[EU]Why EU green hydrogen legislation is capricious
Author: Huang Xiangyi
Translated from https://mp.weixin.qq.com/s/W4JUyBNhuEW-wCv4kdApiQ
In the face of the energy crisis, the EU is actively seeking a green transition and green hydrogen (i.e. renewable hydrogen) is key to the European Commission's efforts to accelerate Europe's green transition in response to the energy crisis. However, the process of EU hydrogen legislation has been erratic, with several draft strategies and bills falling through, although a three-year long discussion on additional rules was proposed in the Renewable Energy Plan and Authorisation Bill in May 2022, only to be repealed in the Renewable Energy Amendment Bill in September.
I. Erratic EU hydrogen legislation
Hydrogen is expected to play a key role in Europe's efforts to decarbonise as a renewable and clean energy source. Hydrogen currently accounts for less than 2% of Europe's energy consumption and 96% of hydrogen production is obtained mainly through natural gas. Renewable hydrogen (also known as green hydrogen), obtained mainly by separating water in electrolysers driven by renewable energy sources, could not only replace fossil energy in transport and industrial processes, but also potentially support the EU's electricity sector and contribute to grid storage, helping to improve the flexibility of energy systems, balancing supply and demand and increasing energy efficiency across the EU.
Regulatory uncertainty hinders the use of hydrogen in the market and its participation in Europe's green decarbonisation process. Back in 2018, the EU started discussions on rules for green hydrogen production from renewable electricity to ensure that electrolysers producing green hydrogen only use "additional" wind or solar energy and do not deprive other sectors of scarce renewable electricity. This decision sparked a lobbying battle over the meaning of the 'additionality' rule and how energy sources such as hydrogen produced from electricity, rather than fossil energy, qualify as renewable within or outside the EU.
On 8 July 2020, the European Commission published the EU Hydrogen Energy Strategy, which sets the direction for the development of clean energy in Europe, and in particular hydrogen energy, over the next thirty years. The strategy looks at ways to produce and use renewable hydrogen to help decarbonise Europe's economy in line with the European Green Deal, including a strategic pathway to 2050 for Europe's hydrogen ecosystem and an investment plan for the rapid development of the hydrogen industry. The European Energy Systems Integration Strategy (ESIS), published at the same time, also proposes a climate-neutral energy system that includes renewable hydrogen. In the same period, the European Clean Hydrogen Alliance, which brings together relevant European industries, national and local governments, civil society and other stakeholders, was launched as part of the EU's new industrial strategy to bring together the needs of all sectors and the transmission and distribution of hydrogen in order to achieve the deployment of hydrogen technology by 2030.
On 15 December 2021, the European Commission adopted a series of legislative proposals, including a recast of the 2009 EU Gas Directive to promote the decarbonisation of natural gas and the promotion and adoption of low-carbon gases such as hydrogen. The proposals propose the establishment of a hydrogen energy market and a certification system for low carbon gases, requiring national network development plans of Member States to cover hydrogen, and are expected to be a core component of the new EU legislative framework for hydrogen energy networks.
On 18 May 2022, the European Commission officially launched the REPowerEU plan, which aims to increase the energy status of renewable hydrogen in Europe to move away from dependence on Russian fossil fuels and accelerate the green energy transition. The plan proposes to combine the development and trade of hydrogen and renewable energy, to promote the investment, development and evaluation of hydrogen projects, to accelerate the deployment of hydrogen infrastructure, to establish a green hydrogen partnership and to produce 10 million tonnes of renewable hydrogen in the EU and import 10 million tonnes by 2030. According to the plan, hydrogen for industrial production and transport needs to be lower carbon to improve energy efficiency and decarbonisation, and relevant guidelines and innovation funding will support the complete conversion of hydrogen production from natural gas to renewable energy.
On 20 May 2022, the EU published the draft of two new Delegated Acts, the Methodology Delegated Act for renewable fuels of non-biological origin (RFNBO) and the Additionality Delegated Act for electricity-based RFNBO production. The draft of the "Additionally Delegated Act" for the production of RFNBO based on electricity. Both drafts give a definition of renewable hydrogen and its production, responding to potential concerns as a complementary part of the Renewable Energy Plan (REPowerEU).
