Yesterday saw the launch of the EC’s new Hydrogen Strategy, the focus of our next live online discussion and Q&A. Register now to join us at the event next Wednesday at 12.45 CEST on Zoom to hear direct from the European Commission’s Dr. Florian Ermacora, Future Energy System expert Prof. dr. Ad van Wijk, Giulia Branzi – Head of Regulation at event partner SNAM and trading specialist Marcel Steinbach of BDEW.
Here, to set the scene, Gökçe Mete at International Energy Charter and Leonie Reins at the Tilburg Institute for Law, Technology, and Society take a careful look at a wide range of issues that still need to be resolved: unbundling, Third Party Access, distribution and transmission tariffs, Guarantees of Origin, dynamic market regulation, and regulatory sandboxes. This is to ensure the smooth development of hydrogen’s three most pressing challenges: infrastructure, transport and a functioning market – all three of which will be considered by the panel and up for scrutiny in our unique live Q and A. Proceedings will be moderated by Erik Rakhou, consultant at Baringa Partners and alternate member of ACER board of appeal. Register for the discussion here and if you already have questions after reading today’s article, please put them in the comments box below…
HYDROGEN technology will increasingly take centre-stage in achieving the objective of a net-zero carbon emissions economy. However, several regulatory and legislative barriers to achieving a hydrogen economy in Europe continue to persist. The European Commission’s new Hydrogen Strategy, published yesterday, seeks to tackle some of the remaining challenges.
The new Hydrogen Strategy
Regardless of high prices, many fossil fuel and energy companies consider the development of the hydrogen business as an attractive economic opportunity. After repeated calls from industry to EU policy-makers to adopt the necessary regulations, frameworks and policies in order for a hydrogen economy to kick start and run smoothly, the new Hydrogen Strategy sets a first concrete step in this direction.
In this blog post, we discuss the central elements of the new Hydrogen Strategy, setting out the details on the opportunities and required measures to increase the uptake of hydrogen as part of an integrated energy system. Specifically, we question whether the rise of hydrogen as a new energy carrier will transform the existing structure of the internal energy market, including the role of market players, and principles of the EU internal market, such as unbundling, third party access and tariffs.
The Hydrogen Strategy published yesterday complements the Strategy for Energy System Integration, published and presented at the same time, which proposes concrete policy and legislative measures at EU level to gradually shape the energy system ‘as a whole’, across multiple energy carriers, infrastructures, and consumption sectors, including development of a new hydrogen ecosystem.
Among the roadmap of key actions envisaged in the Hydrogen Strategy for the coming years, those designed to enable and support a functioning hydrogen market are three-fold: Infrastructure, Transport and a Market.
Hydrogen is an energy carrier, rather than an energy source and can deliver or store significant amounts of energy. Currently, most hydrogen is produced from fossil fuels, such as natural gas. Electricity, from the grid or from renewable sources such as biomass, geothermal, solar, or wind, is also sometimes used to produce hydrogen.
The new Hydrogen Strategy refers to hydrogen forms such as “electricity-based hydrogen”, “renewable hydrogen” (i.e. “clean hydrogen”), “fossil-based hydrogen”, “fossil-based hydrogen with carbon capture”, “low-carbon hydrogen”, and “hydrogen-derived synthetic fuels”. It gives priority to hydrogen production from renewable electricity as it is the greenest solution. However, a transitionary role for other forms of low-carbon hydrogen is also foreseen to gradually replace existing fossil-fuel based hydrogen and kick-start an economy of scale.
Towards an internal market for hydrogen?
The new Hydrogen Strategy and the Strategy for Energy System Integration emphasise the need to develop an enabling regulatory framework for a ‘liquid and well-functioning hydrogen market’, to bring the costs down and for scaling up wind and solar energy output dedicated to hydrogen production. However, they fall short of detailing the preferred market structure and price formation.
For instance, key questions over the role of different market players, third party access, and the direction of travel of price and tariff formulations remain unanswered.
In the absence of clear policy actions, a number of Transmission System Operators (TSO) and Distribution System Operators (DSO) across the EU Member States have already been experimenting with blending small amounts of green hydrogen and the association of European Transmission Operators for Gas (ENTSOG) already foresees a role for the TSOs in production of hydrogen.
