Europe and the Eastern Mediterranean: the Potential for Hydrogen Partnership

Recent steps toward hydrogen in the Eastern Mediterranean

The earliest mention of hydrogen strategy in the Eastern Mediterranean region came from Greece, which considered the role of hydrogen in its National Energy and Cli­mate Plan published in 2019. Greece’s National Natural Gas System Operator (DESFA) is actively engaged in the EU dia­logue on hydrogen, notably through its participation in the European Hydrogen Backbone initiative, and is poised to begin construction of dedicated hydrogen pipe­line infrastructure within Greece. The country may also adopt domestic legislation on hydrogen in the near future. Egypt is in the process of introducing hydrogen into its Integrated Sustainable Energy Strategy – a major priority in the run-up to COP27, which will be hosted by Egypt in November 2022.

Egyptian state energy companies are engaged in active discussions with the private sector, including major European companies, on green hydrogen projects. Eni, a major partner of the Egyptian state in the field of oil and gas production, has been working with the state-owned Egyp­tian Electricity Holding Company (EEHC) and Egyptian Natural Gas Holding Com­pany (EGAS) since July 2021 to explore the feasibility of hydrogen production. In August 2021, the EEHC signed a memorandum of understanding (MoU) with Siemens – a leading manufacturer of electrolysers for green hydrogen production – to work jointly toward the development of “hydro­gen-based industry [...] with export capa­bility”. Another group of international and local companies have signed a separate MoU to produce “green” (low-carbon) ammonia at Ain Sokhna. There have also been reports that members of this group are engaging in discussions with multiple potential partners for further green hydrogen development projects.

Other countries in the region are less advanced in their policy approaches toward hydrogen. Agreements to develop the first Israeli green hydrogen pilot project were just signed in December 2021. Israel also hosts some high-tech start-ups seeking to develop technologies in the hydrogen space. Turkey has not developed a formal hydrogen strategy, but various technical initiatives and commercial studies are underway, driven mainly by the private sector and the scientific community. Turkey hosted the biennial meeting of the World Hydrogen Energy Conference in June 2022.

Blue or green hydrogen?

As they develop their hydrogen strategies, Eastern Mediterranean countries face the same fundamental question as any poten­tial producer of low-carbon hydrogen: should policy focus on “green” hydrogen produced by renewable energy and electrol­ysis or “blue” hydrogen made from natural gas in a process that includes the capture and sequestration of resulting CO2 emis­sions?

Could hydrogen enable a “transition pipeline” to Europe?

Some Eastern Mediterranean countries are seeking ways to maximise the potential of their natural gas resources while simultaneously focusing on hydrogen as part of their energy transition strategies. One con­cept – that of a “transition pipeline” to Europe – could align these two objectives to the mutual benefit of both gas and hydrogen regional development strategies.

While much of the discussion regarding additional natural gas exports from the Eastern Mediterranean region has focused on LNG, pipeline options have also been considered. The EastMed gas pipeline pro­ject, which proposed to bring regional gas to mainland Greece and Italy via Cyprus and Crete, completed a series of feasibility studies in 2018 and attracted considerable political support. While political backing for the project seemed to ebb in late 2021, in November 2021, Greece and Egypt man­aged to sign an MoU on energy cooperation that included a proposal to build a pipeline to bring regional gas to Europe via Egypt along an alternative, shorter, and more cost-effective sub-sea route.

Decarbonisation in Europe, however, presents a serious challenge for the import of Eastern Mediterranean gas via pipeline. While gas supply diversification remains an important European policy goal – particu­larly in the context of the high gas price environment seen in Europe since autumn 2021 – the EU’s urgent focus on the energy transition raises questions about the need for new natural gas pipelines to supply Europe. At the very least, the EU’s 2050 net-zero target would seem to put an end-date on the expected commercial lifetime of any new pipeline built to deliver natural gas to Europe.

These considerations will make financing a natural gas pipeline from the Eastern Mediterranean region to Europe difficult at best. The European Investment Bank – a core financial backer of gas infrastructure projects in the past – has already adopted a policy of no longer financing “unabated fossil fuel projects, including gas” as of the start of 2022.

In this context, one concept would see a natural gas pipeline from the Eastern Medi­terranean to Europe developed as a “tran­si­tion pipeline” – one that would start opera­tions delivering natural gas, and then tran­sition over time to transporting hydrogen.

