Hydrogen Central

European Union Hopes to Build on Past Experience to Fast-Track Hydrogen Market – Euractiv

european union hydrogen market

European Union hopes to build on past experience to fast-track hydrogen market – Euractiv.

In its attempt to create an EU-wide market for clean hydrogen, the European Commission aims to build on years of experience spent trying to integrate EU markets for gas and electricity. These lessons could prove crucial to grow the hydrogen market and meet the bloc’s 2030 climate goals.

Hydrogen, a clean-burning gas, is seen as a potential silver bullet to decarbonise fossil fuel-reliant industrial sectors like steel and chemicals, as well as long-distance transport where electrification is not feasible at the moment.

With the Russian war in Ukraine, the EU is now pushing on the accelerator. In March, the EU executive announced plans for an additional 15 million tonnes of renewable hydrogen by 2030 on top of the 5.6 million tonnes previously announced in the Commission’s 2020 hydrogen strategy.

Ursula von der Leyen, European Commission President as she presented the plans on 8 March said:

The quicker we switch to renewables and hydrogen, combined with more energy efficiency, the quicker we will be truly independent and master our energy system.

Branded REPowerEU, the Commission plan will be followed up by more detailed proposals on 18 May. And hydrogen will once again be at the centre of attention.

Higher targets

According to the March proposal, two thirds of the extra hydrogen will be imported into Europe from countries like Oman, the UAE or Chile, with the rest being produced in the EU.

But for that to happen, the EU will have to build a competitive hydrogen market as fast as possible without scaring away investors, something the Agency for the Cooperation of Energy Regulators (ACER) says will require a “gradual and flexible regulatory approach”.

To do this, the EU executive hopes to rely on years of experience building an integrated market for gas and electricity, which started in the late 1990s with the first liberalisation directives.

The last reform entered into force in 2019 with a complete overhaul of EU electricity markets, which signalled a decisive shift to decentralised power generation based on renewables.

With hydrogen, the European Commission wants to achieve a similar level of integration in less than a decade, by 2030.

Hydrogen and decarbonised gas market package

To do this, the EU executive presented a gas package of legislation in December, which aims to establish a new hydrogen, with a dedicated infrastructure.

It won’t start from scratch, however. Drawing on the lessons from past energy market overhauls, the EU executive outlined a two-step approach: before 2030, EU competition rules will be partly suspended in order to attract investors.

After that date, the EU’s more stringent regulations will start applying, including so-called ‘ownership unbundling’ rules requiring network operators to be independent from energy suppliers.

Other rules relate to tariffs for third-party access to networks and cross-border cooperation on infrastructure to ensure strategic planning at EU and national level.

Like for gas, a European Network of Network Operators for Hydrogen (ENNOH) will be established, modelled on ENTSOG, the European Network of Transmission System Operators for Gas, which performs regular assessments on security of gas supply.

Thanks for staying up to date with Hydrogen Central. ENNOH’s role will be to promote a dedicated hydrogen infrastructure, coordinate across borders, work on interconnectors and put out technical rules.

For Europe’s nascent hydrogen industry, the chief concern relates to 2030 when unbundling rules will start to apply.

Another key issue the certification of hydrogen depending on how it is produced – whether from fossil gas (grey hydrogen), gas with carbon capture and storage (blue hydrogen), electrolysis using renewable electricity (green hydrogen), nuclear (pink hydrogen) or from the power grid.

2030 “Big Bang”

The 2030 turnaround date when EU market rules will start applying in full has been described as a “Big Bang” by ACER’s Dennis Hesseling.

Before 2030, private hydrogen networks will be exempted from the strict unbundling and access rules. This will allow member states to grant operators a derogation from all EU rules meant to foster competition, including participation in ENNOH.

For regulators, the quick deployment of infrastructure is key. In Brussels, the European Commission supports an approach based around “hydrogen valleys” where network infrastructure is shared among industrial users of hydrogen in an integrated geographical area, typically large ports.

However, regulators like ACER and the Council of European Energy Regulators (CEER) are worried that the 2030 deadline is too early to encourage investments in infrastructure and will slow down the creation of a hydrogen market.

While established industrial clusters like Antwerp are likely to have a functioning hydrogen infrastructure in place by then, there are concerns that Eastern European states may lag behind.

Who will foot the bill?

Given the tight deadlines, providing market incentives to build infrastructure is considered key.

A 2020 study by Gas for Climate, an industry lobby group, estimates that €27 to €64 billion will be needed to create a “European Hydrogen Backbone”, even if 75% of the infrastructure is built from retrofitted gas pipelines.

