Energy transition in the heavy industry remains challenging. Direct electrification is often not an option due to the need for very high temperatures and the use of molecules as feedstock. As a result, in comparison with other parts of the energy system, the Dutch heavy industry has seen limited reduction in CO₂ emissions over the last two decades. What’s more, much of the emission reduction that was realized has been a result of lower production volumes rather than actual decarbonization measures.

Although green hydrogen offers a technically-feasible solution, its adoption is hindered by several economic and policy barriers. EU’s Renewable Energy Directive (RED III) mandates use of green hydrogen for current grey hydrogen users. However, industry stakeholders indicate that with the current policy formulation, green hydrogen use and even further existence of heavy industry in the Netherlands and the EU more broadly are at risk. Main barriers are high cost of green hydrogen-based products, lack of demand for those products, and policies which make import more attractive than local production. These barriers have led to a declining pipeline of green hydrogen projects in Europe, with many delays and cancellations.

A potential solution to this issue is the implementation of a demand-side obligation that would require use of green hydrogen in end-products made with steel and fertilizers. Requiring a certain percentage of products to be made using green hydrogen could provide the demand certainty for steel and fertilizer producers, and in turn stimulate emergence of a market for green hydrogen, enabling investments in the necessary infrastructure and reducing costs over time. This could be complemented by other policy measures, such as subsidies and improved border adjustment mechanisms (for example importers paying for the difference between grey and green H₂-based steel and fertilizers), to ensure a level playing field between EU and non-EU producers.

Effective design of a demand obligation requires careful consideration of geographical scope, obligated parties, which end-markets to target, as well as how to certify and track green hydrogen-based products through the value chain. Research suggests an EU-wide obligation would be more effective than one at a national level, as most steel and fertilizers produced in the Netherlands are exported to other EU countries, and most steel used is imported. An EU-level obligation would encourage decarbonization across the region, benefiting also the Netherlands by creating consistent demand for green hydrogen-based steel and fertilizers while minimizing competitive disadvantages and reducing reliance on imports. Most stakeholders also agree that the obligation should be placed as close to the consumers as possible to maximize its impact, focusing on the markets with high concentration and captive nature of operations. A tailored approach is needed for each end-market.

Preliminary analysis shows that the increase in cost of many end-products resulting from a well-placed obligation would be limited – often less than 1% even if all conventional steel or fertilizers were replaced with green hydrogen based alternatives. Conversely, emissions reduction could be disproportionally high, because for many products steel and fertilizers are the main sources of production emissions. A gradual implementation of the obligation could foster a positive cycle of rising demand and falling costs.

Administering the obligation would require standardized certification that is simple and does not create excessive additional effort. Initial research identified two possible models of certification that could be used, a mass balance method, where the green hydrogen certificate “travels” with the steel and fertilizer products through the value chain, and a book-and-claim method, where producers offer green hydrogen-based steel or fertilizer certificates on a trading platform, where obligated parties buy them to meet the obligation.