In theory, a pipeline built to transport natural gas for a defined and limited period could fit the EU’s taxonomical conceptualisation of gas as a “means to facilitate the transition towards a predominantly renew­able-based future”. Such a transitional pipe­line would support diversity of gas supply in its early years of operation without rais­ing concerns about long-term lock-in. At a certain point – perhaps after a short period during which a methane/hydrogen blend could be shipped – the pipeline could be adapted to deliver 100 % hydrogen to the European market by adding substantial new compression capacity. The pipeline itself would be built from the start to speci­fications that would allow it to transport hydrogen, with relatively modest cost im­plications.

A “transition pipeline” is a novel concept, and capital markets are not always eager to support something that is being done for the first time. But there would be obvious synergies between short-term gas transmission and longer-term hydrogen transmission. A firm commitment to tran­sitioning the natural gas pipeline to one that transports hydrogen would be more financeable and more aligned with EU policy.

Just as important, a transition pipeline would substantially reduce the cost of delivering large volumes of hydrogen from the Eastern Mediterranean to Europe. The main economic challenge for a long-dis­tance hydrogen pipeline is the required up‑front capital expenditure (capex), which reflects not only pipeline procurement and pipe-laying costs but also the enormous requirements for gas compression. The up‑front capex for a brand-new hydrogen pipeline from the Eastern Mediterranean to Europe would be extremely high, a cost that would be reflected in a high transportation tariff that would damage the com­petitiveness of the delivered hydrogen.

The transition pipeline concept would essentially use a short period of natural gas transportation as a large subsidy for later hydrogen transportation, with natural gas transport revenues covering all pipeline capex (and some compression capex). The additional capex for compression that would be required later for conversion to hydrogen would be large, but far less than the capex attached to a hydrogen-only pipeline. Tariffs would be lower, and the delivered hydrogen, more competitive.

EU regulatory uncertainty and risk

Emerging hydrogen strategies for the non-EU countries of the Eastern Mediterranean region are being driven first and foremost by these states’ energy, economic, and climate strategies. At the same time, their approach toward hydrogen will also be shaped by the external force of EU policy along two different axes. First, the potential for low-carbon hydrogen exports to Europe is fundamentally based on the EU hydrogen strategy and its assumption that much of the hydrogen that will ultimately be con­sumed in Europe will need to be imported – and that EU funding should support hydrogen projects targeting the European market. Second, the forthcoming intro­duc­tion of the CBAM points toward a future in which regional exports of a growing list of products will need to be gradually decarbonised to maintain their position in the EU market.

The most likely approaches toward hydrogen in the Eastern Mediterranean will incorporate both pathways implied by these two axes: hydrogen export to the EU and expanded use of low-carbon hydrogen as a domestic fuel and feedstock. Either way the EU will be a key partner, and the EU regu­latory approach toward hydrogen will be a critical driver.

This raises an obvious source of investment risk, namely the uncertainty that currently exists regarding the details of EU hydrogen policy, which at present remains in the early stages of development at both the Union and member state level. Already noted above are the differing views within the EU about the acceptability of blue hydrogen. Will imports of low-carbon blue hydrogen ultimately be allowed in the EU, or will zero-carbon green hydrogen be mandated?

This is not the only area of uncertainty. Even with respect to green hydrogen, there are potential EU regulatory issues associ­ated with the thorny question of addition­ality. From the most rigorous perspective, renewable energy development for the purposes of green hydrogen production should only be considered zero-carbon if it can be demonstrated that the new renew­able capacity is “additional”, i.e. if the capacity would not have been developed otherwise and its development does not negatively affect the rate of growth of re­new­ables for general use in a country’s overall electricity supply mix. Proving ad­ditionality is a fraught exercise, and very strict EU rules of this sort could make it difficult to meet EU requirements in the context of power generation systems in the Eastern Mediterranean given that the region will still rely partly on gas-fired generation for years to come.

Another issue relates to potential integra­tion of hydrogen-focused renewable generation with the national electricity grid in a producing country. Levelised production costs for green hydrogen can be re­duced materially if excess electricity can at times be sold into the grid, and if some electricity for electrolysis can be drawn from the grid at other times in order to maintain produc­tion during some hours of low solar and/or wind output. But the question arises as to whether grid-connected generation for green hydrogen production could be certi­fied or accepted in the EU as having a suf­ficiently low carbon footprint, and if so, under what specific conditions.

Finally, the prospects for public funding to support EU imports of hydrogen are still uncertain. This issue is critical given the assumption that the development of the EU hydrogen economy will not be economical on a purely commercial basis, particularly in its earlier stages before costs are reduced and EU industry decarbonisation more deeply advanced. While there is broad policy acknowledgement that some form of public support for hydrogen will be needed, the details remain to be determined, and the willingness of governments to subsidise imports as well as domestic hydrogen devel­opment is unknown. Germany may be a partial exception however, especially in light of its establishment of the H2Global Institute to match supply and demand in addition to its continued efforts to coordi­nate funding mechanisms to support hydro­gen importation.

