Hydrogen network under severe pressure - Ineffective grant to offset startup losses

Climate neutral in 2050 – a role for hydrogen

The Netherlands has set ambitious climate goals for 2030 and 2050. To combat climate change and fulfil its international commitments, the Dutch government aims to considerably reduce national greenhouse gas emissions by 2030 and become a zero net emitter by 2050. Emissions can be cut in many ways, one being the replacement of natural gas with green hydrogen (hydrogen produced using renewable electricity).

This report concerns the effectiveness and efficiency of public investment in the development of a national hydrogen network by Hynetwork Services (HNS), a wholly-owned subsidiary of Gasunie, a state-owned enterprise (‘Gasunie/HNS’). In keeping with the government’s policy on state-owned enterprises, the hydrogen network would thus be under public ownership. The network would connect industry clusters and supply them with green hydrogen. The Minister of Climate Policy and Green Growth (KGG) announced in November 2023 that grant funding of up to €750 million would be available for the construction of the network, which would come on stream in 2030. That grant is the subject of this audit.

The government is promoting the rollout of hydrogen by means of grants, loans, guarantees, tax schemes and other financial instruments. A total of €11 billion will be released from the budget over a period of 6 years to support the production and import of sustainable hydrogen, its use by customers, the development of storage facilities and development of a national hydrogen network. The many aspects of each transaction must be compatible. This, however, may not always be the case. Green hydrogen production and import, for instance, are falling short of expectations, as is industrial demand for hydrogen. In this report, we look at the influence this is having on supply, demand and the development of infrastructure.

The Dutch hydrogen network

The hydrogen network will be some 1,200 km long and will connect 5 industry clusters, the import terminals and a hydrogen storage facility in Zuidwending (Groningen province). In Rotterdam (1 of the 5 industry clusters) Shell is the only company in the Netherlands that is currently building a 200 megawatt (MW) electrolyser. The network will also export hydrogen to Antwerp and the Ruhr area through international connections with Belgium and Germany. In the longer term, the network may also connect regional industries in a sixth cluster. The hydrogen network will be constructed in 15 distinct sections. Gasunie/HNS is currently building the Rotterdam Hydrogen Network (WNR). This is the first, and to date only, section that Gasunie/HNS is building. 

The hydrogen netwerk enables national and international transport and storage

Construction delayed and more expensive

Construction of the hydrogen network has been delayed by 2 years and will cost far more than projected. The most recent cost estimate, from February 2025, is now €3.8 billion, against an original estimate in 2021 of €1.5 billion. The increase is in part to higher steel prices, less repurposing of natural gas pipelines and stricter sustainability requirements.

Construction and operation is a Service of General Economic Interest

The Minister of KGG has classified the construction and operation of a national hydrogen network as a Service of General Economic Interest (SGEI) and has made Gasunie/HNS responsible for delivering the SGEI until hydrogen transport is regulated. As part of the European hydrogen and gas decarbonisation package, regulation will come into force no later than 1 January 2033, when a regulator will have to be appointed. In the Netherlands, the minister of KGG has designated the Authority for Consumers and Markets (ACM) as the future regulator. Until then, the Minister of KGG will perform a number of regulatory tasks that the ACM will assume in 2033 at the latest. They concern:

• the transport fee charged by Gasunie/HNS;
• a reasonable return for Gasunie/HNS;
• the efficiency of Gasunie/HNS’s investment and operating costs.

Hydrogen has many uses but electrification is gaining ground

Hydrogen has been used for many years in the Netherlands in the fertiliser industry to produce ammonia, by refineries in cracking and desulphurisation processes, and in industrial chemical processes. The hydrogen is produced from natural gas, which inevitably involves the release of CO2. If the Netherlands is to meet its sustainability goals, it must use green hydrogen or at least capture and store CO2 emissions. The government sees hydrogen as an opportunity to make industry more sustainable, and has identified applications in shipping, aviation, mobility (passenger and freight transport) and the built environment (heating). Yet several potential uses of hydrogen have lost their appeal due to recent advances in electrification. Homes will be heated by means of heat pumps or heat networks and electric vehicles are becoming the norm. Batteries are also making great strides in the storage of green electricity. These developments weaken demand for green hydrogen.

