_ Yuri Kofner, economist, MIWI Institute for Market Integration and Economic Policy. Grünwald, March 6, 2023.
Making Bavaria a major hydrogen hub is one of the left-green dreams of State Minister of Economic Affairs Hubert Aiwanger (Freie Wähler). For this dream, the Bavarian state government is spending about 13.8 million euros of taxpayers’ money annually (a total of 151 million euros between 2014 and 2024) to build a hydrogen capacity of up to 1,700 MW (8,500 MWh per year) by 2030.[1]
This one-sided and, in this sense, planned government subsidization of a single technology is wrong. This is because the state government cannot know what “the energy carrier of the future” will be. Only the free market can figure this out through a functioning price mechanism. The state-forced ramp-up of the regional hydrogen economy can thus be considered a prime example of a “presumption of knowledge.”[2]
As a niche product, hydrogen is indeed an interesting energy carrier. However, it will not replace hydrocarbons in the medium term. Only consumers should be free to decide whether a switch makes sense for them. In 2021, fossil fuels and nuclear energy accounted for three quarters of primary energy consumption in Bavaria.[3] According to all the main scenarios (IEA, BP, Equinor), around two thirds of primary energy consumption worldwide will still be covered by fossil fuels and nuclear energy by 2050.[4] It should also not be forgotten that the overall efficiency in the re-conversion of H2 to electricity is only 30 to 40 percent.[5] Hydrogen is the only energy source that can be used to generate electricity.
Generating hydrogen in Bavaria using volatile solar and wind power is very expensive and inefficient: around 50 cents per kWh for 1,000 annual full-load hours.[6] At the same time, domestic wind power could only provide 1,900 annual full-load hours in 2020, and photovoltaics only 850.[7]
If the regulatory restriction on only “green” hydrogen remains, then it would be significantly cheaper (16.5 cents per kWh) to import it from distant regions that have a comparative cost advantage, such as Chile and Morocco.
In this context, blending H2 into the existing natural gas infrastructure would be a cost-effective but limited option (max. 15 percent). However, even that is currently unjustly prohibited by EU Directive (2021/0425 (COD). Because H2 is a highly corrosive and volatile gas, retrofitting existing and building new transportation and storage infrastructure is very costly.[8]
Local hydrogen production would only be economically feasible under an open-technology approach that allows for the production of “gray” and “red” hydrogen, i.e., through steam reforming of hydrocarbons (5 cents per kWh) or nuclear power (6.5 cents per kWh).[9]
Instead of the unilateral governmental focus on domestic H2 production, there could be more perspectives to focus on exporting conversion systems to produce synthetic fuels. According to estimates by IW Cologne, Germany’s mechanical and plant engineering sector could create around 30 billion euros in value added and nearly 400,000 new jobs in this sector nationwide by 2030.[10]
In summary, hydrogen is an interesting technology, but its application is and will remain limited by physical and economic aspects. The Bavarian government should refrain from dirigistically pushing this single technology through subsidies. Instead, Munich, Berlin and Brussels should increase funding for research and development to solve cost problems of the hydrogen economy (corrosiveness, efficiencies, etc.), reduce bureaucratic hurdles to implementation and welcome a technology-open and cost-efficient approach, including “gray” and “red” hydrogen.
Notes
[1] Response of the State Government to the Written Question by Gerd Mannes (AfD), Member of Parliament, dated October 26, 2022, concerning hydrogen in Bavaria I.
[2] Hayek F.A. (1973). The presumption of knowledge. Ordo, Vol. 26.
[3] Bavarian state government (2022). Primary energy consumption. Energy Atlas of Bavaria URL: https://www.energieatlas.bayern.de/thema_energie/daten/primaerenergie#:~:text=Ab%20den%201970er%2DJahren%20hat,er%20auf%201.746%20Petajoule%20geschgesch%C3%A4tzt.
[4] Blümm F. (2022). Energy of the future: what will the energy mix look like in 2050? Tech for Future. URL: https://www.tech-for-future.de/energiezukunft/
[5] Response of the State Government to the Written Question of the Member of Parliament Gerd Mannes (AfD) of 08.07.2019. Limits of the energy transition in Bavaria – Question III: Energy storage. Printed matter 18/3528.
[6] Ibid.
[7] VBEW (2021). Electricity generation in Bavaria 2020.
[8] Response of the State Government to the Written Question of the Member of Parliament Gerd Mannes (AfD) dated 26.10.2022 concerning Hydrogen in Bavaria III.
[9] McKinsey (2021). Hydrogen Insights. URL: https://hydrogencouncil.com/wp-content/uploads/2021/02/Hydrogen-Insights-2021.pdf
[10] Fritsch M., Puls T., Schaefer T. (2021). Synthetic fuels: potentials for Europe: climate protection and value creation effects of a ramp-up of the production of climate-friendly liquid fuels. IW Cologne. URL: https://bit.ly/35TTIxL
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