The uncertainty inherent in these issues means that investment plans must be dynam­ically aligned with emerging devel­opments in the hydrogen strategy of the EU overall as well as with the strategies of the EU member states in southern Europe that would be the first ports of call for imported hydrogen. Ideally, this uncertainty could be mitigated by effective high-level coordination on hydrogen between the Eastern Medi­terranean region and the EU. The EMGF, with the participation of four EU member states and the EU’s role as an observer, could be an appropriate forum for such coordination; this would entail a significant expansion of the institutional capacity of the EMGF and a deepening commitment to the organisation on the part of its member states.

One important regional economy – Tur­key – is not a member of the EMGF, and indeed the creation of the organisation was prompted in no small part by Turkish actions that have been perceived as a chal­lenge to Cyprus’s right to develop its own internationally recognised offshore gas resources. Until or unless this changes, EU cooperation with Turkey on hydrogen would need to be addressed separately. Encouraging a more cooperative Turkish approach in the region is of course an im­portant goal for EU policy, but this should not be the basis for broader external energy policy in the Eastern Mediterranean.

For Turkey, hydrogen development will revolve less around its exportation and more around its use in the domestic econ­omy, particularly to allow Turkish export industries to remain competitive as the CBAM is implemented. It will be in the EU’s interest to provide appropriate levels of support for hydrogen in Turkey for this reason.

Conclusion

The European Union and its member states are establishing themselves as leaders in terms of both policy and funding for low-carbon hydrogen projects, and EU hydrogen policy will be a critical foundation for developing hydrogen across the Eastern Mediterranean region. The EU Hydrogen Strategy published in July 2020 sets out an ambitious framework and road map for hydrogen development, one that is sup­ported by and aligned with member state strategies. Meanwhile, the € 723 billion Recovery and Resilience Facility (RRF) that makes up the core of the EU’s post-pan­demic recovery plan will dedicate as much as 40 % of this funding toward climate in­vestments. National recovery plans sub­mitted in April 2021 indicate that the share of this funding to be dedicated to hydrogen projects will be significant.

The following EU and German policies would help maximise the scope and effec­tiveness of cooperation with the Eastern Mediterranean region in the field of hydro­gen, both for the benefit of the EU’s energy transition and to support hydrogen devel­op­ment in its neighbourhood.

The most important step will be to clari­fy policies on the importation of green vs. blue hydrogen, and on the acceptable thresholds for imported hydrogen to be accepted as “low carbon”. Clarity on these issues will be critical to enable and de-risk potential investments in Eastern Mediterranean hydrogen, both for export to Europe and for domestic use in energy-intensive industries to which the CBAM will even­tually apply.

The EMGF, as an established and effective organisation in which the EU already plays an important role, stands out as an appropriate forum for cooperation with the region on hydrogen development. The EU should intensify and further formalise its relationship with the EMGF, not least be­cause it will encourage the organisation to broaden its focus from natural gas develop­ment to hydrogen as well.

A parallel track for cooperation on hydrogen should be developed with Turkey, with the potential for EU policy and fund­ing support for development of a hydrogen economy in Turkey as the focus. Such an effort will help to mollify any concerns in Turkey that the implementation of the CBAM will damage Turkish export sectors. It will work to promote the CBAM instead as a mutually beneficial pathway for Turkey to hasten its own energy transition.

The Eastern Mediterranean’s strategic focus on natural gas development cannot be ignored by Europe. The possibility of importing blue hydrogen from the region should be seriously considered to the extent that it can lower costs in the short- and medium-terms and promote a climate-friend­ly approach toward domestic value-added applications for natural gas. The concept of a “transition pipeline” that could improve Europe’s security of gas supply in the medium-term while laying the basis for reducing the costs of low-carbon hydrogen imports in the long-term stands out as one way to align European and Eastern Medi­terranean regional interests with regard to both natural gas and hydrogen.

Linking the Eastern Mediterranean region to Europe via long-distance HVDC trans­mission lines (EuroAsia and EuroAfrica) is a credible alternative concept, but its costs and benefits should be compared with those of regional exports of green hydrogen or green ammonia to Europe. The Eastern Mediterranean is well positioned to export either low-carbon hydrogen or electricity to Europe, but probably not both at once.