Part 2

Hy-Politics – political considerations shaping the evolution of clean hydrogen policy

Summary of the use case in the EU

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

• 42% of the hydrogen used in certain industry sectors (including ammonia and chemicals production, oil refining and steel manufacturing) shall stem from renewable sources in 2030. This share shall rise to 60% by 2035 according to the latest agreement on RED III. The even higher level of ambition under REPowerEU aiming at a 78% share renewable hydrogen consumed in industry could not be translated into legislation (yet);

• Renewable fuels of non-biological origin (RFNBOs - the technical term for “green” hydrogen products in RED II) shall represent a share of at least 1% in transport by 2030, backed by a 1.2% sub-quota for RFNBOs in maritime transport. It is noteworthy that multipliers of 2 for road transport and 1.5 for aviation and maritime transport apply when calculating the fulfilment of the targets, effectively reducing the amount of RFNBOs to deployed to the transport sector but also making it more attractive;
• Hydrogen refuelling infrastructure, capable of serving both cars and trucks, must be in place by 2030 in urban areas and every 200 km along the core TEN-T network.

• After 2035, a new EU Regulation on CO2 standards for cars and vans commands a zero-emissions target for new passenger cars and light commercial vans. While many expect that this will lead to a wide deployment of electric vehicles, vehicles with internal combustion engines running on fuels proving GHG savings of at least 100% are in principle also able to fulfil the zero emissions target of the regulation.

• According to the proposal for a recast of the gas regulation, gas transmission system operators shall accept gas flows with a hydrogen blend of up to 5% by volume at interconnection points between Union Member States in the natural gas system thus. Although replacing natural gas with hydrogen may help decarbonising the natural gas network, it is not the Commission’s favourite option who would prefer the use of hydrogen in its pure form but leaves the option of admixture of hydrogen into the natural gas networks to the Member States.  

Part 5

Hy-ly Volatile? making it safe, sustainable and transportable

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:

Renewable Energy Directive (RED)

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.

Delegated Acts on Hydrogen under RED

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

• the so-called additionality requirement which demands that RFNBOs should in principle source the electricity they use from new RE plants to avoid diverting renewable electricity from other uses which would then have to divert to emission-intensive gas or coal-fired power plants;

• differentiating between RFNBO producers that are connected via a direct line to an RE plant and RFNBO producers that source renewable electricity from the grid.

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.

Certification and guarantees of origin

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).

Transport: AFIR/ReFuelEU/FuelAviationEU

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:

• With effect of 13 April 2023 the new Regulation (EU) 2023/1804 on the deployment of alternative fuels infrastructure (AFIR) will apply. It foresees a target of one publicly accessible hydrogen refuelling station available every 200 km along the TEN-T network and each urban node by the end of 2030 to allow for the seamless travel of hydrogen-powered light-duty and heavy-duty vehicles throughout the Union. Such hydrogen stations should at least serve gaseous hydrogen at 700 bar and allow for ad hoc refuelling accepting electronic payments;

• The Regulation (EU) 2023/2405 on ensuring a level playing field for sustainable air transport (ReFuelEU Aviation) requires aviation fuel suppliers to blend sustainable aviation fuels (SAF), including RFNBO and low-carbon fuels in their fuels in increasing amounts from 2025 onwards. Air craft operators are obliged to refuel their aircrafts at EU airports and airport operators have to facilitate the access to SAF:

• The Regulation (EU) 2023/1805 on the use of renewable and low-carbon fuels in maritime transport (FuelEU Maritime) introduces limits on the GHG intensity of energy used on board by of ships above 5,000 gross tonnage arriving at, staying within or departing from ports under the jurisdiction of an EU Member State. If RFNBOs are used on board by a ship a multiplier of ‘2’ can be used when calculating the yearly average GHG intensity of the energy used on board.

Gas market reform package

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.

Taxonomy Regulation

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.

EU ETS and CBAM

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.

Taxation

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.