Last December, the European Commission published its legislative Package on Hydrogen and Decarbonized Markets (“Package”), which proposes new rules aiming to develop a hydrogen market in the EU. The new rules bring much awaited legal clarity to the concepts and role of blue and green hydrogen within the EU’s energy regulatory framework for the climate transition.
In effect, the Commission’s legislative Package is intended to promote the use of blue hydrogen until at least 2030 provided that it achieves the same decarbonization as green hydrogen (i.e., 70% GHG reduction). However, the European Parliament and Council may amend both the proposed definition and conditions of blue hydrogen and the proposed regulative incentives during their consideration of the Package and its adoption through the legislative procedure that will now follow. Moreover, the European Commission will be empowered to develop much of the methodologies implementing the definitions of blue and green hydrogen. Companies intending to engage in blue and green hydrogen operations in the EU/EEA would be well advised to closely follow these developments.
I. The Legislative Package on Hydrogen and Decarbonized Markets
The Package is yet another piece of the “Fit for 55” agenda to achieve the EU’s climate neutrality by 2050 and includes three legislative proposals: (i) a proposal for a recast of the EU Regulation on the Internal Markets for Renewable and Natural Gases and for Hydrogen (“Proposed Gas and Hydrogen Regulation”); (ii) a proposal for an EU Directive on Common Rules for the Internal Markets in Renewable and Natural Gases and in Hydrogen (“Proposed Gas and Hydrogen Directive”); and (iii) a proposal for an EU Regulation on Methane Emissions Reduction in the Energy Sector (“Proposed Methane Regulation”).
In line with the EU Hydrogen Strategy, the Package aims to facilitate the uptake of renewable and low-carbon gases, including hydrogen, in the EU’s energy infrastructure. The legislative proposals create a dedicated hydrogen infrastructure and adapt the gas market regulatory framework to remove barriers to the entry of hydrogen with the aim of promoting the consumption of hydrogen in areas where electrification is not an option, such as energy-intensive industries and heavy-duty transport.
Both green and blue hydrogen would benefit from this proposed beneficial regulatory framework provided they comply with the proposed definitions and requirements. However, they would continue to be impacted differently under other parts of the EU’s climate and energy rules, such as the Renewable Energies Directive (“RED II”) and the proposal for a Regulation on a Carbon Border Adjustment Mechanism (“Proposed CBAM Regulation”) and the Regulation on the Establishment of a Framework to Facilitate Sustainable Investment (“Taxonomy Regulation”).
II. Renewable and Low-Carbon Hydrogen
The EU’s current energy regulatory framework fails to define renewable (aka “green”) and low-carbon (aka “blue”) hydrogen. This legal uncertainty has hampered the role-out of green and blue hydrogen markets and infrastructure in the EU. To correct this, the Package introduces new legal definitions of renewable and low-carbon hydrogen that the Commission will be empowered to detail by adopting specific calculation methodologies and threshold determinations in delegated acts.
The Proposed Gas and Hydrogen Directive includes definitions of renewable and low-carbon hydrogen that are in line with those of the proposal to amend the Renewable Energies Directive II (“Proposed Directive to Amend RED II”).
- Renewable hydrogen is defined by reference to the definition of the Proposed Directive to Amend RED II, e., as hydrogen that (i) derives its energy content from renewable sources other than biomass; and (ii) achieves a 70% GHG emission reduction compared to fossil fuels.
- Low-carbon hydrogen is defined as hydrogen with an energy content that is derived from non-renewable sources, and that meets a GHG emission reduction threshold of 70% compared to fossil-based hydrogen.
This means that the EU’s rules for the maximum greenhouse gas emission intensity of renewable (“green”) and low-carbon (“blue”) will be broadly similar, since the Gas and Hydrogen Directive sets the same decarbonization impact criteria for both (i.e., 70% GHG reduction). The reduction threshold for renewable and low-carbon hydrogen will likely be calculated using a “well-to-gate” approach, that is, taking into account the CO2 emissions from exploration to the production process, including transportation until the production process. However, the Commission has yet to establish the exact calculation and determination methodologies for green and blue hydrogen (see below).
Thus, the proposed main difference between renewable and low-carbon hydrogen would be the production process of the hydrogen and, in particular, the source of the energy that is used to make the hydrogen (e.g., in an electrolyser). In effect, the aim of this approach is to allow low-carbon hydrogen to play a role in decarbonization and facilitate the energy transition until 2030. The amended RED II would continue to promote green hydrogen, and various EU legislation, such as the Proposed CBAM Regulation, would likely impact blue and green hydrogen differently. However, both blue and green hydrogen meeting the proposed definitions would benefit from the Package’s proposed dedicated hydrogen infrastructure and market outlined below at least until 2030.
