies for turbines. Let's dive into the sovereign sentiment which would enable us to understand which direction is the wind flowing.
German Approach, May 2024: This week the fast tracked bill of the German cabinet primarily focuses on reducing compliance burden for supply side hydrogen infrastructure with brief mention of 4 demand side infrastrucre support packages probably under work. The scope of the fast tracked hydrogen bill revolves around reducing compliance burden for the following:
The reduction of regulatory burden would also apply to public contracts awarded for such projects. In conjuction with the March 2024 fund of 3.84 billion USD which was earmarked to primarily support the supply side of hydrogen infrastructure in Germany, this fast track bill is intended to reduce the compliance cost and boost the timeline of approvals of green field projects which can take upto 26 months (German average) as per evaluation of cases in 2023. This does not only include greenfield projects but also applies to retrofit of existing pipleines and storages to enable storage of hydrogen and it's carriers. The reduced compliance burden and application for subsidies are applicable if it can be proven that a retrofit would be using around 80% of hydrogen, ammonia or any relevant carriers. This bill would primarily allocate subsidies to EnWG to the tunes of around 200,000 EUR per year along with additional support to enable quicker turn around for compliance burden as well as grant of public funds for supply side infrastructure. The current belief of the government is that there would be 10 or more on-shore electrolysers above 30 MW capacity that is to be expected to come online by 2030 with sovereign support. It has been assumed that there would be around 15 hydrogen storage facilities and low single digit number of compressors for pipelines that would come online by 2030. This stimulus structure is created to remove smaller than 5 GW electrolysers out of the merit order. The administrative cost to the government for approval per project is estimated to be around 25,000 EUR per case. The effect of this supply side stimulus is to be re-evaluated in 2033 to account for the development of the hydrogen ecosystem. Depending on the applications submitted in this would enable supply infrasturcture growth for hydrogen as never seen before in Germany. At this point the exact internal supply of hydrogen and the import balance may be difficult to predict because a number of applications currently under process may not materialise in the capacity for which it is currently planned for. One thing is pretty clear the the sovereign emotion is in favour of supporting internal production and transportation of hydrogen and this would create pressure on the commerical viability of the import balance into Germany.
South Korean Approach, May 2024: South Korea has announced one of it's kind tender to hydrogen co-fire for around 6,500 GWh of annual electricity production in starting by 2028 for upto 15 years. As per 2023 production in South Korea, this would be around 13.15% of the current electricity production capacity in South Korea. Ofcourse if this tender can be fulfilled per specification, this capacity percentage balance would be lower going into 2028 considering other renewable infrastructure coming online. The capacity balance story of South Korean power is as follows:
The currently installed capacity of South Korea is dominated by natural gas and coal fired turbines. RE in the capacity graph includes bioenergy & renewable waste, hydrogen fuel cell, hydro, IGCC, marine, solar PV, and wind. Capacity does not ensure that produced electricity would be sold at maximum utilization. In general the market tends to be smart enough to buy at lower end of the levelized cost spectrum.
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Though there has been a push to shift the production merit towards non coal and gas sources for power generation, as per 2023 it can be observed that coal and natural gas is currently the lowest cost generators in South Korea and the grid will keep rewarding coal and natural gas until the sovereign decides to change the sentiment of commerical viability. integrated (coal) gasification combined cycle and hydrogen fuel cells have been at 1.03 GW of capacity which the sovereign would like to push towards a higher percentage in capacity. The most commerically viable tenders would focus on combined cycle co-firing for both coal and natural gas which would enable the easiest introduction of hydrogen in the fuel mix as a serious contender.
Currently the co-firing of hydrogen in South Korea is a very small part of the power generation mix and the sovereign sentiment aims to enable 2.1% of the mix to hydrogen and the current tender is a part of the effort. Though it is expected that there would be allocation to fuel cells to increase the current capacity of 89 GW, the primary tenders would be focused on co-firing with ammonia in coal fired power plants inorder to dent the mix. South Korea aims to use South Korean ETS to further put pressure on the real levelized cost of unit production to ensure that blend turbines become a reality for atleast the lower end of the merit for coal fired power plants. Though the submission of tenders are not very transparent yet, it would be possible to estimate which plants would be participating in the process. Current South Korea ETS system prices carbon at a lot lower value in comparison to the EU ETS and currently 90% of ETS allocation in the South Korean carbon trading system is allocated without cost. It can be easily foreseen that the emotion of the soveriegn is in favour of reducing the free allocation to coal fired power plants to push for faster retrofit.
Current sovereign sentiment of South Korea seems to favour net import of hydrogen and carriers and enable utilization of the fuel in blend turbines to enable a commercially viable lower carbon future.