Red tape, green hydrogen

Italy plans to exit coal-fired power generation by 2025, but what can replace the fossil fuel? Listen to a discussion on the outlook for green hydrogen as well natural gas in a country that is often beset by red tape and lengthy permitting processes. 

Guest: 

• Matteo Mazzoni, Head of Market Strategy, Snam

Transcript

0:01

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Richard Sverrisson, Editor-in-Chief Europe, Montel: 0:29

Hello listeners and welcome to the Montel Weekly podcast. Bring Energy Matters in an informal setting. This week's pod takes a closer look at Italy and its decarbonization plan. The country plans to fully exit coal by 2025, but how much of a role will gas play going forward in a country that uses. As well as transits North African gas, Italy also has ambitious plans for hydrogen and for renewables growth. However, the expansion of green energy has often been painfully slow due to lengthy permitting processes and a lot of red tape. So here to discuss these issues with me, Richard Sverrisson is Matteo Mazzoni of Snam It his gas transit operator. A warm welcome to you Mateo.

Matteo Mazzoni, Head of Market Strategy, Snam: 1:11

Thank you Richard, and thanks for having me.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:13

We first met about 10 years ago, right? Matteo, when you were based in Bologna, focusing on CO2. But now you are based in Milan and mainly focused on gas, isn't that right?

Matteo Mazzoni, Head of Market Strategy, Snam: 1:23

Partly right? Yes, it's right. We, it's been a long time we've known each other and I was the very beginning of the emission trading scheme. And yeah, now I'm still looking at obviously everything connected to carbon and carbon, the decarbonization process in Europe and around the globe. But working more on the, trying to work on the. Infrastructure angle. So working for one of the most important gas DSOs in the world, and trying to help Italy and whole European Union to the carbonize and reach the net zero target by 2050.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 1:59

Absolutely. I think, the role of infrastructure here is absolutely crucial. Can you tell us a little bit, first of all Mateo, about the COVID situation in Milan and in Italy more general is, are things improving? Are things coming back to normal?

Matteo Mazzoni, Head of Market Strategy, Snam: 2:11

It is likely, let's say higher temperature and the effort that. We made over the past months this kind of breathing, a new life all over the country. There is a will and there is a strong, attitude of trying to go back to normal and try to regain somehow the time that we passed inside. Luckily, the numbers, when we look at COVID cases are supported. We hope that even, the. Speeding up of vaccine will help to actually go back to some sort of normal life or something, which is let's say more open than the past few months.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 2:49

Absolutely. It'll be very nice to get back to some sort of level of normal life again, I think. But Mateo let's talk a little bit about, the more general objectives that Italy has and its plans for decarbonization. So what are the targets and are these realistic?

Matteo Mazzoni, Head of Market Strategy, Snam: 3:04

So if we look at the pieces of legislation and let's say policy proposals. That at the moment, shaped the National Decarbonization strategy. What we have is the National and Gen Climate Plan, which was submitted in 2019, which sets targets for 2030. So we have 33% GHC reduction, 30% renewable, and and target for energy efficiency. Which will be probably amended and updated in the coming months since we are moving to a new paradigm of the European Union agreed to step up the challenge and so increase the targets with the green deal by 2030. Alongside that, at the end of last year, the government sent to Brussel did long-term strategy, which is the first document that actually looks at 2015, trying to massage a pathway that would lead us to an net zero economy by then. And in that sense we have the first attempt that was done politically to actually design some sort of, process and even, setting the first guidelines to actually show the way and try to, let's say, embark in a common process with other European countries in trying to beat net zero by 2050. Another important policy proposal that was published last year and we are now waiting for the final piece of legislation is that the guidelines on the national Hydrogen Strategy. Where the government set target of having up to 2% of fine energy demand met by hydrogen by 2030 with target of having up to five gigawatts of electrolyzer capacity is stall by 2030. That projected in 2050, that target raises to up to 20% of final energy use.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 5:00

That's a 20%. So that's quite ambitious there. Italy has already submitted an application for funds from the EU as part of the wider EU recovery fund. What does that envisage does there, there now suddenly potentially a lot more funding for hydrogen and for other projects in the country?

