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Seeking to achieve the wide-scale deployment of clean hydrogen in Europe across different sectors is a key priority for the European Commission and one of the main deliverables of the European Green Deal to achieve climate neutrality by 2050.
In 2020, the European Commission published its hydrogen strategy for a climate neutral Europe (COM/2020/301 final), its energy system integration strategy (COM/2020/299 final) and launched a European Clean Hydrogen Alliance which it has since underpinned with various policy and legislative measures.
Whereas it became clear from the Commission’s hydrogen strategy that there is a general preference for “green” hydrogen from renewable sources, low-carbon hydrogen (like “blue hydrogen” from fossil fuel sources using carbon capture and usage/storage (CCU/S) technologies or “pink” hydrogen produced with nuclear electricity) are likely to play a role in the foreseeable future – at least during the phase of market ramp-up.
The Commission considers that the two main lead markets for hydrogen end-user demand will lie in industrial applications (e.g. replacing carbon-intensive hydrogen in refineries, the production of ammonia and methanol and replacing fossil fuels in steel making) and transport (in particular for heavy duty vehicles where electrification is more difficult). It should be born in mind that “hydrogen” is often referred to what in fact are hydrogen derivates and products, like ammonia, ethanol, methanol and different types of e-fuels.
The Commission’s hydrogen strategy was certainly ambitious, aiming for the production of up to ten million tonnes of green hydrogen and 40GW of electrolyser capacity within Europe by 2030 (with one million tonnes of green hydrogen and 6GW of electrolyser capacity by 2024). It, however, did not have a special focus on importing hydrogen products.
This changed with the gas security crisis triggered by the Russian invasion into Ukraine. In May 2022 the Commission published its REPowerEU Plan (COM(2022) 230 final) accompanied by a staff working paper (SWD/2022/230 final) for a hydrogen accelerator setting a target of 10 Mt of domestic renewable hydrogen production and 10 Mt of renewable hydrogen imports by 2030. Accordingly, installed electrolyser capacity was set to rise from 44MW to 65 MW in 2030 compared to previous planning.
Given that renewable hydrogen needs new production capacity and dedicated transport infrastructure the Commission expects renewable hydrogen only to start to contribute significantly after 2027.
The Commission also states that electrolyser manufacturing capacity in Europe must be scaled-up significantly to meet the expected demand for renewable hydrogen production, notably to an annual electrolyser manufacturing capacity in Europe of 17.5 GW by 2025 (and further in the following years) requiring investments of up to €2bn.
Regarding the different sectors the general targets of the strategies are translated into sector specific targets, e.g. through a revision of the Renewable Energy Directive (RED II to RED III), as part of an extensive legislative package called “Fit for 55” (Ff55) from 2021 which were partly adjusted with the REPowerEU targets during the legislative process. For example
When it comes to supporting hydrogen projects the role of the European Union is two-fold: One the one hand it sets the framework (of the hydrogen policy of its member states – especially in the field of state aid – but also offers own support schemes for stakeholders along the hydrogen value chain, e.g. under the Innovation Fund. Many of the policies and instruments are interlinked on EU and national level. To navigate the funding landscape the Commission publishes a Hydrogen Public Funding Compass.
As a basic rule, EU Member States must notify all measures constituting state aid to the European Commission and can only implement them after the Commission's approval. This is to ensure that the state aid measure – be it direct financial support or an indirect measure like e.g. a tax reduction scheme – does not threaten or distort competition in the internal market or affects trade between Member States.
An exemption from the need of notification applies if a state aid measure or scheme is in scope of the General Block Exemption Regulation (GBER). The GBER exempts certain categories of state aid from the requirement of prior notification to the Commission if they fulfil certain criteria and do not surpass certain thresholds. Since its last amendment in July 2023 the GBER makes specific reference to state aid for projects related to renewable and low-carbon hydrogen, regarding production, transport and use of hydrogen.
National state aid not covered by the GBER will be evaluated by the Commission in light of Art. 107 AEUV. To this end, the Commission will different non-binding guidelines it has given itself into account. Aid for renewable hydrogen projects or schemes will in many cases fall under the categories described in its Climate, Environmental protection and Energy Aid Guidelines (CEEAG) which since its last revision also cover aid for the reduction and removal of greenhouse gas emissions, including infrastructure projects for hydrogen and other low-carbon gases.
Member states wishing to support hydrogen projects on their territory may notify these projects as Important Projects of Common European Interest (IPCEI) to the Commission. The projects need to prove that they overcome market failures, enable breakthrough innovation in key sectors and technologies and infrastructure investments, with positive spill-over effects for the EU economy at large. Relating to hydrogen, 22 member states and Norway have applied with joint lists of hydrogen projects in four so-called waves addressing the entire value chain in the field of hydrogen and fuel cell technology, namely in technology (Hy2Tech), industry (Hy2Use), infrastructure (Hy2Infra) and mobility & transport (Hy2Move).
The IPCEI Hydrogen was launched at the beginning of 2021 to support the market ramp-up of green hydrogen. The numerous projects of companies from 22 EU Member States (plus Norway) were bundled. Funded by the EU Member States, the Commission grants an exemption from the prohibition of state aid in the case of an IPCEI if there is insufficient private innovation funding for a project of European interest due to significant risks.
