Clarity needed for hydrogen rules — Current status of the regulation guiding the renewable hydrogen production
Julia Ranta, Associate, Hannes Snellman Attorneys Ltd
Meri-Katriina Pyhäranta, Counsel, Hannes Snellman Attorneys Ltd
Hydrogen regulation is currently subject to several legislative processes at the EU level that are expected to bring some long-awaited clarity to the various hydrogen market participants. The most heated discussion persists around the revision of the Renewable Energy Directive (EU) 2018/2001 (the “RED II”) and the so-called additionality rules, which specify the conditions under which hydrogen and hydrogen-derived fuels can qualify as renewable. This blog post discusses the current status and the most recent proposals related to the regulation on the production of renewable hydrogen at the EU level complimented with certain Finnish-specific remarks.
The RED II, which entered into force in December 2018, establishes the legal framework for the promotion of energy from renewable sources in the EU. To increase the share of renewables in hard-to-abate sectors, the RED II also introduced a new non-biogenic fuel category, renewable fuels of non-biological origin used in the transport sector (the “RFNBOs”) to recognise and create rules for renewable hydrogen and renewable hydrogen-derived fuels, both of which are currently envisaged to have a pivotal role in decarbonising the economy in the future. Although RED II defines RFNBOs as fuels used in the transport sector, the RED II revision proposal aims that RFNBOs become of wider relevance in all sectors, especially in industry and buildings, by dropping the transport label from the definition.
Following the Parliament’s vote on 14 September 2022 to adopt its negotiation position on the revision of the RED II and the additionality rules, the EU institutions are currently negotiating the final compromise and legislative text in trilogue negotiations between the EU co-legislators. The logic behind the additionality rules is to incentivise the deployment of new renewable energy production capacity to be used in the RFNBO production instead of diverting the existing capacity to electricity intensive renewable hydrogen production and thus, increasing indirectly the deployment of non-renewable electricity.
Determining the Share of Renewable Electricity in the Production of RFNBOs
In general, the RED II sets forth three options to determine the share of renewable electricity used in RFNBO production in order for the fuel to qualify as renewable: the renewable grid electricity, direct connection, and average grid electricity options. Further conditions and requirements are still to a large extent unclear, and a lot has moved back and forth at the EU level since the adoption of the RED II. We have discussed the importance of qualifying hydrogen as renewable in this blog post.
The RED II grants the Commission a power to adopt two delegated acts providing key rules for the sourcing of electricity in the RFNBO production as well as a methodology for assessing and accounting greenhouse gas emission savings from RFNBOs. After years of speculation and debate around the missing complementary rules, the first proposals were finally published in May 2022 leading to a massive amount of critical feedback. The Parliament took different, less stringent approach when it voted on its position on the revision of RED II on 14 September 2022. The Parliament has proposed to insert the additionality requirements directly into the respective article of the RED II, and to remove the delegation of powers from the Commission in this respect. Overall, the proposed additionality framework is quite substantially looser and simpler than the one proposed by the Commission. As said, the rules are still open and thus, we would expect the final outcome to be somewhere between these two approaches.
Renewable Grid Electricity
The first option, which is expected to have the most relevance at least in the near future, allows RFNBO producers to count the electricity taken from the grid as fully renewable. In this option, the fuel producers conclude power purchase agreement(s) (the “PPAs”) with operators producing renewable electricity at least for the amount of electricity that is claimed as fully renewable, and the electricity claimed is effectively produced in these installations. The guarantees of origin granted for the renewable electricity are transferred to the purchaser together with the renewable electricity under the PPAs.
The Commission’s draft delegated regulation strongly includes the element of additionality. It provides that the installations generating renewable electricity should have (i) entered into operation not earlier than 36 months before the RFNBO production facility (and if production capacity is added to the installation generating renewable electricity, the addition should take place no later than 36 months after the initial installation came into operation) and (ii) have not received support in the form of state aid.
In addition to the additionality requirement, the draft delegated regulation also provides detailed rules with respect to geographical and temporal correlation between the production and consumption of the renewable electricity. In terms of geographical correlation, the installation generating renewable electricity needs to be located in the same bidding zone or adjacent offshore bidding zone as the electrolyser, or in a neighbouring bidding zone with certain further requirements. In terms of temporal correlation, the draft delegated regulation provides that RFNBOs should be produced either
(i) during the same one-hour period as the renewable electricity under the respective PPA, or
(ii) from renewable electricity obtained from a storage asset located behind the same network connection point as the electrolyser, and that has been charged during the same one-hour period in which the electricity under the PPA has been produced, or
(iii) during a one-hour period where the clearing price of electricity resulting from single day-ahead market coupling in the bidding zone is lower or equal to EUR 20 per MWh or lower than 0.36 times the price of European Emissions Trading System’s emission allowance.
As an exception to the above-mentioned additionality and temporal correlation requirements, in the event electricity is consumed to produce RFNBOs during periods of downward redispatch, i.e. when renewables are curtailed, an equivalent amount of electricity may also be counted as fully renewable. However, we note that it is not entirely clear how this exception will be operationalised.
