H2 industry hopes for legal certainty soon

Without legal certainty, businesses cannot invest. But why haven’t European legislators succeeded yet in creating clarity for the hydrogen industry? And what is already known about the future sustainability criteria for green hydrogen?

Producing renewable hydrogen-based fuels is only worthwhile if they can be counted towards fulfilment of the minimum quota in the meaning of the EU’s Renewable Energy Directive (RED II). Currently, a binding minimum quota for the percentage of renewable energies in the total energy consumption only applies to the transport sector. However, mandatory quotas for the industrial sector are foreseeable. Once creditability is given, green H2 producers will be able to earn more money than with conventional gray hydrogen.

What is the state of affairs?

Whether a produced RFNBO (renewable fuel of non-biological origin) molecule is creditable depends on whether the sustainability criteria were met during its production. The EU Commission was tasked in the 2018 Renewable Energy Directive with setting sustainability criteria for RFNBOs by December 31, 2021 in two so-called delegated acts. The first of these is to stipulate the electricity obtainment criteria (Art. 27 (3)) and thus the criterion of renewability. The second defines the method for calculating greenhouse gas intensity (Art. 28 (5)) and thus the criterion of greenhouse gas saving.

The challenge for the EU Commission is immense. If the criteria are too strict, production costs could be so high that market ramp-up would be severely limited or only feasible with the help of high financial support. If the criteria are too soft, hydrogen as a climate protection technology would be rendered meaningless. If for example water electrolysis is run with the average electricity from the German grid instead of purely renewable electricity, however, this would produce higher overall greenhouse gas (GHG) emissions than the production of fossil (gray) hydrogen.

The delegated acts have caused real excitement in the course of their preparation. From the beginning, the industrial sector as well as EU member states and civil society organizations have paid them much attention. In addition to stakeholder workshops and consultations with officials, they were the subject of numerous open letters, expert opinions and discussions.

After the Commission had nevertheless, or precisely because of this, kept quiet for a long time, starting 2021 the first details on the shape of the legal acts were announced. Following initial reactions and particularly after the public consultation on the first official drafts in the summer of 2022, the Commission moved towards the industry’s concerns on a number of points, but has not however backed away from its basic interpretation of the criteria already laid down in the Directive. The current state of the criteria is as follows:

When is electricity obtainment deemed additional?

According to the Renewable Energy Directive, the “additionality” of the electricity used in the production of the fuel needs to be established (obtained from additional renewable energy generation capacity added to energy grid of EU member state). Furthermore, the production of the renewable electricity must be temporally and spatially correlated with its application. This means the electricity needs to be generated in the vicinity of the water electrolysis system and near to the time of the hydrogen production.

According to the current drafts of the European Commission, the delegated act on renewable electricity obtainment stipulates that the electricity for water electrolysis must be obtained through direct supply contracts (power purchase agreements, PPAs) in order to be counted. The renewable energy installations for the power outputs agreed in such a contract must have been put into operation no earlier than 36 months prior to the electrolyzer. They must also not have received any government funding, unless the installation was renovated (“repowered”) with investments comprising at least 30% of the investments for a new facility or unless it was a research or development project.

Furthermore, in a transitional phase up to January 1, 2027, softer criteria shall apply. In this time period, the electrical energy installations can have been subsidized. In Germany, for example, this would mean that post-EEG plants would be allowed to be used for PPAs. Plants in operation before January 1, 2027, according to the provisions of the transitional regulation, can continue to be used for up to ten years until the end of 2036 at the latest.

In addition, there is a provision for the use of so-called surplus power. Grid electricity used for the electrolysis that would have otherwise been curtailed can be credited as fully renewable. Still unclear is how the required proof of approval by the respective responsible transmission system operators can be brought forward.

Another exception is RFNBOs that are produced in (geographic) bidding zones with a previous year’s share of renewable energy (percentage of total sources for grid generation) of over 90% on average. In these bidding zones, the RFNBOs produced from grid power are considered entirely renewable and the electricity does not need to be purchased through PPAs.

These criteria are intended to ensure the additionality of electricity production. The basis for this was the desire of lawmakers to not divert the existing portions of renewable energy to meet the massive electricity demand of the hydrogen economy, but rather to create additional incentives for the expansion of renewable energies.

How will the temporal correlation be verified?

The temporal correlation of electricity generation and hydrogen production is considered to be fulfilled when electricity production and consumption lie within the same 60-minute interval. There is also a transitional rule for this criterion. Up until March 31, 2028, correlation within an interval of one quarter of a year is acceptable. To give producers more flexibility, electricity storage systems can be interposed, for which the same criteria shall apply. Furthermore, the non-transitional criterion automatically takes over once the electricity price at the market falls under 20 euros per MWh or under 0.36* emissions trading price (EU ETS).

