High prices may curb the green transition. The Danish government's Power-to-X-strategy proposes initiatives to reduce production costs of hydrogen and PtX products.

Power-to-X (PtX) is a technology with significant potential for the green transition of industry and heavy transport.

At present, the interest in investing in PtX projects is immense. However, one of the main barriers for the expansion of PtX is that the prices of hydrogen and other PtX products are currently too high to compete with traditional alternatives or with alternative green fuels. This may impact the demand for green fuels and the use of PtX technology.

According to the Danish Energy Agency's calculations, expenses for procurement of electricity and payment of power tariffs account for around two thirds of the hydrogen production costs under the existing regulatory framework, and the production of hydrogen using electrolysis is a basic element in PtX projects.

PtX strategy will reduce production costs
Effective from 16 December 2021, the government's PtX strategy is to improve the regulatory framework for the production, distribution and application of PtX, for instance by reducing the production costs of hydrogen and PtX products.

The establishment of direct grid connections between PtX plants and solar or wind farms providing electricity for the plants will allow cutting costs on the procurement of electricity. Further, the government opens up for reduced electricity tariffs for PtX plants placed in areas with sufficient grid capacity as well as for a possibility of receiving subsidies from a DKK 1.25bn subsidy pool.

The government's proposed PtX strategy is currently being negotiated. Like the rest of the industry, we are anticipating the clarification of the regulatory framework for PtX projects, going forward.

Direct grid connections
It will be possible to reduce the costs to the electricity consumption in PtX plants by establishing direct grid connections between the PtX plants and the electricity-producing systems (solar or wind farms) that the PtX producer owns or has a bilateral power purchase agreement with. Thus, the price of electricity will not depend on the market price, nor will it be subject to power tariffs, as the electricity is produced and consumed without using the collective power grid.

The government's PtX strategy invites the establishment of an application scheme under which heavy electricity consumers such as PtX producers can apply for permission to construct direct grid connections. The construction costs must be paid by the PtX producer.

Applications for direct grid connections will be considered individually subject to defined criteria that underpin socio-economic principles. The PtX strategy does not set out specific approval criteria, including any requirements as to distance. Nor is it clear who will have the right to own and operate the direct grid connections.


Geographically differentiated tariffs
The government proposes the introduction of geographically differentiated consumer tariffs. This will give Energinet and the grid companies an opportunity to design a more cost-genuine tariff structure as the tariff may be determined on the basis of the grid costs caused by the electricity customers. Accordingly, PtX producers placing PtX plants in areas with sufficient grid capacity may be able to save on future tariff payments as compared with the tariffs currently payable that are not geographically differentiated.

According to the government's PtX strategy, the proposed tariff initiatives can reduce the costs of hydrogen production by up to around 25% and may thus impact the business case for constructing a direct grid connection between PtX plant and RE production.

It is up to Energinet and the grid companies to develop the specific tariff methods to be approved by the Danish Utility Regulator.

Subsidy scheme for PtX projects
In the political agreement "Climate agreement for energy and industry, etc., 2020" of 22 June 2020, it was decided to establish a government pool of funds subsidising PtX. The pool is financed by an agreement concluded with the Netherlands on statistical transfer of RE shares.

The pool holds DKK 1.25bn and will support the production of green hydrogen and PtX products. It has been suggested that subsidy is awarded as a fixed price premium for a 10-year period. 

We await announcements as to when the tender procedure has been finally determined and when the tender is expected to be conducted.

Sale of surplus heat may ensure improved economic viability
Still more PtX plants have the potential for providing surplus heat for district heating and industrial purposes. Selling surplus heat from PtX plants may contribute to reducing the total costs for PtX projects, including costs for cooling.

The potential sale of surplus heat depends on the electrolysis technology applied as well as on local aspects, including the possibilities for integration with the district heating grid.

Bech-Bruun is among the leading advisers in the area of renewable energy. Our specialists are internationally recognised for their significant industry knowledge and advise on all legal aspects of the energy area. With our longstanding experience from major utility projects, complex transactions in the solar and wind industries and extensive contracts, we have built unique market insight to the benefit of our clients' businesses. And with our position at the cutting-edge of the green transition, including multiple carbon capture projects, we provide advice to our clients on the green solutions of the future.