Hydrogen indeed can be transported in some parts of Europe using the existing gas grid or with modifications to the existing gas pipelines, or via dedicated pipelines. The natural gas network is operated by TSOs, their role in the hydrogen value chain may be at odds with the unbundling principle, which precludes the TSOs to engage in energy production and trade activities.
While hydrogen production could be considered conversion, this still entails an economic activity. And hydrogen storage may be considered supply activity when the stored hydrogen is used for re-electrification. The new strategy does not address this problem, however it points out that towards 2030, the role of newly built dedicated hydrogen will be limited, and instead the focus of infrastructure development will be on repurposing existing infrastructure for cross-border transport.
The new Hydrogen Strategy, without going into the details, provides that non-discriminatory TPA rules need to be developed to reduce undue burdens to market access and that providing clarity now will avoid sunk investments and the costs of ex-post interventions later. Earlier this year, ACER and CEER highlighted that for dedicated hydrogen pipelines the TPA would distort the economic viability of projects and a time limited exemption could be considered until the market kick starts. For those pipelines with the objective of supplying the industry with hydrogen (close to consumption), TPA would not be relevant.
Another consideration necessary for establishment of a hydrogen market is the determination of distribution and transmission tariffs. The scope of the Gas Directive does not include hydrogen. One view is that as blended hydrogen and biomethane will use the same pipeline system as natural gas, they can be subject to the same tariff methodologies, capacity allocation and balancing rules.
However, it is not clear yet whether these should be addressed instead under the Renewable Electricity Directive (REDII), which already covers biogas and biomethane or whether a new dedicated hydrogen package will be necessary. The new Hydrogen Strategy does not address this problem specifically. It instead, notes that ‘equal treatment of hydrogen with other carriers must be ensured to not distort the relative prices of different energy carriers’.
The new Hydrogen Strategy gave consideration to the establishment of a Guarantees of Origin system as the disclosure of the origin of green hydrogen to end-users and Supply Certificates capable of addressing policy target compliance are key for transparency, consumer empowerment, intra-EU trade and consumption of hydrogen, creating market pull and for improving the business case.
The main question with the future direction of the schemes for Guarantees of Origin has been whether separate certificates are needed for hydrogen itself, green hydrogen or whether they should be location based (for instance hydrogen produced with renewable energy in the North Sea). This topic is at the cross-roads of market creation and regulation as it also relates to balancing, booking and claiming Guarantees of Origins.
According to the new Hydrogen Strategy, the Commission will swiftly introduce a ‘low-carbon threshold/standard for the promotion of hydrogen production installations based on their full life-cycle greenhouse gas performance, which could be defined relative to the existing ETS benchmark for hydrogen production’ along with a ‘comprehensive terminology and European-wide criteria for the certification of renewable and low-carbon hydrogen possibly building on the existing ETS monitoring, reporting and verification and the provisions set out in the REDII.’
The CertifHy project “Designing the 1st EU-wide Green and Low Carbon Certification System” has already developed a Green and Low Carbon Certification pilot, which has led to the issuance of 76,000+ Guarantees of Origin, of which 3,600+ have been used so far. The new Hydrogen Strategy considers that methodologies developed by industry initiatives, such as CertifyHy can facilitate the most cost-effective production and EU-wide hydrogen trading.
Dynamic market regulation
Another issue is the application of the Gas Target Model for hydrogen, which specifies the steps required to realise liquid and dynamic gas markets, comprising entry-exit zones with liquid virtual trading points. As acknowledged by the new Hydrogen Strategy, this is problematic as the price of hydrogen will be different from natural gas and the zones for hydrogen trade may be different from the current gas trading zones, and entry points for hydrogen will be different geographically depending on access to renewable from wind and sun, biomass, and the access to CO2 and hydrogen storage.
Furthermore, a different tariff configuration may be called for entry-exit tariffs for injections of hydrogen to the gas grid and storage facilities. In order for these discussions to be properly addressed, the Sector Integration Strategy points out that the Gas Package should be reopened, as it is currently too narrow to apply to hydrogen.
