As the regulatory landscape for hydrogen projects evolves at national levels, a number of key publications in March 2023 are seeking to shape how low-carbon hydrogen will be defined and regulated in EU Member States.
As part of the wider EU’s ‘Fit for 55’ climate change package, the European Council (‘EC’) has recently agreed its negotiating position on two proposals within the hydrogen and decarbonised market gas market framework. In summary, the EC is seeking to create a regulatory framework for:
- dedicated hydrogen infrastructure and markets;
- integrated network planning;
- providing/ensuring consumer protection; and
- strengthening security of supply,
through implementing and the Gas and Hydrogen Directive 2021/0425(COD) (the ‘Directive’) and Gas and Hydrogen Markets Regulation 2021/0424(COD) (the ‘Regulation’) on the internal markets for renewables and natural gases for hydrogen.
Some of the key proposals contained within both pieces of draft legislation are summarised below.
The Directive
The Directive aims to facilitate the penetration of renewable and low-carbon gases into the energy system, implementing a regulatory framework incentivises market participants to phase out fossil fuel use and transition in renewable sources.
In summary, the Directive expressly incorporates renewable gases and hydrogen in within the future of the EU network, and extends the existing EU gas market principles (i.e. unbundling and third party access rights) to renewable gases and hydrogen.
Scope
Article 2(5) of the Directive amends and creates several definitions relevant to the future of hydrogen systems extending the legislation applicability and scope to renewable gases and hydrogen.
This includes:
- The formal introduction of a ‘hydrogen system operator’ (meaning a person who carries out the function of storage of hydrogen and is responsible for operating such facility).
- ‘low-carbon hydrogen’, means hydrogen the energy content of which is derived from non-renewable sources and that which meets the greenhouse gas emissions reduction threshold of 70%, compared to the fossil fuel comparator EF(t) as set out in Annex V of Directive (EU) 2018/2001.
- The provision that ‘hydrogen systems’ must now meet the applicable ‘hydrogen quality' standards. (‘hydrogen quality’ means hydrogen purity and contaminants with the applicable hydrogen quality standards for the hydrogen system).
- ‘Supply’ now includes hydrogen carriers (including ammonia, methanol or liquid organic hydrogen carries).
Unbundling
Vertical unbundling requirements
As with other sectors, notably methane gas networks, Hydrogen Network Operators ('HNOs') must unbundle their production and supply activities.
Member States shall ensure that from the end of the Directive’s transition period, HNOs are unbundled in accordance with the rules for natural gas transmission system operators ('TSOs' )as laid out in Article 56 of the Directive
For those hydrogen networks which belong to a vertically integrated undertaking, a Member State may decide not to comply with the unbundling requirements. In such case, that Member State shall designate a independent system operator (‘ISO’) unbundled which is subject to the European Commission’s approval. HNOs and (‘TSO’) for Gas may act as an ISO.
By way of derogation, where a hydrogen network belongs to a certified TSO for gas, or belong to a vertically integrated undertaking, Member States may instead opt to designate an entity under the sole control of the TSO, or of the vertically integrated hydrogen entity, subject to certain rules.
Horizontal unbundling
A HNO shall, at the very least, be independent in its legal form to a horizontal transmission or distribution undertaking.
Third Party Access
Networks
Article 31 of the Directive provides that Member States shall ensure the implementation of a system of Third Party Access (‘TPA') to hydrogen networks based on published tariffs without discrimination between any hydrogen network users.
Until 31 December 2035, a Member State may opt not to comply with the TPA provided that, in such case, the Member State implements a negotiated TPA system to hydrogen networks in accordance with the overriding EU principles (objectivity, transparency and non-discrimination).
Terminals
As regards hydrogen terminals, Member States must ensure TPA to hydrogen terminals based on negotiated access in an objective, transparent and non-discriminatory manner, agreed in good faith. Alternatively, Member States also have the right to apply a regulated TPA system.
Storage
Member States must ensure the implementation of a system of TPA to hydrogen storage when technically and economically necessary for providing: (1) access for the supply of customers; (2) access to line pack, (3) and/or access to ancillary services based on negotiated access in an objective, transparent and non-discriminatory manner.
As with access to hydrogen terminals, Member States also have the right to apply a regulated TPA system.
From 1 January 2036, Member States will need to ensure that a regulated TPA system for storage is implemented when technically or economically necessary for points (1) – (3) mentioned above.
The Regulation
The Regulation supports the Directive, providing details on the structure of a future hydrogen network as well as clarifying the rules for tariffs and tariff discounts pertaining to the hydrogen sector.
In summary, the Regulation sets out: the establishing of a hydrogen network, details of the way in which tariffs/tariff discounts will apply to renewable gases and hydrogen, and introduces rules on hydrogen blending.