According to the two draft Delegated Acts, the production of fully renewable hydrogen should incentivise the deployment of new renewable generation capacity to meet the additionality condition, either when electrolysers support the integration of renewable generation into the electricity system or in bidding zones where renewable electricity is already dominant and the price of electricity in the different bidding zones needs to be adjusted upwards to avoid grid congestion. In order to demonstrate that the additionality condition is met, hydrogen producers will need to show by 31 December 2026 that monthly hydrogen production matches direct renewable energy output or locally stored renewable energy, or provide evidence that the electrical installation connected to the grid for hydrogen production is directly connected and always provides renewable electricity, or demonstrate that renewable hydrogen produced from electricity received from the grid is produced through power purchase agreement incentivises the deployment of new renewable generation capacity to produce, otherwise the hydrogen produced will not be considered renewable.
The two enabling acts will phase in stricter rules so that only new unsubsidised wind and solar farms can be used to produce green hydrogen by 2026. The requirements of the enabling acts will prevent green hydrogen developers from entering into power purchase agreements with existing renewable energy assets in the EU.
The European Commission also launched two consultations on the two enabling acts, clarifying the EU rules applicable to renewable hydrogen under the 2018 Renewable Energy Directive, which have not yet been adopted following the consultations, concluding the public consultation on 17 June 2022 and referring them to the European Parliament and the European Council for a two-month review.
In September 2022, the European Parliament voted by 314 to 310 for an amendment to the EU Renewable Energy Directive (REDII) that repeals the additionality requirement at EU level. The long-standing controversy over 'additionality' appears to be history, with green hydrogen producers being able to draw electricity from the grid, only having to demonstrate that they have entered into renewable electricity purchase agreements to meet the same amount of electricity demand, the hourly certification requirement for dedicated renewable energy sources to supply renewable hydrogen production no longer applying, and MEPs voting to amend the balance and reporting of electricity generated from renewable sources and hydrogen produced through electrolyzers, and adopted binding targets for renewable hydrogen and its derivatives in industry and transport. In response, the European Commission stated that it respects the European Parliament's decision to abolish the principle of additionality and will consider its effects in the context of ongoing legislative work. The European Commission will submit a revised enabling bill based on the amendment. While the result of the vote means that the European Commission will no longer be able to enforce additionality requirements, individual member states will still have the option to implement them or not.
ii. internal and external factors hindering EU hydrogen legislation
Within the EU, France and Germany, the core countries of the EU, disagree on the rules for hydrogen to achieve decarbonisation targets. the draft enabling bill published by the EU in May 2022 was not universally accepted, with France insisting that hydrogen produced using electricity from low-carbon nuclear power plants meets low-carbon criteria and should be given a green or low-carbon label to meet the EU's green financial classification criteria, and opposing the import Germany, on the other hand, stresses that only hydrogen produced from renewable electricity can be given the green or low-carbon label and that imports are allowed, while paying more attention to the role of Russia in this.
Germany has actively participated in the EU legislative discussions on hydrogen since the Scholz government took office, making the case in favour of a hydrogen economy to the European Commission, while also taking the initiative to promote the deployment of green hydrogen at home. When the European Commission presented a series of legislative proposals in December 2021 with a view to ending its "additionality" rules, the new German State Secretary Patrick Graichen submitted an open letter to the Commission criticising the Commission's actions at the time. In his letter, Graichen expressed concern about the lack of flexibility in the current legislative proposals, proposing that the additionality standard for renewable electricity producing renewable hydrogen be given greater flexibility and introduced as a progressive phase; that rules be developed to ensure that electrolyzers operate at least 5,000 hours per year at full capacity or approximately 57% of the time; that the international applicability of the standard be increased and that consideration be given to introducing A "general openness clause" to allow foreign hydrogen imports to be considered "green" if certain conditions are met, etc. Gretchen also asked the European Commission to postpone the rules until January next year and to pass on Germany's needs in the draft, and the proposal did not make significant new progress until the following month, with a clear focus on green hydrogen and sustainability. The CEO of Hydrogen Europe, Chazimakakis, believes that these German demands, made last year, are at the heart of the latest enabling act revealed by the European Commission and that Germany has a key role to play in European hydrogen legislation.
