The European Commission has identified ‘renewable’ and ‘low-carbon’ hydrogen as major elements of its decarbonisation strategy. The REPowerEU Communication of 2022 set the target for renewable hydrogen consumption at 20 Mt/y by 2030, of which 10 Mt/y would be imported. In December 2021 the Commission published the Hydrogen and Gas Decarbonisation Package which included proposals for regulation of hydrogen infrastructure. The final package is expected to be agreed with the EU Parliament and EU Council by the end of 2023.
The proposals for hydrogen regulation must be seen in the context of the EU’s decarbonisation policies aimed at reducing emissions by 55 per cent by 2030, the ‘Fit for 55’ package. The EU Commission has predicated its proposals on the establishment of an integrated EU hydrogen market and has used the PRIMES model to develop scenarios for energy usage which meet the Commission’s goals. It has used the METIS model to simulate the operation of energy markets within the EU, and hence the impact of policy choices on the development of EU energy infrastructure. However, this means that the Commission’s proposals are ‘path dependent’ on the EU hydrogen market developing in line with its scenarios. This in turn depends on agreement on all the elements in the Fit for 55 package being aligned with the Commission’s scenarios, and on Member States putting in place effective policies to meet the EU-level targets.
There is little allowance for the considerable uncertainty about the development path of the hydrogen market. Unlike natural gas at the time of liberalisation, there is no well-established mature hydrogen market and infrastructure. The Commission is being heavily influenced in its approach by its experience in trying to liberalise natural gas markets over the last quarter century, including the issue of unbundling networks from gas production and supply. Although the Commission does recognise that the hydrogen market is yet to be developed, it is open to question if it has learned the right lessons from its past experience given the very different challenges involved. The Commission expects there to be two gaseous networks, one for methane (including biomethane and synthetic methane as well as natural gas) and one for hydrogen.
Based on the REPowerEU target the Commission anticipates a need for infrastructure to transport up to 14.7 MT/y of hydrogen, of which 6 MT/y will also need hydrogen import infrastructure. (A further 4 MT/y of hydrogen will be imported in the form of ammonia or other hydrogen derivatives.) The Commission expects there to be a requirement for significant cross-border infrastructure for hydrogen transportation, as well as hydrogen storage of renewable energy to mitigate the intermittency of renewable electricity generation.
The Commission’s policy objectives include:
facilitating the emergence of an open and competitive EU hydrogen market
removing barriers to, and ensuring incentives for, investment in hydrogen infrastructure
addressing the risk of natural monopolies in hydrogen infrastructure
ensuring cross-border integration within the EU and with third countries and unhindered crossborder flows of hydrogen
providing transparency of the repurposing of existing natural gas networks to transport hydrogen enabling cost-efficient planning on the basis of scenarios in line with climate target objectives
Potential problems which the Commission has identified include:
lack of rules governing hydrogen infrastructure
the need for a definition of low carbon (as opposed to renewable) hydrogen
lack of rules on hydrogen infrastructure investments including repurposing of existing gas pipelines hydrogen infrastructure likely to be a natural monopoly and therefore a hindrance to competition diverging hydrogen quality rules and hydrogen blending levels hindering cross-border flows
intra-EU entry/exit tariffs hindering the establishment of a fully integrated, liquid, and interoperable EU internal market as a result of the ‘pancaking’ effect4 where hydrogen crossing several borders pays tariffs at each border
insufficient energy integration in network planning
varied network planning between Member States and separate planning for electricity and gas lack of transparency on potential for repurposing or decommissioning existing infrastructure
The Commission’s analysis is based on the way it expects the hydrogen market to develop. There are several vulnerabilities to this analysis including:
the failure of low-cost hydrogen imports to materialise as quickly as expected
dependence on Member States’ policies for the ramp-up of EU hydrogen production and use
the ramp-up of additional renewable electricity required in the EU to produce hydrogen (500 TWh is only slightly less than current levels of EU wind and solar generation)
and the Commission’s mistaken analysis of the tariff pancaking issue.
