Hydrogen investment - Balancing climate objectives and regulation
Almost every presentation we have heard on the hydrogen economy over the past year has contained the following message: one of the main, if not the main, factor holding back investment at the moment is the incomplete regulation on hydrogen.
What is the hydrogen legislation about?
Almost every presentation we have heard on the hydrogen economy over the past year has contained the following message: one of the main, if not the main, factor holding back investment at the moment is the incomplete regulation on hydrogen. In other words, investors are reluctant or afraid to make investment decisions because of the ongoing debate at the EU level on the different colours of hydrogen and the associated requirements. Indeed, hydrogen produced from renewable energy sources such as wind power is not automatically green hydrogen. In addition to the origin of the electricity, there are a number of other requirements that are proposed as preconditions for hydrogen to be called green in the sense of EU legislation.
But what does the colour of a colourless gas matter anyway? From the point of view of the EU's climate objectives, it is not irrelevant what kind of energy is used to produce hydrogen. Hydrogen production itself is nothing new. What is new is the possibility of replacing fossil fuels with hydrogen or hydrogen-based fuels, especially in sectors that cannot be efficiently electrified, such as industry and heavy transport. The potential of hydrogen to store electricity generated from renewable energy is also essential, and thus brings much-needed flexibility to the energy system. From an emissions reduction perspective, it is therefore essential that hydrogen is produced from renewable energy and that sufficient renewable energy is available for hydrogen production and other needs. The aim of the regulation is to ensure that the huge electricity consumption of hydrogen production does not take up too much of the existing renewable energy production and lead to a situation where there is ultimately not enough renewable energy to supply the grid.
The primary purpose of the hydrogen legislation is therefore to ensure that hydrogen production reduces the use and emissions of fossil fuels. The challenge for regulation is to strike a balance between the most ambitious climate targets possible and regulation that encourages investment. The proposals put forward for the content of the regulation have so far failed to strike a satisfactory balance and the longer the wait for a final outcome, the greater the risk of investment flight, particularly to the US. The Inflation Reduction Act of August 2022 will attract investment to the US, in part because of subsidies for clean hydrogen production.
Why does the origin of hydrogen matter?
Green hydrogen has a special role to play in meeting the climate targets of the RED II Renewable Energy Directive, which came into force in 2018. RED II sets a binding EU target of at least 32% of the total final energy consumption originating from renewable sources in the Union in 2030, and at least 14% of energy used in transport being renewable by 2030. In addition to RED II, Member States have set their own national commitments to meet the Union's overall target. Finland has announced its target of at least 51% renewable energy in general and 34% in the transport sector in 2030. The transport target has been implemented in Finland by the Distribution Obligation Act, which imposes an obligation on transport fuel distributors to supply renewable fuels for consumption every year. The share of renewable energy in Finland's total energy consumption is monitored through, among other things, the guarantee of origin system.
The regulation of hydrogen production is part of the ongoing reform of the RED II Directive. The Commission's proposal would increase the share of renewable energy in the Union's total final energy consumption to 40% in 2030 under the updated RED II. Transport targets would also be revised: Member States could either choose between a global reduction target of at least 13% in greenhouse gas intensity by 2030 or commit to at least a 29% renewable energy share regarding the total final consumption in the transport sector by 2030.
The Commission has also proposed an amendment to the Directive to increase the share of renewable energy in industry. If implemented, the amendment would include a target to increase the share of renewable energy in final energy use in industry by a minimum average annual increase of 1.1 percentage points by 2030. In addition, the share of non-biological renewable fuels (so-called RFNBOs, such as green hydrogen and fuels further processed from green hydrogen) should reach 50% of the hydrogen used in industry by 2030. In addition to the renewable energy targets, industrial products should no longer be allowed to be labelled or presented as being produced with renewable energy or RFNBOs without indicating the percentage of renewable energy or RFNBOs used in their production and distribution. Therefore, clarity and predictability in the legislation regarding the production of hydrogen and derived fuels is of paramount importance for operators considering investments.
In addition to RED II, the taxonomy, the EU's green investment classification system, should not be forgotten. The requirements on the origin of hydrogen will also indirectly apply through the taxonomy, although RED II and the EU taxonomy regulation are in themselves different entities.
What to expect?
The hydrogen legislative package is currently under discussion in the Council and Parliament of the European Union. The "gas package" on hydrogen markets and infrastructure is also being prepared at the EU level, as is the RED II Directive. The Commission has previously estimated that the reform of the RED II Directive will be ready in the first quarter of this year, but the timetable given should be treated with caution. On a positive note, the Swedish Presidency of the EU Council in the first half of 2023 has set prioritising green transition packages as a target.
Due to the rapid development of the energy sector, legislation in the energy sector is also constantly evolving. In addition to the regulation under preparation at the European level, attention should also be turned to national legislation and the coordination of the various areas of legislation. Identifying the key regulatory requirements is a critical part of project development.
Original article is published on Hannes Snellman’s website at:
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.