A public consultation must take place without delay on how to define green and blue hydrogen, its storage, transport and trade. At the same time, regulating hydrogen under the Gas Package with the same detail may constrain innovation as the gas market legislation was designed to prevent market failure, whereas, there is currently no market for hydrogen, so instead, revising the REDII may be a more appropriate approach to the regulation of hydrogen.
The TEN-E Regulation provides a framework for the selection of electricity, gas and CO2 infrastructure projects of common interest (PCI) that can benefit from financial support from the Connecting Europe Facility (CEF). This regulation is among the many that will be revised to be brought in line with the climate neutrality objective under the Green Deal and the Climate Law.
As it stands, the TEN-E regulation does not reflect on the integration of hydrogen and power-to-x technologies into the EU energy system. The TEN-E revision process, which is currently at stakeholder consultation (via webinars) stage, among others, will see the scope and governance of Ten-Year-Network Development Plans adapted by 2021 to allow cross-sectoral planning between power and gas infrastructure. However, the new PCI list under the new TEN-E Regulation will only be approved in 2023 (as the 4th PCI list was approved in October 2019, and the 5th PCI list in 2021 will be also under the current regulation).
The new Hydrogen Strategy notes that full integration of hydrogen infrastructure in the infrastructure planning including a network of fuelling stations will be developed on the basis of ten-year network development plans and this should also inform and be the basis for incentivising investments by private investors in electrolysers at the best locations.
Both strategies published yesterday are shy of providing detailed regulatory action on hydrogen.
Regulation of new technologies can be a double-edged sword, as on the one hand regulation is necessary, as energy is of crucial societal relevance but at the same time it can stifle innovation. With this in mind, and in the absence of specific policy recommendations towards legislative measures, ACER recommends adopting sandbox model as a dynamic and targeted regulatory measure at the EU level, in particular for small scale projects.
Regulatory sandboxes have been implemented very differently in each Member State to date, and have mainly been explored in the electricity sector. With these sandboxes, regulators open the doors for innovators to experiment with how the project can be developed. The regulator then studies the case and decide on what set of rules should be exempt for this technology to kick start it without threatening competition, consumers and safety of the system. Italy has already launched a consultation in the gas sector to realise some pilot projects/sandbox model for cross-sector integration.
There is no EU-level equivalence of the sandbox model and therefore ACER proposes an “EU umbrella” for the sandbox approach. This, in their view, this would allow for time-limited derogations while generating useful information which would enable knowledge sharing between National Regulatory Authorities (NRAs) and help avoid replicating pilots.
Another approach at the national level could be a regulatory pilot, guided by the regulator and the network companies with predefined exemption from the rules. NRAs may also provide strictly defined exemptions for hydrogen projects (activity) or actors (companies), as it has been the case for merchant interconnections in the EU (i.e. Article 36 of the Gas Directive). This would however not provide the required predictability by hydrogen project developers (and it could arguably be stated that the current exemption route under the Gas Directive vests commercial decision-making powers to the Commission).
While the support towards a hydrogen economy at the industry and political level is increasing, there are still many unknowns and interlinked regulatory revision procedures, linked to both economic and technological uncertainties. The current regulatory architecture was not designed with hydrogen and power-to-x technologies in mind. There is an apparent regulatory gap, which constitutes barriers for the hydrogen economy. The new Hydrogen Strategy does not address this problem directly. However, concrete measures are likely to emerge as part of the revision of the TEN-E, REDII and Gas Market Regulation, all due to take place in the course of 2021.
Existing regulatory frameworks need to be revised to enable hydrogen production, distribution and transport. While ENTSOG considers that all gases should be treated under the same regulation and a new market model with a fair level playing field should be established for the energy system integration, we argue that a Hydrogen Package could be introduced to regulate hydrogen at the European level. The Commission’s new Hydrogen Strategy opens doors to new hydrogen horizons, but leaves many regulatory questions unanswered. This, however, may be seen as a logical consequence of the multi-layered framework that has a bearing on the deployment of hydrogen.
Leonie Reins is Assistant Professor at the Tilburg Institute for Law, Technology, and Society