Useful lessons for hydrogen policy from transitions in agriculture and other sectors

When setting up the policy to realize the transition in the energy supply to hydrogen, useful lessons can be drawn from previous transitions in other sectors, such as in the natural gas sector, agriculture, housing and the electricity sector. These lessons mainly relate to the design of financial support and the safeguarding of public interests.

These are the conclusions of Daan Hulshof, Machiel Mulder and Peter Perey of the Center for Energy Economics Research (CEER) of the University of Groningen in their research into the lessons that can be learned from the transitions that have taken place in agriculture, gas and electricity sector and housing construction over the past decades.

Society faced major challenges in each of these sectors. Shortly after the war, there was a great shortage of both food and housing. By means of targeted policies, the government took measures to solve these problems. In the gas sector, the discovery of the Groningen gas field in 1959 made a completely new energy source available, after which a major change in the energy supply was realized. In the electricity sector, the government has been working for several decades to realize a transition from fossil generation (from coal and gas) to renewable generation (with wind and sun).

Hydrogen transition is comparable to previous transitions

A similar situation now seems to exist with hydrogen. In many countries, much is expected from hydrogen in order to achieve the climate goals, because this energy carrier can be used in many ways without the release of CO2. However, the widespread use of hydrogen will not get off the ground automatically, especially since it is still quite expensive to make. In addition, an infrastructure for transport and storage still needs to be developed, and users need to make all kinds of adjustments to be able to use hydrogen for, amongst others, heating homes, fuel in transport and as a raw material in industry. These developments will not be realized without government support. If the government provides adequate support, the hydrogen sector can be given a major boost, as has been shown in other sectors.

Agricultural subsidies led to overproduction and more environmental impact

In the agricultural sector we have seen that by guaranteeing minimum prices and granting production subsidies, a sector can be strongly stimulated. However, experience in this sector also shows that continuing to provide such financial support for too long can lead to overproduction with a heavy burden on public resources and damage to the environment. In short, when government policy is too focused on the interests of a particular sector or technology, as has happened in agriculture, there is a risk that the public interest will shift beyond the horizon. It is therefore important to remain focused at all times on the primary public interest, which in the case of hydrogen is the reduction of CO2 emissions.

Subsidies for renewable electricity led to excess profits

The design of subsidies is of course crucial, as the experiences with the promotion of sustainable electricity have shown. Initially, the subsidies provided a fixed payment for electricity from wind or solar, without taking into account the exact need for subsidy, which led to significant over-subsidization. Such effects are prevented by cleverly designing subsidies, for example by regularly adjusting the subsidy amount to market prices. The experiences in the electricity sector also show that the effectiveness of domestic policies can be reduced by policies in neighboring countries. Due to the promotion of renewable electricity in Germany, for example, electricity prices in the Netherlands also fell, which meant that more subsidies were needed here for wind and solar power. This can also happen with hydrogen production: foreign measures to stimulate hydrogen production will increase the price of electricity, which will (also) make hydrogen production more expensive in the Netherlands. It therefore seems more obvious to stimulate hydrogen production on a European rather than a national scale.

Mortgage interest relief led to higher house prices, not necessarily more supply

Providing financial support does not always lead to more supply, as we have seen in the housing sector. Through the mortgage interest relief tool, buyers have been stimulated for years to buy houses, but due to the shortage in supply, this measure led not so much to more supply, but to higher purchase prices. This experience shows that stimulating demand only makes sense if the supply can respond flexibly. Applied to the hydrogen sector, this means that stimulating hydrogen demand, in industry or transport, for example, will only lead to more hydrogen consumption if more green hydrogen can be produced, that is, if more renewable electricity is also produced. As long as the supply of green electricity is limited, stimulating the use of green hydrogen means that prices will increase, but not that more green energy will be added, because other electricity users will then have to use grey electricity (based on fossil energy).

Agriculture and gas policy paid too little attention to negative effects

Strong stimulation from one sector can lead to negative effects elsewhere. In agriculture, we have seen this in terms of adverse environmental impact.In the gas sector there was a strong emphasis on maximizing yields from the Groningen gas field, with attention only later being paid to the consequences for the living environment of the Groningen residents. From this we learn that it is important to adjust government targets in time when such effects occur. In the case of hydrogen, it is conceivable that a strong stimulation of hydrogen production, for example for export, will lead to a greatly increased roll-out of wind farms, which could have negative consequences for other interests on both land and the North Sea.

Constant safeguarding of public interests is crucial

From foregoing follows that a strong focus on promoting a particular industry leads to the risk that other public interests will be lost out of sight. This risk will occur even more when the policy is designed in close consultation between government and the sector concerned. In agriculture and the gas sector in particular, there was a close interweaving of government and business, as a result of which the private interests of the business community and public interests simply became intertwined. In order to ensure that government policy remains focused on the ultimate public interests - in the case of hydrogen the reduction of CO2 emissions- it is important that the government remains at a distance from the business community, that it is not only dependent on information provided by the sector (for example for the subsidy schemes) and that it also involves other stakeholders in the decision-making.

For more information, please contact Prof. Machiel Mulder machiel.mulder@rug.nl of 06-31035729

Report: Daan Hulshof, Machiel Mulder and Peter Perey (2021). Giving hydrogen a jump start; lessons learned from Dutch policies in other industries. CEER Policy Paper 9.