When is there geographical correlation?

Geographical correlation is considered to be met if the electrolyzer and the electricity generating station are located in the same bidding zone. Alternatively, electricity may be sourced from adjacent offshore bidding zones. If no transmission constraints are present, the electricity can also be obtained at the same price from connected bidding zones. On this point, the EU member states are given room for maneuver, as they are allowed to enact further (stricter) criteria at national level to avoid grid congestion.

For the German federal government, this could be an option to avoid additional grid bottlenecks, which due to the good potential for renewable energies in northern Germany, could increasingly arise in consumption centers in southern Germany. For RFNBO producers, however, the member states’ interpretational leeway means additional uncertainty, as it could take more time for national regulations to be set and utilizable.

How is greenhouse gas intensity calculated?

RFNBOs are “low-carbon fuels” if they meet the minimum requirement of 70% greenhouse gas reduction compared to conventional fuels. In order to determine the greenhouse gas intensity, a binding, EU-wide uniform method of calculation is needed. The calculation methodology includes the value-adding steps of production, processing, transport, combustion and CO2 capture. It also sets the fossil reference value, compared to which the emissions (in CO2 equivalents) must be at least 70% lower, for hydrogen-based fuels. This reference value was set as 94 gCO2eq/MJ.

If RFNBOs are produced with renewable grid electricity (renewable according to criteria in Art. 27 (3)), the GHG intensity can be input as 0 gCO2eq/MJ. If grid electricity is used for water electrolysis in a way that is not compliant with the electricity obtainment criteria, then the GHG intensity is the CO2 intensity of the overall national power grid.

The more contentious aspects of the Commission’s proposals for this delegated act, however, are the CO2 sources that may be used for the synthesis of more complex RFNBOs, such as e-kerosene. Acceptable, according to the latest drafts, are biogenic sources such as CO2 from biogas plants, carbon capture from air (direct air capture, DAC), carbon capture from combustion of RFNBOs and recycled carbon fuels, and natural CO2 sources that would otherwise not be used.

CO2 capture from industrial sources such as cement works or power plants would be relatively cheap and is available. Capture from industrial sources, with the exclusion of electricity production plants, is therefore to be acceptable until December 31, 2040. To producers of RFNBOs, this has not been thought out far enough. However, the widely supported proposal to divide industrial sources into long-term avoidable and non-avoidable sources of CO2 (e.g. cement plants) was not taken up by the Commission.

What is to be expected next?

The proposals have varying appraisal among industrial stakeholders. While some can live with the proposed compromises or even call for stricter criteria, others find them unacceptable. Agreed by all is the need for the process to go faster: There must now be clarity as quickly as possible. This means that, firstly, the Commission should present the final versions as soon as possible and, secondly, that the member states should transpose the requirements into national law without delay after they appear. In Germany, this means the swift enactment of the 37th BImSchV, the 37th ordinance on the implementation of the German emissions reduction law (Bundes-Immissionsschutzgesetz).

In order to exert pressure on the Commission, the European Parliament has also intervened in the meantime. In a vote on the revision of the Renewable Energy Directive in mid-September 2022, the Parliament approved a motion tabled by Markus Pieper (European People’s Party) by 314 votes to 310. Accordingly, the Parliament is in favor of not defining the criteria for electricity obtainment in the form of delegated acts but rather in the main text of the Directive, in Article 27 (3). Furthermore, the principle of additionality is to be stricken. Unclear at this time is whether the Parliament will adhere to this position during the negotiations on the revision of the Renewable Energy Directive.

When clear criteria will be defined is still unclear. It would be possible for the Commission to present the final versions not long from now. The publication would be the starting signal for the two-month period during which member states can object to the draft by qualified majority vote. This period could optionally be extended by another two months. In this scenario, the criteria could be transposed into national law starting the second quarter of 2023 at the earliest.

Should trilogue negotiations between the EU Council, Parliament and Commission ensue in response to the Parliament’s proposals, the delegated acts of RED II would be in effect until the revision of RED II goes into EU law or until its national implementation (expectable starting 2025).

Another aspect could be clarified during the trilogues: So far, the criteria only apply to hydrogen-based fuels in the transport sector. However, it is possible that in the future they could also apply to other sectors, in particular the industrial sector.

As complex and controversial as the criteria may be, without them RFNBOs will not achieve their climate protection potential. Until an agreement is reached, the oft-invoked development of a hydrogen economy is at a standstill.

Author: Korinna Jörling, NOW GmbH, Berlin, Korinna.joerling@now-gmbh.de


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