Matteo Mazzoni, Head of Market Strategy, Snam: 5:18

Yes, hopefully. That's the plan now. It's obviously. All the funding connected to the recovery plan is linked to the active implementation of projects. So there is now the time, which is obviously the most challenging one, which is the implementation of all measures and and proposal that was that were part of the document that was submitted to Brussels. But definitely I think that the effort that was made. But the government goes in the right direction. Sustainability and the energy transition are both a pillar of the recovery plan as they should be, and it meets all the criteria, and also it sends the right message to private companies, investors and the whole and whole society that is where we should be focused on.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 6:05

No, absolutely. We recently reported on doors passed in Italy for just trying to speed up some of the permitting processes and to cut red tape. How do you see this going forward? Will this result in quicker uptake or quicker expansion of renewables including hydrogen? I

Matteo Mazzoni, Head of Market Strategy, Snam: 6:21

think that's the effort the government. Scaring out moment I is phasing. And then what they're trying to do is very important. There is a need to streamline the old authorization process and to spur the uptake of new investments. And as I said the implementation part is always that tricky one because there are a lot of things that, can go wrong and can, slow down. The whole process. But I think that what is going on at the moment and what the message and the activity and the effort put on this offer new opportunities for investment in green projects from going from renewables up to hydrogen. And as Nam, obviously we. We're taking an active role in this. We want to help the country to actually go in that direction to promote the support development of the full value chain. So for example, we have already started different projects on mobility. The conversion of train to hydrogen or fueling stations. We work with industrial partners on the, on, hard to abate sectors like the steel. Actually we recently carried out the first of a kind. Project of blending up 30% of hydrogen in a steel mill just outside Milan. And obviously we took part directly in, into some of the, on the supply side, we were part of, our partner with the Nora, which is supplier of electrolytes for electrolyzers. And we also jumped into a partnership with ITM, which is also manufacturing electrolyzers. And this is part of what we, we think it's. There should be a common effort. Join forces that trying to. Overcome all the different buyers that at the moment green investments are facing.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 8:09

No, absolutely. Now, obviously Snam has a crucial role to play here in terms of the infrastructure and I, is the infrastructure ready now or is there gonna be some way to go before it could be ready for an uptake of pure hydrogen? Will it need to maybe blend with natural gas as well? What's the outlook here? Matteo.

Matteo Mazzoni, Head of Market Strategy, Snam: 8:27

So what we carried out an assessment of our. Of our network in Italy. And the result was somehow very positive because up to 70% of our network is already hydrogen ready. We're working on bringing that number to a hundred percent in the coming years. And now we have started a project with Rina on certifying our grid. And just today we announced the signing of a contract for the supply of roughly 400 kilometers. Of high pressure pipes that could transport up to a hundred percent of pure hydrogen in the coming year. So we know that for the development of each market, infrastructure plays a critical role and we want to be there in order to, speed up the process to set the crown for hydrogen to be part of the transition already in the next years.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 9:21

Cost is obviously important here, is Italy ready to receive imported hydrogen? Is that likely to be more of an option or is it gonna be more home produce or mixture of the two?

Matteo Mazzoni, Head of Market Strategy, Snam: 9:31

I go for the mix of the two. If I could choose, the, there is targets, the government said five gigawatts electro capacity target by 2030, which will obviously be part of, we contribute to meet the 2%. Hydrogen demand by 2030, which roughly is we're talking about. 700 kilotons of hydrogen. If I, doing some calculation I can tell you that probably those five gigawatt won't be enough to actually meet that demand. So we will need additional sources of green hydrogen or low carbon hydrogen. There might be a mix of different sources. And and we are very interested in trying to look for possibilities of having, cost competitive green allergen from enabling countries. We know, it's not a secret that we are connected with we not in Africa. And there is a huge in that. Of solar resources and hydrogen that could come from from those regions and potentially, use reuse part of the network that connects the two areas of the Mediterranean Sea.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 10:39

So both the, in terms of electricity and gas. Eventually potentially, importing hydrogen or green hydrogen from North Africa. But that raised the question here, mate. What's the role of blue hydrogen? And there's a lot of. Things said that it could be bridging, but really you, we need to be, go towards the green or low carbon varieties. So what role should blue hydrogen play in the energy transition here?