The Commission’s legislative proposals include:
regulated third-party access and ownership unbundling for hydrogen networks with limited exceptions to this to the end of 2030, and possible limited exemptions thereafter for interconnectors
regulated third-party access to hydrogen storage and negotiated third-party access for hydrogen import terminals
No cross-border tariffs on hydrogen networks and discounts for renewable gases in natural gas networks
A separate European Network of Network Operators for Hydrogen (ENNOH) by end 2025
a definition of low-carbon hydrogen by end of 2024 with greenhouse gas savings of at least 70 per cent
the ability to transport up to 5 per cent hydrogen blended into natural gas networks at crossborder points
improved integrated planning of energy networks
The regulated approach proposed by the Commission should work well once the hydrogen market is well established with a mature supply and customer base, and well-developed infrastructure. The Commission has also provided regulatory certainty to market participants as the framework is detailed and builds on the experience of the gas market.
However, the proposed framework only really becomes valid once the hydrogen market and associated infrastructure has developed as until then there are no natural monopolies. Full blown regulated third-party access is burdensome for embryonic networks. Strict ownership unbundling prevents risk sharing of the type that was common in the early days of the gas pipeline and LNG industries. The Commission recognises the advantage of providing some regulatory flexibility in the early years of the hydrogen market but the date at which this is withdrawn (2030) leaves very little time for the market to develop. The Commission is moving too slowly with a deadline of the end of 2024 for its definition of low-carbon hydrogen; the sooner a definition is in place, the sooner companies can invest in hydrogen production which meets the required standard.
A separate organisation for hydrogen operators (ENNOH) will take time to set up. An organisation for both natural gas and hydrogen network operators based on the European Network for Transmission System Operators for Gas (ENTSOG) would be quicker to set up and benefit from common expertise and is therefore a better option. The disadvantages that the Commission foresees in a combined organisation can be overcome via the current regulatory framework and transparency of operation. The proposal to remove cross-border tariffs on hydrogen networks, is based on the Commission’s fallacious analysis of the pancaking issue and its view that cross-border transport tariffs hinder trade. Proposals for zero tariffs at cross-border points are a bad solution in search of a non-existent problem and should be shelved. Removing cross-border tariffs will require several network operators to agree revenue-sharing mechanisms which will be complex; this does not solve a problem but creates one.
Discounts on tariffs for low-carbon and renewable gases in natural gas networks are also problematic as they represent a cross-subsidy between different groups of network users and mean that tariffs do not reflect costs. Cost-reflective tariffs allow for better comparison between different forms of energy transportation, so it would be better to subsidise renewable gases directly rather than via network tariffs. It is difficult to tell if 5 per cent hydrogen blending is the right level, and certain technical implications are still being evaluated by the industry.
Both Parliament and the Council propose a 2 per cent maximum. There is also considerable ongoing debate as to the merits of blending hydrogen into the gas network given the likely scarcity of renewable hydrogen in the early years. Improved planning and cooperation between energy networks is useful. To some extent there may be more of a central planning approach for hydrogen by default if Member States choose to subsidise hydrogen networks explicitly as a means to stimulate the market. The high cost of hydrogen compared to fossil fuels means there is not sufficient value in the supply chain for the industry to be self-financing in the way that the natural gas market was in its early days. The Commission has succeeded in its aim of providing a clear framework for the regulation of a future mature hydrogen infrastructure. With some minor changes, such as the regulation of storage and import terminals, it has followed the same template as that used for the successful liberalisation of the gas market, which ensures that gas flows to where it is needed and the EU can attract supplies from abroad. The Commission is also renewing its commitment to competitive gas markets, including for hydrogen. For this it should be applauded.
However, the key issue is whether the Commission has allowed enough time and flexibility for the hydrogen market and its associated infrastructure to reach maturity. The Commission relies heavily on matching its regulatory proposals to its scenarios for hydrogen usage but has not considered what could happen if the hydrogen market develops less quickly, or in a different manner to that which it expects. There are many uncertainties concerning both the production of hydrogen, and its demand.