Harder and harder to make energy-intensive industry more sustainable

In 2023, energy-intensive basic industries such as refineries, chemical plants, steel producers and fertiliser manufacturers accounted for nearly half of all energy demand in the Netherlands. It is uncertain whether these industries will remain in the country. Several chemical factories, such as Vynova in Chemelot and Westlake, LyondellBasell and Tronox in the Port of Rotterdam, shut down in 2025. Economists also have doubts about the feasibility of the business case for Tata Steel Nederland’s sustainability. Progress was made towards a binding tailor-made agreement with Tata Steel in September 2025. Attempts to reach similar agreements with most of the biggest CO2 emitters, however, have stranded.

Replacing natural gas with hydrogen to meet the country’s sustainability goals has so far failed. Market conditions are not yet conducive for green hydrogen. There is little production, demand is low and prices are still high. The Netherlands’ targets of producing 4 gigawatts (GW) of green hydrogen by 2030 and 8 GW by 2032 are not realistic. At present, just 1 electrolyser, with a capacity of 0.2 GW, is under construction and an investment decision has been taken on another electrolyser with the same capacity. This is relevant to the hydrogen network’s business case because the network builder and operator, Gasunie/HNS, has based its earnings potential on the production and transport of 4 GW of green hydrogen by 2030.

Minister of KGG funding construction of the hydrogen network

A large-scale market for green hydrogen is not possible without a transport network, and a hydrogen transport network will not be built without demand for hydrogen. This is a case of market failure; the market itself cannot bring about a satisfactory outcome. This form of market failure is known as a chicken and egg problem. The minister wants to overcome it by grant funding construction of the network. Subject to conditions, the European Commission permits this in the case of an SGEI. One condition is that the grants may not be higher than necessary.

The grant is intended to cover Gasunie/HNS’s startup losses. Startup losses will be incurred if low initial demand for transport capacity does not generate enough income (from transport fees) to cover all costs. Preparation costs, depreciation, operating costs and other startup losses are covered by the minister’s grant to a maximum of €750 million. In the 2023 grant decision, the minister assumed that the network would cost €1.5 billion, would be regulated and fully operational in 2031 and would transport 3-4 GW of hydrogen per annum as from that year.

Lower transport volume and higher costs make grant ineffective …

Production of green hydrogen and the demand for it are making such very slow progress that little hydrogen is available for transport. So little, in fact, that by the time Gasunie/HNS has built the hydrogen network there will not be enough fee-paying customers to earn back the investment. The grant will provide compensation for up to €750 million in startup losses until the regulated period commences (no later than 2033). The ACM will then set break-even fees. The fees must be affordable, they may not be infinitely high.

Our audit found that Gasunie/HNS’s grant application had estimated total loss compensation at €857 million, €107 million more than the available grant. The grant ceiling was almost certainly in sight from the very outset. By 2025, the estimated cost of the network had risen to €3.8 billion and the transport volume was lower than expected. Losses will likely substantially exceed the maximum available grant of €750 million. Gasunie/HNS says it will need €2.5 billion in loss compensation (under current agreements). This is €1.8 billion more than the maximum foreseen by the minister (see figure 2) and 3 times higher than the estimated startup losses.

We accordingly conclude that the grant is not effective as it is highly likely that €750 million will not be enough to cover startup losses and the national network will not be completed by 2030. Expected startup losses represent a substantial risk to the government. The Ministers of KGG and Finance are responsible for managing this risk. Talks are still being held on a solution.

… and are placing pressure on the construction of individual network sections

Our audit found that the lower transport volume and higher costs are also exerting pressure on the construction of individual sections of the network. It is doubtful whether all sections will be built. The Minister of Finance and Gasunie/HNS have agreed that Gasunie/HNS will take demand into account when deciding on the construction of a particular section. If demand is weak, an investment decision will not be taken and the section will not be built. Each section thus has its own chicken and egg problem.