European Network of Network Operators
The Regulation’s modified scope incorporates renewables gases and hydrogen as key components of the future European gas market. Article 40 of the Regulation provides that to ensure optimal management of the EU hydrogen network and to facilitate trading/supply cross-border, a European Network of Network Operators for Hydrogen (‘EENOH’) should be established.
The EENOH shall consist of HNOs in Member States. HNOs are eligible to join the EENOH from the start of the certification procedure by the regulatory authority (subject to the recast of the gas Directive as proposed in COM(2021)803 within Article 13 of this Regulation within 18 months of joining ENNOH and subject to at least developing hydrogen infrastructure project(s) with a financial investment decision within 3 years of joining the ENNOH.
HNOs should cooperate to create network codes for providing/managing access to networks across borders and to ensure a coordinated hydrogen network development. For example, the quality of hydrogen consumed across Europe can vary depending on production/technology type, thus a harmonised approach is required at a Union-wide level to ensure quality management as the network expands.
Until the EENOH is established, the European Commission shall set up a temporary platform involving the Agency for the Cooperation of Energy Regulators (‘ACER’) and all relevant market participants.
Tariffs
HNOs shall be regulated, and responsible for balancing their networks from 2036, or from an earlier date where otherwise provided. The rules adopted by HNOs for balancing the network shall be objective, transparent and non-discriminatory (including rules for energy imbalance charges).
The Regulation helpfully specifies the criteria to which tariffs for access to the hydrogen network are determined. When setting tariffs, a discount for renewable and low-carbon gases shall be applied respectively.
Under Article 15 of the Regulation, discounts for renewable and low carbon gases shall be applied to entry points from renewable and low-carbon production facilities as follows: (1) 100% discount to capacity-based tariffs for the purpose of scaling up injection of renewable gases, and (2) 75% discount to low-carbon gases. Notably regulatory authorities may decide not to apply discounts or to set lower rates provided that it is acting line with the general tariff principles laid out in the Regulations (i.e. the principle of cost-reflectiveness, taking into account the new for stable financial frameworks for investment).
Additionally, until 31 December 2025, the regulatory authority may apply a discount of up to 100% capacity-based transmission and distribution tariffs at entry points from, and exit points to, underground gas storage and liquified natural gas (‘LNG’) facilities.
Under Article 16 of the Regulations, as of 1 January (in the year following the proposals adoption) network users shall received a discount of 100% on the capacity-based tariff from the transmission system operator at interconnection points between Member States for renewable gases and 75% for lower-carbon gases.
For transparency, objective and non-discriminatory tariff purposes, from 1 January 2031 HNOs, or relevant authorities, will publish complete information on tariff derivation, methodology and structure.
Hydrogen Blending at interconnection points
The blending of hydrogen into the natural gas system is not always possible and may affect the operation of infrastructure and the interoperability of cross-border systems. For this reason, the Regulation recognises the needs for a EU-wide harmonised approach hydrogen blending into the natural gas networks but retains the ability for TSOs in the relevant member states to resist the blending of hydrogen at cross-border interconnection points.
Harmonised standards
Pursuant to Article 54 of the Regulation, the European Commission, may subject to its powers under the Regulation adopt implementing or delegated acts, as network codes.
Practices which are in conformity with harmonised standards shall be presumed to be in conformity with obligations provided for in delegated acts which are adopted.
Next steps
The Regulation and Directive establishes the EU Council’s provision position on the proposal and forms the basis for the preparations for negotiations with the European Parliament.
Once an agreement is reached, the two institutions will formally need to adopt the pieces of legislation before they are published thereafter coming into force. The Directive shall enter into force on the 20th day following its publication in the Official Journal of the European Union.
While the Regulation will come into effect uniformly immediately, under Article 87 of the Directive Member States shall be responsible for transposing the Directive into national law within 2 years of its entry into force.
Commentary
While the hydrogen and decarbonised gas market package represents a significant transition and expansion of gas networks within the EU, this is a significant departure from the current market set up. At present most renewable gas is currently produced and fed into local distribution grids, however the design of the energy package focuses on the large-scale of transmission connected production. Arguably, the agreed approach on the Directive and Regulation is more ambitious than the current rate of renewable gas and hydrogen production, and will necessitate the need for further legislative change and policy development as the sector matures. In any case the Directive will need to be transposed to national laws of the relevant member state.
As some industry commentators have noted clearer distinction should be made between hydrogen derivatives and carriers; for instance, by removing the reference to LOHC from the definition of hydrogen supply and hydrogen derivatives.
Policy makers should also be encouraged to accelerate the process to define low-carbon hydrogen by retaining the six-month deadline for the adoption of the Delegated Acts on low-carbon fuels methodology, in line with the parliamentary position.
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