Matteo Mazzoni, Head of Market Strategy, Snam: 11:02

I think that I mean from my point of view, all sources that could help us in lowering our carbon F footprint and and lowering the carbon intensity of our consumptions should be used. In a timely and cons, competitive way, trying to assess, what is the optimal combination of options that we have in front of us, and obviously blue hydrogen. If we look at the numbers and we look at the economics, quite interesting opportunity of being a complimentary source with green hydrogen in, in, in the next years. We know that it's, let's say. It offers the advantage of being, programmable. So more flexible to accommodate fluctuations in demand and conserve different users. But what you said is completely right in the long term the major role should be played by green hydrogen because even the economics, they point all in favor of screen allergen being. Let's say cost competitive with other sources and cheaper than blue hydrogen. And on top of that, additionally we need to consider that blue hydrogen brings about the CO2 storage component, which is not, so abundant everywhere. So it's limit for blue hydrogen that, apart from so social acceptability. Which may vary country by country or region by region, but we know that the possibility to store CO2 is limited to a number of countries. So somehow this, restricts the number of countries that actually have that as a possibility, as an option, unless we see a future for shipping CO2 elsewhere. This is not unrealistic, huh? It's its possibility. If we look at some projects that already are under development in Northern Europe. This is far from being, impossible, but obviously it brings another cost in into that. Yeah.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 13:03

It is very costly, isn't it? That's the problem. And the social susceptibility of it is also even in the, in northern Europe is quite yeah, it's not always there. But to stick with the discussion on costs here that, that's the crucial part here. And you mentioned the economics of green hydrogen that will be there, but. How long do we have until it becomes, cost effective and what could be done to bring costs down? Are we talking, bas basically scaling up or are we talking, some kind of subsidy situation or support in terms of carbon contracts for difference or, what is needed to bring these costs down so it can really develop beyond this sort of embryonic and this planning stage to actually materialize? Difficult question, Mateo, but yeah. I'll put you on the spot a bit there. But yeah,

Matteo Mazzoni, Head of Market Strategy, Snam: 13:49

it's pretty evident that right now the main limit is the cost of electrolyzers. But we know that, and we have seen that with other technologies, that once you start scaling it up, once you start at opening it, then the costs come down pretty quickly, usually quicker than everybody expects. For hydrogen, we know that that there is a sort of, threshold, which is the somehow position at 25 gigawatts of electrolyzer capacity installed worldwide. That is that, let's say, what is needed to bring the cost of producing hydrogen around $2 per kilo in most favorable regions. We know that in Europe. At the moment, there are already roughly 30 gigawatt of capacity of electrolyzer capacity, which are part of national strategies, and roughly there are say 50 gigawatt of projects announced worldwide. So that treasury is already inside. We know that we can actually approach and reach.$2 per kilo, which is somehow the critical tipping point to to actually make hydrogen competitive against, fossil alternatives. And as now we are part of a consortium of a collision of private companies called the Green Hydrogen Catapult, which has the aim of accelerating the scaling up and the production of green hydrogen in the next years with the goal of having. 25 gigawatt of green hydrogen projects by 2026. So a 50 fold increase in the next six years. So this is doable. I think it's now there are other companies that, let's say, along the old value chain from suppliers to, to, to consumers and looking at data and the renewable potential in Europe, I think we, according to the analysis that we carried out. We could approach the two euro per kilo by 2030 already in some part of Europe. And especially, if I look at Italy, south of the country's like the right candidate to offer such opportunity. That level could be reached even sooner in solar abundant countries like the ones that I mentioned before. If we look at Tunisia, Nigeria, Egypt, Morocco, the northern part of Africa, or even, we, you've read on news that in Saudi Arabia that they are already starting to emphasize to. To invest into hydrogen production facilities with the aim of bringing the cost down to two per kilo. I would say it, it will come sooner than everybody expects today. There is an effort that should be taken into account and there are all the different conditions that should somehow be put in place in terms of, how you incentivize also the end users to actually switch from one method of producing and consuming energy to another one.'cause obviously you don't just need, hydrogen to cost two euro or even less per kilo. And you need to change, production fac con consumption facilities or, even industrial facilities, which as we all know they have, you know. Cycles of investments, which are very stretched long, pretty long timeframe.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 17:19