The €34 billion Connecting Europe Facility (CEF) aims to build, develop, modernise and complete the trans-European networks in the transport, energy and digital sectors and to facilitate cross-border cooperation in the field of renewable energy. It includes funding for
In March 2023 the Commission presented its communication on a Hydrogen Bank (COM(2023) 156 final) as a key instrument of direct EU support for the hydrogen sector. The Hydrogen Bank is built on four pillars, two of which provide funding for producers of RFNBOs:
The first tender round with a support volume of 800 mio. € from the EU Innovation Fund was launched in November 2023 with bids due on 8 February 2024. According to the call document for the first round of tenders.
Qualifying proposals will be assessed and ranked from lowest to highest bid price and will be awarded in that order until the available budget of € 800 million is exhausted.
If a bid is not awarded under the European wide auction, the bid may still be win an award if the project is located on the territory of an EU member state that decided to give funding and use the Hydrogen Bank to provide an Auction as a Service (AaaS) for them. In this process countries may allocate national budgets to fund projects located on their territory. The information on not awarded projects will be passed on to the participating countries which are responsible for awarding, contracting and monitoring project support under the national budgets.
In its 2020 Hydrogen Strategy the EU Commission set out a list of 20 action points, which it declared to be fulfilled in 2022. And indeed, many legislative projects at EU level have been introduced since then, some of which have already crossed the finish line, while others have not. Finally, one has to bear in mind that not all EU legislation (like directives) is directly applicable in the member states but needs to be transposed into national law. Even directly applicable regulations often needs to be accompanied by national legislation. When, for example, the RED II sets general sector targets for RNFBOs or emission reductions it is up to the member states how to implement these – instead of requiring stakeholders to fulfil certain quota they are free to implement a range of policy instruments which help achieve RED II targets.
Perhaps most notably, in 2021 the Commission presented its 'Fit for 55' (Ff55) package, which included a series of legislative and policy proposals to enable the EU to meet its commitment to reduce greenhouse gas emissions by 55% by 2030 compared to 1990 levels. Although not exclusively focused on clean hydrogen, the Ff55 package included a number of legislative proposals with the potential to significantly boost the development of the clean hydrogen economy in the European Union:
Currently, one of the main pieces of EU legislation relevant to clean hydrogen is the recast Renewable Energy Directive (EU) 2018/2001 (so-called RED II). RED II defines RNFBO as fuels “the energy content of which is derived from renewable sources other than biomass” (Art. 2 no. 36), requires that the electricity used to produce the RNFBOs stems from “additional” capacity (Art. 27) and demands that the life-cycle emissions of RFNBOs must achieve GHG emission savings of at least 70% (Art. 25) and are documented through a mass-balancing scheme (Art. 30). Besides, EU Member States are obliged to issue guarantees of origin for producers of energy from renewable energy sources, including for RFNBOs (Art. 19).
With Ff55 the Commission proposed an amendment of the RED II which will besides substantially raising the overall goal of renewable energy sources in the system, extend the definition of renewable fuels of non-biological origin (RNFBOs – i.e. “green” hydrogen products) from the transport sector to other industry sectors, introduce a targeted 50% share for RFNBO for hydrogen used in the industrial sector by 2030 as well as a common targeted 5.5% share of RFNBOs and biofuels in the transportation sector. After tough negotiations the final text of the amending directive (EU) 2023/2413 came into effect on 20 November 2023. The Member States need to implement the changes introduced with the amended directive (now RED III) by 21 May 2025.
In February 2023, the Commission published two delegated regulations that provide more details on the definition of RFNBOs in the RED.
The first delegated regulation (EU) 2023/1184 sets out detailed rules to determine when electricity used to produce hydrogen is deemed to be renewable taking into account the requirements in RED II or when electricity can be considered to be fully renewable, including
In particular, the first delegated regulation stipulates that (after a phase-in period) the electricity for the electrolysis must come from clearly identifiable renewable energy installations that are not much older than the electrolyser, and that the electricity and hydrogen must be produced in the same time periods. For more details on the requirements for renewable electricity used to produce RNFBOs please see our blogpost.
The second delegated regulation (EU) 2023/1185 contains details on how to calculate the necessary emission reduction of 70% compared to a fossil counter-part over a life-cycle of an RFNBO, including rules on admissible carbon sources for the production of hydrogen products with carbon components like methane or ethanol. While the second delegated regulation allows for the use of carbon derived from direct air capture, geological or biogenic sources (i.e. biofuels or biomass complying with the sustainability requirements under RED II) carbon captured from industrial processes using non-sustainable fuels is only permitted before 2036 (for the production of electricity) or before 2041 (for other uses) under the condition that the emissions were subject to a “effective carbon pricing” system in the country of origin – which might prove difficult for producers outside the EU ETS.
Although the delegated regulations have provided more certainty for market players, a number of questions remain when it comes to the details of developing a hydrogen project. The Commission published a Q&A paper in July 2023 that addresses some of these questions. However, uncertainties remain and it will be some time before the production of the different types of RNFBOs becomes a commodity.