Minister not managing grant efficiency appropriately

Together with Gasunie/HNS, the Ministers of KGG and Finance have studied 3 alternative grant options in which financial risks are allocated differently to the Minister of KGG, Gasunie/HNS and Gasunie/HNS’s customers. In the Minister of KGG’s preferred alternative, she will cover the capacity risk in case demand falls short to a maximum of €750 million. The capacity risk is the risk of demand for hydrogen transport being lower than anticipated and income from transport fees not covering costs. The Minister of KGG will provide compensation for all capacity losses during the unregulated period until 2033 at the latest, provided the costs are ‘efficient’. In other words, the costs have to be necessary and efficient. Other options had allocated part of the capacity risk to Gasunie/HNS. When the Minister of KGG assumed the risk in full in June 2022 and undertook to cover up to €750 million of all startup losses, she did not insist on Gasunie/HNS earning a lower return. The required rate of return remained 6%, even though the minister could have demanded a reduction because Gasunie/HNS had gained firmer assurances on its future earnings. If she had, there would have been a knock-on effect on the amount of the grant: the Minister of KGG could have reduced the amount she budgeted for the grant by up to €268 million. We conclude that the minister did not design the grant with a view to its efficiency. She did not balance the risks she would bear against the return that she permitted Gasunie/HNS to earn during the unregulated period. 

Minister of KGG bears the risk of lower than anticipated demand during unregulated period

When the grant decision was taken in November 2023, a return of 6% was not unreasonable. But that was on account of a chance increase in interest rates in 2022-2023 and was not the outcome of a strategy or an assessment of what constituted a reasonable return for Gasunie/HNS during the preparatory stage.

Poor quality cost estimates

The Minister of KGG based her 2023 grant decision on a cost estimate made in 2021. The estimate put the cost of investment at €1.5 billion (2020 prices). In our opinion, the grant decision should not have been based on such a poor estimate (partly because it ignored the surge in inflation in 2022) and its range was too wide (€1.1-€2.5 billion). The minister should have been more critical of the cost estimate because it underpinned the size of the grant. In June 2022, the Minister of Finance received an updated estimate from Gasunie/HNS amounting to €2 billion (2022 prices). To our amazement he did not share this update with the Minister of KGG.

Before the Ministers of KGG and Finance took their decision, 2 independent firms carried out an external validation of the 2021 cost estimate. They raised concerns about the dated prices, the rate of inflation applied and Gasunie/HNS’s return during the unregulated period. The validations did not prompt the ministries to revisit or reconsider their decision. This is a matter of concern; external validations are an excellent tool to ensure the estimate is of appropriate quality.

House of Representatives receives partial and incomplete information

The Minister of KGG informed the House of Representatives of the expected €1.5 billion investment costs in June 2022. She did not reveal that the estimate was based on 2020 prices. As the first independent validation had referred in February 2022 to ‘recent significant price increases’, we conclude that the minister informed the House incompletely. In subsequent letters to parliament on the hydrogen network’s progress, she did not mention updates or potential cost increases, despite the many indications she received in Gasunie/HNS’s grant application in May 2023 and the second independent validation in June 2023.

Moreover, the minister informed the House about the possible repurposing of natural gas pipelines for hydrogen but failed to mention the strict conditions that would apply. On this point, too, the minister informed the House incompletely.

Our recommendations

Climate neutrality by 2050 will require the government to take the lead in major transition projects, such as hydrogen storage (Hystock), carbon capture and storage (the Aramis project), heat networks (EBN), nuclear energy and other change projects. These ambitious transition projects are surrounded by significant uncertainties, especially in their early preparatory phase. If the Minister of KGG supports these projects, we expect her to be aware of the uncertainties and manage both the windfalls and the setbacks as effectively as possible.

Recommendations to the Minister of KGG

• Before awarding a grant, carefully examine the financial risks and use the insights into government and businesses’ exposure when deciding on the appropriate WACC.
• After awarding a grant, monitor changes in the business case and periodically inform the House of Representatives of potential and actual windfalls and setbacks in both financial and technical area.

Recommendation to the Ministers of KGG and Finance

• Involve all stakeholders in the decisions taken on the future development and funding of the hydrogen network.

Table 1 Conclusions and recommendations