On Wednesday (June 16, 2021), Energy Post is hosting a panel with representatives from ELIA, SNAM and BASF to discuss the best approach to market and system design for Hydrogen. It’s free and you can register here. In this article, Walter Boltz, Senior European Energy Advisor, makes the case for a regulatory framework ‘mostly identical’ to the one so painstakingly developed for natural gas with a few practical differences – but this won’t suit everyone of course. What is the best pathway for designing the net-zero gas system? Join us on Wednesday to hear from a large industrial consumer, namely Jochen Wagner, BASF, Team Lead Energy & Utilities EU / Procurement & Regulatory Affairs; Europe’s largest Gas TSO, namely Giulia-Maria Branzi, Head of Climate Policies at SNAM; and a voice from the electricity side: Nicolas Gielis, Head of Strategy, ELIA. These three experts join Walter at the table from 12.00 to 13.30 CEST. The discussion is moderated by Catherine Galano, Associate Director, Frontier Economics. REGISTER NOW
The EU is committed to a set of very ambitious overall decarbonisation targets. The Green Deal, the Fit for 55 packages, the EU Hydrogen– and the EU Sector Integration Strategy, require full decarbonisation of the EU energy system by 2050.
To also decarbonise the hard-to-electrify sectors, like energy-intensive industries, industries that need gaseous feedstock, heavy-duty transportation, and air transport etc., will require a rapid ramping-up of a hydrogen market and a decreasing share of (fossil) natural gas.
To achieve this, the European Commission (EC) is currently considering different forms of regulation for hydrogen markets and networks. The first set of draft regulatory rules will be released on 14 July 2021, the second one in October 2021. So far, there is uncertainty on issues like the level of regulatory intervention (no regulation, light or full regulation) as well as when regulation should kick in during the hydrogen market ramp-up.
On the consumption side, hydrogen is one of the cleanest fuels, but the overall carbon footprint depends on the source of hydrogen that determines its life cycle GHG emissions. The contribution of hydrogen to the decarbonisation efforts will depend very much on the regulatory framework that can either accelerate or slow down hydrogen use in different sectors.
Hydrogen needs its investment cycle shortened
A cost-effective, sustainable, rapid development of the EU hydrogen market and infrastructure is needed to achieve the set decarbonisation targets. Especially, since full electrification of all sectors that use gas today is not possible, at least not by 2050. It is obvious that the replacement of fossil gas by hydrogen (and to a limited amount by biogas) has to happen much faster than what usual investment cycles would allow.
So, we will need massive political interventions and public support for accelerating the transition. This, of course, raises the risk that such policy interventions are based on wrong assumptions, slow down and massively increase the cost of the needed transformation.
A well-designed regulatory system will accelerate the uptake of hydrogen and will reduce the societal costs of the EU energy system transformation. On the contrary, a badly designed, fragmented and confusing regulatory system with legal uncertainties will slow down investments, create delays and makes decarbonisation more difficult and costly.
Legal uncertainties are an obstacle to investment
The current lack of investments and speed in ramping up hydrogen infrastructures and markets is not only due to a lack of available market-ready technologies and/or investment funding but also due to legal uncertainties regarding the future regulatory framework for hydrogen. The frequently changing percentage targets for GHG emission reductions further jeopardise the regulatory predictability for stakeholders and investors. Well-intended, but impractical rules like the stringent additionality requirements for renewable hydrogen will further slow down the development of a hydrogen market.
Use the existing gas infrastructure
The Internal Energy Market (IEM) objectives of a liquid, competitive and integrated energy (gas and electricity) market, high security of supply as well as functioning retail markets are by now achieved in almost all EU regions. Europe benefits from a well-developed and intermeshed natural gas infrastructure in most EU Member States as well as a mature EU regulatory framework. The existing EU gas infrastructure grew over the past sixty years to a significant size, also with the help of public support. Some of those assets are already fully depreciated, but still represent a significant monetary value in the range of 200+ bn Euro just for the gas transport system in addition to the derived benefits and values of an IEM. We should strive to make the best use of these assets in the interest of all EU citizens.
The decarbonised energy system in 2050 and beyond will use less gas, which implies that parts of today’s gas infrastructure will most likely not be needed in the future. How much of the infrastructure will be converted to hydrogen use depends heavily on the regulatory framework and the rules enabling such a re-purposing.
Policy decisions on the legal and regulatory framework for the transformation of the natural gas market and infrastructure to the future hydrogen market will determine if we are successful in decarbonising this part of the energy system and at what cost. What Europe needs now in this context is a pragmatic and practical regulatory framework, that provides a high degree of legal and practical certainty as well as some flexibility on timing, technology and applications where hydrogen can be used. Premature exclusions of hydrogen application areas or fixing certain technologies as winners or losers will most likely turn out to be costly mistakes. Very rarely have policymakers been correct in predicting technological developments correctly.
…and the gas regulatory framework
Looking back at the painfully slow and complex opening of the European gas market, it seems the best choice of a regulatory framework for hydrogen is one that is mostly identical to natural gas regulations with a few adjustments to reflect structural differences. Given the infancy of the hydrogen market, we will need the possibility to grant derogations and exemptions from some rules over the next 10 – 15 years to enable investments to happen now, even if they do not fully conform to the rules that come later.
This approach would provide legal certainty to everyone in the market as the rules for the gas market are well known and it would be clear how the final market structure will look like. Also, the regulatory system is proven to work in practice, including under stress situations, something that would need to be closely checked and monitored for any set of significantly different regulatory rules for hydrogen. As we have seen in the gas market, it can take several rounds of legislative efforts and many years until a well balanced and workable set of rules are in place.
Further benefits would be an easier conversion of gas infrastructures to hydrogen use within the existing TSOs and DSOs regulatory framework (or even regulated asset bases) and the avoidance of complex valuation questions and transfer rules between gas and hydrogen networks.
Finally, a regulatory framework, not only for hydrogen but also for system integration between the electricity and the hydrogen sector, is needed urgently. Not least since an important argument for establishing a hydrogen system is the need to store large amounts of energy long term, something that, to our current knowledge, can only be achieved with molecules like hydrogen or gas and not with currently known electric battery technologies.
Walter Boltz is a Senior Advisor European Energy at Walter Boltz Consulting