EU Member States are obliged to issue guarantees of origin (GO) for producers of energy from renewable energy sources, including for RFNBOs (Art. 19 RED II/III). GOs have the purpose to demonstrate to final customers the share or quantity of energy from renewable sources in the energy supplied to them. GOs can be traded separately from the commodity they have been issued for, also between member states (book and claim). However, the details of the GO schemes are to be defined by the Member States themselves which may e.g. decide to issue GOs also for energy from non-renewable sources or whether a GO shall be issued for energy that received state aid under a support scheme (if so, the worth of the GO needs to be accounted for in the support scheme).
GOs are however, not designed to prove that hydrogen products qualify as an RFNBO, which is necessary if Member States want to prove that they reached their overall renewable and specific RFNBO quotas. Art. 25 to 30 RED II (resp. 25 to 31a RED III) stipulate a EU-wide certification system allowing for mutual recognition of RFNBOs produced in different places all over the world including inside the EU for producers of RFNBO needing to prove the renewable property e.g. for purposes of the EU ETS, to fulfil emission savings quotas or the different EU or national support programmes.
The RED II/III foresees that the Commission officially recognises private or national certification systems to become so-called voluntary schemes. Approved certification bodies will then be able to confirm conformity of an RFNBO with REDII/III requirements under such voluntary scheme. While for biofuels already several voluntary schemes are in place, this is not yet the case for RFNBOs. However, in November 2023, two schemes covering RFNBOs were pending for approval by the Commission, namely the CertifHy scheme and the REDcert-EU scheme which has already been recognised by the Commission as a system for the certification of sustainable biomass.
Going forward, proofs of sustainability under a RFNBO voluntary scheme are going to be stored in a Union Database which is currently being established (starting with biofuels) to trace RFNBOs over their life cycle (starting from their point of production to their first placement on the market or feed-in to the gas grid) and avoid double-counting when traded across borders. Other than for GOs, no book and claim system applies, so proofs of sustainability and RFNBOs cannot be traded separately (mass balancing system).
In the field of transport hydrogen products are going to play a role especially for heavy duty road transport but also in shipping and aviation sectors. The Ff55 also saw a reform of different transport related legislation:
As part of the Ff55 package, the European Commission also presented legislative proposals for a gas market reform in December 2021 by recasting both the gas market directive as well as the gas market regulation. The proposals include an introduction of a European regulatory framework for the future hydrogen market and pure hydrogen network regulation which will bring a definition of low-carbon gases which would apply to hydrogen products not covered by RED II/III and for which a 70% GHG emission saving threshold also will apply. The Commission will need to enact a delegated act for calculating the threshold which will determine which kind colour of hydrogen will be able to fulfil the 70% threshold (nuclear, or grid electricity, CCU/S). The reform proposals also contain rules on blending of hydrogen into natural gas grids and introduce special rules for pure hydrogen networks, e.g. for unbundling, third party access and network planning. For more details on the proposed amendments please see our blogpost. In November 2023, Council and Parliament reached an informal agreement on the recast Gasmarket Directive which would distinguish between hydrogen grid operation on distribution and transport level and would in general weaken the unbundling rules as originally proposed by the Commission while negotiations on the recast of the Gasmarket Regulation were still ongoing.
Next to (and to a certain degree interlinked with) the definitions of low-carbon hydrogen in the gas market package and RNFBOs in the RED sits the definition of “sustainable hydrogen” which is important under the Taxonomy Regulation for the disclosure of companies subject to reporting and the labelling of financing products. For hydrogen production meeting the GHG thresholds outlined in Section 3.10 of Annex I of the Climate Delegated Act under the Taxonomy Regulation the production of hydrogen products is considered to be “sustainable”, irrespective whether the energy used can be deemed renewable or not. Notably for electricity used to produce hydrogen fulfilling the requirements of the Additionality DA I under RED II/III a carbon intensity of zero is applied under the Taxonomy DA. Read more on the Taxonomy Climate DA here.
A robust pricing signal on CO2 emissions will positively impact the business case for RFNBOs. The EU has been putting a price on CO2 emitted from certain sectors and products (including hydrogen) inside the EU since 2005 within the EU Emission Trading System (EU ETS). To prevent the movement of emission intensive industries to countries with lower or no costs on CO2 (“carbon leakage”), the EU ETS grants free allowances to certain emitters.
Following the latest changes to the European Emissions Trading System (EU ETS) the scope for free allowances for hydrogen from different sources was broadened and the a Carbon Border Adjustment Mechanism (CBAM) introduced which will gradually replace the system of free allowances under EU ETS: Since October 2023 importers of certain goods and selected precursors (incl. steel, fertilizers and hydrogen) have to report the CO2 emissions associated with their products and as of 2026 certain imported commodities pay for the direct and indirect emissions caused by their products based on a life-cycle approach.
With its Ff55-package the Commission also proposed to allow member states to reduce or eliminate taxes on renewable hydrogen under the Energy Taxation Directive (ETD); this legislative process however, has not advanced further lately.
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