Isn’t it ironic? How Europe’s oil refiners could offer a route to scale up green hydrogen

This comes at a cost, however. European refiners have been part of the EU Emissions Trading Scheme for more than a decade and are charged for the CO2 they emit beyond a certain free allowance. This allowance will gradually be eliminated over time, raising the cost for refiners. Producing green hydrogen on site using renewable-powered electrolysis would eliminate many of those CO2 emissions and, hence, emission-related carbon costs.

The rising burden of emissions costs has promoted energy-efficiency initiatives and made the idea of producing on-site green hydrogen more appealing. However, high European electricity costs have stymied this to some extent. So, to promote the broader adoption of green hydrogen, governments must consider bold policy initiatives and incentives , such as investment subsidies and favourable financing.

The EU policy solution

The EU’s Renewable Energy Directive (RED) aims to drive reductions in the energy sector’s carbon emissions by increasing the contribution of renewable sources. The latest iteration, RED III, provides essential support for green hydrogen adoption , as it seeks to promote ‘renewable fuels of non-biological origin’ (RFNBOs) ‒ that is, liquid or gaseous fuels that derive no energy content from biomass. Green hydrogen is deemed an RFNBO if it meets strict EU sustainability and traceability criteria.

There are three main ways of meeting the EU RFNBO targets: e-fuel use in the transport sector, green hydrogen use in fuel-cell vehicles and green hydrogen use in the refining process. The EU uses “multipliers” in its RED III accounting methodology. The actual RFNBO content is accounted for at higher levels, promoting use in those sectors with the highest multipliers, such as e-fuels for aviation and maritime, followed by refining. Because of the high cost of e-fuels and limited uptake of fuel-cell vehicles, the refining route is currently the most suitable and achievable means of compliance.

We forecast European refiners will require around 0.5 million tonnes per year (Mtpa) of green hydrogen to comply with regulations. This would replace about 30% of Europe’s current refinery-based, CO₂-emitting, purposely produced hydrogen – at a substantial investment of more than US$15 billion for the green hydrogen production capacity.

On paper, RED III bodes well for green hydrogen’s near-term growth in the European refining sector, at least once adopted into national legislation by the 27 EU member states. But much more is still required. RED III requires that RFNBOs account for only a minimum of 1% of the energy used by the transport sector by 2030. This share, low by any measure, is in large part an acknowledgement of the challenges involved in expanding RFNBO supply.

Locking in significant longer-term growth will require further action in three key areas: costs, technology and the wider regulatory environment.

Tackling costs to secure offtakers

The major hurdle for European refiners is the cost of producing green hydrogen , which remains significantly higher than for traditional hydrogen production units. Renewable electricity sourcing is the overwhelming driver of these high costs, though the levelised cost of renewable electricity in Europe is forecast to decline one-fifth by the end of this decade. Automated manufacturing, standardisation and efficiency improvements will also help drive cost reductions for electrolyser stacks.

Accessing low-cost renewables and operating electrolysers at high utilisation levels are essential, with the latest market signals offering encouraging signs. The European Commission launched its European Hydrogen Bank in 2023 to support domestic production of green hydrogen. The most recent auction results reveal how costs have changed since the pilot auction was awarded in 2024.

The average levelised cost of hydrogen (LCOH) across all bids from the second-round auction, which closed in February 2025, fell 18% to US$8.35/kgH2, with average bids in Germany falling more than 55%. The results also provide offtake prices that each end-use sector is willing to pay. Here, refineries were among the highest, at a weighted average of US$9.23/kgH2, demonstrating a willingness to pay a premium to meet regulatory mandates. Wood Mackenzie’s asset-level modelling of projects targeting the refining sector in Europe produces an LCOH of US$7.04 to US$8.30/kg – reinforcing the progress in this sector.

Cost reductions also hinge on ongoing project deployment, which should enable improvements in project delivery and operation. Critically, many European refiners are now looking to produce green hydrogen on site to decarbonise their refinery operations and supply fuels compliant with RED III. By producing their own green hydrogen, refiners can guarantee offtake and overcome a significant challenge facing many other project developers.

Technology risks and competing technologies

Developers continue to wrestle with contingency costs for these first-of-a-kind projects, with lenders, in turn, applying a risk premium. Reducing premiums relies on successful technology deployment and the developers’ ability to demonstrate timely commissioning and operational reliability. Accelerating the deployment of such capital-intensive technology is difficult, illustrating why government support is so essential early on.

Chinese-made electrolysers are competing with Western technology. Yet, to date, post-FID European projects have opted for Western electrolysers. Others, however, are weighing up the benefits of the upfront capital cost savings offered by Chinese alkaline electrolysers. Electrolyser manufacturers face stiff competition, which promises lower project costs, but it’s piling the financial pressure on many of them, with some already failing.

Green hydrogen is not the only route open to refiners, though, and alternative paths to decarbonisation are gaining traction. Carbon capture and storage will be more suitable for some. This can help to manage emissions across the broader refinery complex. It can also support a switch to blue hydrogen, although for European refiners, this will not directly contribute to their RED III targets.

Policy and regulatory uncertainty

The EU’s RED III legislation is an important part of the push to grow the green hydrogen economy in Europe, with both Repsol and TotalEnergies confirming in recent earnings calls that green hydrogen is the most competitive route to regulatory compliance. Member states have been slow to convert the ambition of RED III into national law, however, which has slowed green hydrogen project development across most of the EU. As of August 2025, national legislative adoption was as follows:

Sustainable aviation fuel

Aviation is also a key growth driver for green hydrogen . International bodies and governments are committed to reducing aviation carbon emissions, with the EU leading the charge. Improvements in aircraft efficiency, infrastructure and other operational improvements are minor compared with the opportunity to deploy sustainable aviation fuel (SAF) that is either bio-based or synthetic (e-SAF).

The ReFuelEU Aviation regulatory framework requires SAF to power 6% of the jet pool by 2030, of which an average of 1.2% is to be e-SAF, produced from RFNBO-compliant green hydrogen. If met, this alone would require around 0.35 Mtpa of green hydrogen. As aviation is subject to RED III legislation, this would reduce refineries’ requirement for green hydrogen adoption growth to 0.15 Mtpa by 2030 for overall targets to be met.

By 2050, the SAF blending mandate is 70%, of which half must be e-SAF. This would require 8 Mtpa of green hydrogen, a compound annual growth rate of over 15% for this sector alone.