The group explains:

These costs are relatively limited in the overall context of the European energy transition and substantially lower than earlier rough estimations.

“The relatively wide range in the estimate is mainly due to uncertainties in (location dependent) compressor costs.”

From the industry’s point of view, one of the chief concerns is to avoid a free-rider effect where new market entrants benefit from infrastructure built and financed by others. How to finance the infrastructure and split the costs with new entrants will be crucial, industry sources say.

One source of funding could come from cross-subsidisation where revenues from existing gas networks are used to finance hydrogen infrastructure. The Commission could allow this on the condition that the charge is levied on domestic users only, is limited in time and subject to regulatory approval.

However, this carries risks related to cost mutualisation, which may have unintended consequences, ACER and CEER warned.

The regulators said:

Cross-subsidisation between users of different networks should be avoided, since it is not likely that all gas network users will become hydrogen networks users, or at least not at the same time.

Environmental groups have also warned about the risks of cross-subsidisation.

Christina Averbeck of Climate Alliance Germany and Verena Graichen of environmental NGO BUND, said:

Joint cost regulation or cross-funding of hydrogen pipelines by natural gas customers is highly controversial.

The two NGOs warned in a joint statement:

It entails price risks for households that are difficult to assess in the long term and may create a financial automatism for the comprehensive conversion of the existing natural gas network to hydrogen without sufficient system and individual case analysis.

Additionality

Another worry for the industry is an upcoming delegated act from the European Commission that will define when hydrogen can be considered renewable or not.

In theory, any hydrogen produced entirely from renewable energy will be considered green. But the Commission is worried that Europe’s hydrogen industry will buy massive amounts of renewable electricity for hydrogen production and deprive the electricity users from much-needed wind and solar power.

To qualify for the desired renewable hydrogen label, the delegated act will therefore require proof that the renewable electricity sourced for hydrogen production is “additional” to existing renewable installations.

This means that the electricity can either be generated specifically for hydrogen or taken from excess renewable power that would otherwise be curtailed because of insufficient grid capacity – for instance when there are strong winds over the North Sea.

However, this “temporal correlation” in the additionality principle is giving headaches to the industry, which expressed its concerns in a letter sent to the European Commission in December.

Jorgo Chatzimarkakis, secretary general of Hydrogen Europe, an industry group, said:

You need to prove on a 15-minute basis where the electricity in the grid comes from.

“This means that you need to prove every 15 minutes that it’s additional renewable electricity that you are using to power your electrolyser.”

To avoid grid congestion issues, the industry is looking at installing electrolysers as close as possible to large renewable electricity production facilities like offshore wind farms.

Other solutions are being envisaged. “For example, you could ask a country like Portugal to prove that the amount of hydrogen produced from the grid corresponds to an additional renewable source over a year. Or you could use Hydrogen GOs to prove the electricity used as input is renewable. That is doable,” Chatzimarkakis told EURACTIV in an interview last year.

“Or you could start the additionality accountability as of 2025, and let some flexibility in the kickstart phase until then. That would also be fine, it’s a position which is very much supported by the wind industry for instance.”

Without clearer rules on additionality, the risk is that hydrogen producers will be prevented from using curtailed wind capacity, Chatzimarkakis said. “In reality it is quite stupid, if you ask me,” he told EURACTIV.

The delegated act was initially due for publication at the end of 2021. It has since been delayed, holding back investors who are waiting for regulatory clarity about what can be counted as renewable or not.

Reactions from industry

Germany’s national hydrogen council welcomed the Commission’s move to transpose EU gas market rules to hydrogen.

However, it criticised EU “proposals for vertical and horizontal unbundling of hydrogen networks” saying it would “destroy” the use of synergies between gas and hydrogen networks that are not harmful to competition.

“Countries with ownership unbundling structures, such as the Netherlands and Belgium, would be favoured,” it said.

“Germany and other…countries such as France and the Czech Republic would be left behind in the development of H2 infrastructure. Due to Germany’s hub function, this would also have a negative impact on the ramp-up in neighbouring European countries,” the German expert group warned.

Others expressed concern about the complexity of the proposed EU framework.

Maximo Miccinilli, head of energy at consultancy Fleishman Hillard, said the Commission’s December gas package was “far from exhaustive” and made overly complex by a patchwork of separate rules and regulations.

READ the latest news shaping the hydrogen market at Hydrogen Central

EU hopes to build on past experience to fast-track hydrogen market, May 5, 2022

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