But if you, if the incentives that are in place for these kind of industries to, to change their processes, then perhaps that should also help. But it's interesting. I think, we'll see maybe. This race to, to bring costs down to $2 a kilo is gonna be interesting to see how it progresses. Especially with a huge amount of projects in the pipeline. Almost a day, we see several projects be announced almost every day, so not all are gonna be successful. So I think it's a very exciting space and I think it's, as we mentioned earlier, I think the role of. Infrastructure companies like Snam is of crucial importance here to bring, to distribute and to su supply the green fuel there. But Mateo, if we can just finish off with talking about, so where does this place the role of natural gas and Italy's consumption of natural gas and the demand for the fuel going forward. I know that. Italy has very, has plans to fully exit coal power by 2025. What kind of plans does it, or where does it see gas evolving in the same timeframe?

Matteo Mazzoni, Head of Market Strategy, Snam: 18:17

That's a good question. I think that the short to meet term outlook. Is rather strong for net gas consumption. If we look at the number of the first months of 2021, what we can say is that we are, we have already shrugged off the falling consumption experience last year. Demand from power gen. Already back at, levels seen in thousand and 19, and he is projected to remain quite strong in the coming years thanks to the phasing out of of coal. And also to higher carbon prices, which are somehow levelizing the cost of power across Europe. So the spread, for example, the spread between power prices in Italy and mentally Europe is narrowing right now. So there is. Natural tendency to to favor local production, not always imported from from enabling income. So this is rather supportive. If we look at other sectors like industries, the economic recovery is a support industrial production, hence gas consumption. And an interesting trend, which I'm very curious to to analyze and see how these unfold is related to the change of working habits. As I said, the pandemic, forced us to, to work remotely these last year resulting in, in somehow higher gas demand from buildings because we are all at home and it, it will be interesting to see to what extent we will see a reversal of. Or just, a new trend shaping in the coming years. And this is, let's say it, this is outlook, I would say for the midterm in the long run. As we were saying, we need to decarbonize. Consumption of all these sectors. There are different options on the table when we'll look at gas consumption. Obviously the first option is to replace it with green gas. So Biomet, we have a huge potential. Of biome production in Italy, which again, as Nam we are fully committed to, to help the country and help private operators to fully develop and connect all new facilities in order to transport biome on our grids. At the same time, we know that hydrogen will play a role and in order to not just to reach every consumer and to make them pay the same price. We need the transport grid to do it, but also to connect with other countries because as you said, there is a connection with Northern Africa and there are connections with other countries. We strongly believe that Italy can be an app in that sense and facilitate the emergence of, a European hydrogen market because obviously you don't need just consumption. You need to create a market in order to, to make it possible and to lower the cost for everybody of accessing to the same source.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:20

Absolutely. Matteo, thank you very much for joining the Monte Weekly podcast. Good luck with all these very ambitious plans and I hope to be able to. Come out to Milan and share a cup of coffee with you or something before too long. So once again, thank you very much.

Matteo Mazzoni, Head of Market Strategy, Snam: 21:35

Thanks to you for your invitation, and I look forward that.

Richard Sverrisson, Editor-in-Chief Europe, Montel: 21:37

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