The most significant difference to the Commission’s delegated regulation is that the Parliament’s report does not feature wording requiring the electricity used in the RFNBO production to be new or additional. Instead, it does not impose any temporal requirements for the timing of the first deployment of the installation producing renewable electricity in correlation to the RFNBO production. Further, the receipt of public funding to the respective renewable electricity installations is allowed.
However, similarly to the Commission’s approach, the Parliament’s report also includes the elements of geographical and temporal correlation. The geographical correlation requirement is met if the installation generating renewable electricity is located in the same or neighbouring country as the electrolyser or in an offshore bidding zone adjacent to those. As regards the temporal correlation, the balance between the renewable electricity purchased through one or several PPAs and the amount of electricity taken from the grid to produce the fuel is be achieved on a quarterly basis in order for the production to be fully qualified as a RFNBO. The Commission has proposed to have the power to assess the temporal correlation applicable after 2030, and it shall either be a month, quarter, or a year.
Direct Line Option
The second option provides that electricity obtained from a direct connection to an installation generating renewable electricity may be fully counted as renewable in the RFNBO production, provided that the installation generating renewable electricity (i) comes into operation after or at the same time as the installation producing the RFNBOs and (ii) is not connected to the grid, or if it is, evidence can be provided that the electricity has been supplied to the RFNBO production facility without taking electricity from the grid. The wording of the direct line option entails in practice that there is an actual direct connection between the installation generating the renewable electricity and the RFNBO production facility.
The delegated regulation proposal provides that RFNBO producers adopting the direct line option need to provide evidence that (i) the installation generating renewable electricity came into operation not earlier than 36 months before the RFNBO production facility (or in case of an added production capacity, the addition takes place no later than 24 months after the initial installation came into operation), and (ii) if the installation producing electricity is connected to the grid, a smart metering system measuring all electricity flows shall show that no electricity has been taken from the grid to produce RFNBOs.
The Parliament has proposed in its report to revise the current wording by specifying that the RFNBO production facility may be directly connected to one or several installations generating renewable electricity. Similarly as to the renewable grid electricity option, the Parliament’s report does not feature any additionality requirement with respect to the electricity used in the RFNBO production.
With regard to the direct line option, we would like to note that in Finland operating electricity network, such as a power line connecting a power plant to an electricity consumption place, is subject to the Finnish Electricity Market Act. Therefore, the feasibility of this option should always be evaluated as part of the overall regulation concerning electricity network.
Average Grid Share Option
The third option provides that the share of renewable electricity used in the production of RFNBOs is determined by the average share of electricity from renewable sources in the electricity mix of the country in which the RFNBOs are produced, measured two years before the production year in question.
With respect to the average share option, the Commission’s proposal provides that (i) the installation producing RFNBOs shall be located in a bidding zone where the average proportion of renewable electricity exceeds 90% in the previous calendar year and (ii) the production of RFNBOs shall not exceed a maximum number of hours set in relation to the proportion of renewable electricity in the bidding zone during a year. In practice, this would mean that classifying the fuel as an RFNBO requires that the share of renewable electricity has exceeded 90% of the overall electricity production in that particular bidding zone in the previous year. The Parliament’s report did not include such 90% requirement.
As regards the implementation of this option in Finland, we note that due to high share of nuclear power in the Finnish electricity mix, this scenario seems to be unrealistic at least in the foreseeable future.
Grace Periods and Grandfathering
To allow the development of technology and to facilitate the ramp up of the hydrogen economy, the Commission has proposed certain transitional period rules until 31 December 2026. The renewable grid electricity option’s additionality criteria and the public funding restriction shall apply from 1 January 2027 onwards. Moreover, until 31 December 2026, the temporal correlation requirement is increased from one hour to one calendar month with certain exceptions.
In addition, the so-called grandfathering clause proposes that the additionality criteria do not apply at all to the initial production capacity of RFNBO production facilities that come into operation before 1 January 2027. In practice, this would mean that RFNBO producers, if such facilities would come into operation by the end of year 2026, could conclude PPAs with any installations generating renewable electricity regardless of the time those installations have started operating.
What to Expect?
As a conclusion, finalising the legal framework for the production and use of green hydrogen is a crucial step to enable the development of hydrogen economy. Although the drafts released thus far have already shed some light on the forthcoming requirements for determining the share of renewable electricity in RFNBO production, there is still a large degree of uncertainty involved until the final compromises have been reached.
On 1 January 2023, Sweden took over the presidency of the Council with the intention of finalising the trilogue negotiations on the revision of the RED II. On 7 February 2023, the EU co-legislators will gather next for the fourth trilogue meeting.
Original article is published on Hannes Snellman’s website at https://www.hannessnellman.com/news-views/blog/clarity-needed-for-hydrogen-rules-current-status-of-the-regulation-guiding-the-renewable-hydrogen-production/
Hannes Snellman advises clients on a regular basis with respect to inter alia the permitting, construction, operation and financing of industrial projects. Our experts at Hannes Snellman are closely following the development of the hydrogen economy and the related legislative regime, and offer legal trainings on the matter. Please contact us should you wish to discuss any related questions.