The expectation is that by 2030 the EU will introduce a stricter GHG reduction threshold for the definition of low-carbon (“blue”) hydrogen. This threshold could be similar to that set under the draft technical screening criteria for gas investments under the Taxonomy Regulation, but that remains to be seen.
III. Certification of Low-Carbon Hydrogen
Both renewable and low-carbon hydrogen would have to be certified:
- Renewable hydrogen would have to be certified in accordance with the Proposed Directive to Amend RED II, which requires the Commission to adopt delegated legislation that establishes the methodology for the certification.
- Low-carbon hydrogen would have to be certified in accordance with a methodology that the Commission must adopt as a delegated act under the Proposed Gas and Hydrogen Directive. To avoid duplication, the Package requires that the methodology does not take into account capture of carbon dioxide which has already received credit for avoided emissions under other legislation, such as the Emissions Trading System Directive. The certification requirements will require companies that produce low-carbon hydrogen to provide extensive information about their processes and include related information in an EU database.
The Package also allows the Commission to recognize a voluntary national or international scheme that sets standards for the production of low-carbon hydrogen as equal to the Commission’s own methodology (e.g., the CertifHy scheme). Hence, if an operator provides compliance with a recognized scheme, this will serve to satisfy the certification requirement for low-carbon hydrogen.
The Package applies these certification requirements equally to imported and EU-produced blue and green hydrogen, which may be related to recent efforts by certain Member States to scale up production of hydrogen both inside and outside the EU. For instance, in December 2021 the Commission approved the German State aid scheme H2Global that also supports the production of green hydrogen in non-EU countries for its export to, and sale in, the EU.
IV. Regulation of Hydrogen Networks
The current EU regulatory framework for gas energy carriers does not address the deployment of hydrogen as an independent energy carrier via dedicated hydrogen networks. There are no rules at the EU level on investments into hydrogen networks based on tariff price (e.g., requiring that tariffs be remunerative for network operators in order to invest adequately in infrastructure), or on the ownership and operation of dedicated hydrogen networks (e.g., unbundling rules). The Proposed Gas and Hydrogen Directive and the Proposed Gas and Hydrogen Regulation address these gaps by introducing the following measures:
- Unbundling obligations. Hydrogen network operators would be required to unbundle their production and supply activities, and to be legally and organizationally independent from undertakings active in the transmission and/or distribution of natural gas or electricity. This means that existing transmission systems operators for electricity or natural gas may not act as hydrogen network operators, at least under the same legal entity.
- Nondiscriminatory access and storage. Hydrogen network operators, hydrogen storage facility operators, and hydrogen terminal operators would be required to offer their services on a non-discriminatory basis to all network users.
- Reduced tariffs. The legislative proposals establish tariff discounts for renewable and low-carbon gases. In particular, the proposals envision discounts of 75% on entry and capacity-based transmission tariffs for renewable and low-carbon production and storage facilities. The proposals would also eliminate cross-border tariffs for renewable and low-carbon gases to facilitate sales across borders in the European market.
- Revised investment decisions. Hydrogen network operators would be required to regularly assess market demand for new infrastructure investments. Similarly, every two years, LNG and storage system operators would be required to assess market demand for new investments that would allow or expand the use of renewable and low-carbon gases in their facilities, and to take that information into account when they plan new investments.
- Certification requirements. The proposals would also require Member States to certify all hydrogen network operators. If these are controlled by a person or persons from a third country or third countries, the regulatory authority responsible for the certification would be required to notify the Commission, which would ultimately decide on whether certification is granted. Member States would also have the right to refuse certification if granting certification would put at risk their security of energy supply or the security of that of another Member State.
The European Parliament and Council must now consider the proposed Regulation and Directive for their adoption through the so-called “ordinary” legislative procedure. This procedure allows the Parliament and Council to modify the proposals, for example to include further incentives and more flexible rules for low-carbon hydrogen. The procedure is likely to be expedited so that the legislation is adopted within the next 18 months.
In the meantime, the Commission is also expected to start its preparatory work on the specific methodologies needed for the certification of renewable and low-carbon hydrogen. The Commission will have to make technical decisions that may often have significant business consequences. Affected companies may want to engage the Commission early on in this process.