While the European Commission's enabling bill incorporates Germany's demands for green hydrogen, sustainability and imported hydrogen, France is also active in expressing its attitude. France has long been a strong supporter of nuclear power and expects it to be seen as meeting the requirements for renewable power to produce green hydrogen, and in a letter to the European Commission in September 2022, French Energy Minister Agnes Pannier-Runacher stated that attention should be paid to the carbon content of the hydrogen produced rather than the production carrier. At the same time, France, which has long opposed the strategy of importing hydrogen, arguing that it could create new dependencies and geopolitical risks, has not allowed imports to pass through; and with the target of importing hydrogen proposed in the May 2022 Renewable Energy Plan, where one of the corridors is expected to pass through the Southern Mediterranean, France's opposition leaves plans for an integrated European hydrogen pipeline infrastructure still in limbo.
Beyond the Franco-German divide, more coordinated cooperation within the EU is still needed to drive hydrogen legislation to fruition at EU level. Countries such as Sweden and Poland also see hydrogen development as primarily a domestic issue, with less consideration for international participation and cooperation; countries such as Italy also lack financial incentives and other drivers for renewable energy development; while Germany and Spain are actively discussing green hydrogen, Norway is still thinking more about blue hydrogen; countries such as France are strongly opposed to common imports of hydrogen, while Germany and the Netherlands, for example, have long attached importance to hydrogen imports and have even launched their own hydrogen diplomatic initiatives. While the current draft mainly reflects German interests, countries such as France and Poland oppose the draft.
At the same time, the European hydrogen industry as a whole is looking forward to a more rapid introduction of hydrogen legislation and expects an enabling act on additionality etc. at EU level. The Hydrogen Europe trade association published the Hydrogen Act: Towards the Creation of the European Hydrogen Economy on 7 April 2021 with the aim of coordinating and promoting hydrogen-related actions and legislation to make better use of the potential of hydrogen energy. The report creates a general framework vision for hydrogen legislation, including an infrastructure act to facilitate the gradual conversion of natural gas infrastructure to support hydrogen operations and a market act related to hydrogen products, and proposes a three-phase development roadmap for the creation of a hydrogen economy: a start-up phase from 2021-2025, a ramp-up phase from 2025-2035 and a market growth phase from 2035-2050. When the latest EU Green Hydrogen Standard rules were published in May 2022, there were also voices in the hydrogen industry who felt that the requirements in the draft were too stringent and complex and detrimental to the development of the hydrogen energy sector, with the German utility RWE stating in its statement that the bill imposed unnecessary strictures on the development of the hydrogen economy, and the force actively lobbied for a time in favour of the RED II amendment.
Jorgo Chatzimarkakis, CEO of Hydrogen Europe, believes that hydrogen has become central and central to Europe's energy transition and that legal certainty needs to be achieved as soon as possible, and that an enabling act regulating the principle of additionality is particularly urgently needed to facilitate the development of the hydrogen sector. When the amendments are adopted by the European Parliament in September 2022, while recognising that it may still take at least two years to translate the relevant principles into national legislation, Chazimarkakis maintains the high expectations of the European Hydrogen Energy Organisation for an enabling act on additionality, stressing the need for clearer and more accessible rules to facilitate the development of the hydrogen industry. He also pointed out that other countries are moving quickly to introduce relevant legislation during a period of stagnation in European hydrogen legislation, particularly in the US where the Inflation Reduction Act has significantly changed the competitive environment for the hydrogen industry so that renewable hydrogen produced in the US will be more competitive than that produced in Europe, and that if Europe does not act quickly, European hydrogen producers may lose patience and flow to the US, for example. Following the passage of the RED II amendment in September, while some renewable energy companies have argued that green hydrogen production could cannibalise European renewables, there is a wider view that the hydrogen sector will be less constrained and help to increase the use of hydrogen in the short term to combat the energy crisis.
III. Remaining remarks
It remains to be seen what changes to the enabling legislation will be proposed by the European Commission as a result of the amendments adopted by the European Parliament. The EU hydrogen legislation process is not yet complete and internal differences and external circumstances make hydrogen legislation still highly uncertain. What is certain is that Europe sees the production of green hydrogen as key to accelerating Europe's green transition in response to the energy crisis. In the short term, how the EU manages its internal differences, particularly between France and Germany, will be key to advancing EU hydrogen legislation to accelerate the development of hydrogen energy and the European energy transition.