New EU rules adopted for renewable hydrogen
On 13 February 2023, the Commission adopted new rules defining the conditions under which hydrogen and hydrogen-derived fuels or other energy carriers may be considered renewable. The adopted delegated act supplements the Renewable Energy Directive (the “RED II”) by establishing a methodology setting out detailed rules for the production of renewable liquid and gaseous fuels of non-biological origin (the “RFNBOs”). This article discusses the key considerations of the delegated act that are worth noting by the hydrogen and energy market participants.
Since the adoption of the RED II, heated discussion around the detailed rules for electricity used in the production of RFNBOs has persisted between the EU co-legislators and various economic actors. Compared to the Commission’s draft published in May 2022, the newly adopted version of the delegated act includes certain concessions, for example, as regards the transition period rules. In addition, the adopted version introduces a new option to regard electricity as fully renewable making it possible to take the low emission intensity of a bidding zone’s electricity into account. However, the requirements laid down in the delegated act are still far stricter than the Parliament’s view adopted in September 2022 in connection with its vote on the revision of the RED II. The adopted rules still include the requirements of additionality and temporal and geographical correlation.
The delegated act is binding in its entirety and is directly applicable in the member states. In addition, the rules set out in the delegated act apply regardless of whether the RFNBOs are produced inside or outside the EU’s territory. Therefore, to count towards the EU’s renewable energy targets, the requirements set forth in the delegated act are to be complied also by operators producing RFNBOs for example in the US or elsewhere in third countries and transporting them to the EU.
The delegated act provides different kinds of requirements depending on whether the electricity is obtained via a direct connection between an installation generating renewable electricity and an RFNBO production facility or whether the electricity is taken from the grid. These requirements are discussed below. The fuel producers may, however, combine different options for counting electricity in a flexible way, provided that only one option is applied for each unit of electricity input, i.e. each unit of electricity used in the RFNBO production can be documented to match with one of the options.
Similarly as proposed by the Commission in its initial draft published in May 2022, electricity obtained from a direct connection to an installation generating renewable electricity may be counted as fully renewable in the RFNBO production, provided that the fuel producer provides evidence on each of the following:
(i) the installations generating renewable electricity are connected to the installation producing RFNBOs or the renewable electricity production and the RFNBO production take place within the same installation;
(ii) the installation generating renewable electricity came into operation not earlier than 36 months before the installation producing RFNBOs. If more RFNBO production capacity is subsequently added in the installation producing RFNBOs, such added capacity is considered to be part of the existing installation. However, this requires that such extra capacity is added at the same site as the initial installation, and the addition takes place no later than 36 months after the initial installation came into operation); and
(iii) the installation is not connected to the grid, or if it is, a smart metering system measuring all electricity flows show that no electricity has been taken from the grid to produce RFNBOs.
Electricity Taken from the Grid
If electricity used for the production of RFNBOs is taken from the grid, the following options shall be complied with.
Average proportion of renewable electricity exceeds 90% in the bidding zone
In bidding zones where the share of renewable electricity already represents a dominant share, i.e. more than 90% of the bidding zones’ electricity mix, electricity taken from the grid may be considered fully renewable if the number of full load hours of the RFNBO production is limited to the share of renewable electricity in the bidding zone. Detailed rules for calculating the full load hours of RFNBO production are determined in detail in the delegated act. Any production exceeding this limit shall be considered non-renewable.
Emission intensity of electricity lower than 18 gCO2eq/MJ in the bidding zone
The second option is a new concept introduced by the Commission in the adopted delegated act and is applicable where the aforementioned 90% renewable electricity threshold is not met. In this option, the fuel producers may count the electricity taken from the grid as fully renewable if the installation producing RFNBOs is located in a bidding zone where the emission intensity of electricity is lower than 18 gCO2eq/MJ. The logic behind this option is that in the bidding zones where the emission intensity is below this threshold, namely due to high share of nuclear energy in the bidding zone’s electricity mix, adding more installations producing renewable electricity is not necessary to achieve the RFNBOs’ 70% greenhouse gas saving criteria set forth in the RED II.
The emission intensity is determined following the approach for calculating the average carbon intensity of grid electricity set out in the other delegated act adopted by the Commission on 13 February 2023, based on the latest available data.
In addition to meeting the emission intensity threshold of 18 gCO2eq/MJ, the RFNBO producers must have concluded one or more PPAs at least for the amount that is claimed as fully renewable, and the electricity claimed must be effectively produced in the specific installations under the PPA(s). As mentioned, the additionality of the electricity is not required in this option, but temporal and geographical correlation between the production and consumption of the electricity shall nevertheless be met.
The requirement of temporal correlation includes a grace period applicable until 31 December 2029. Until then, the criteria is fulfilled if the RFNBO is produced during the same calendar month as the renewable electricity produced under the PPA. Alternatively, the electricity can be sourced from a new storage asset located behind the same network connection point as either the electrolyser or the installation generating renewable electricity that has been charged during the same calendar month in which the electricity under the PPA has been produced. From 1 January 2030 onwards, the temporal correlation requirement shall be shortened from one month to one hour. In addition, the temporal correlation is also always adhered to if the RFNBOs is produced 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.
In terms of geographical correlation, the delegated act provides that the installation generating renewable electricity under the PPA needs to be located either:
(i) in the same bidding zone as the electrolyser;
(ii) in an interconnected bidding zone, including in another member state. In addition, this option requires that the electricity prices in the relevant time period on the day-ahead market in the interconnected bidding zone in question are equal or higher than in the bidding zone where the RFNBO is produced; or
(iii) in an offshore bidding zone that is interconnected with the bidding zone where the electrolyser is located.
Electricity consumed during an imbalance settlement period
As regards the third option, the delegated act provides that it is also appropriate to consider electricity taken from the grid to be fully renewable where the production of RFNBOs supports the integration of renewable power generation into the electricity system by reducing the need for redispatching, i.e. driving down renewable electricity generation. Thus, electricity taken from the grid may also be counted as fully renewable if the electricity used in the RFNBO production is consumed during an imbalance settlement period and the electricity production that otherwise would have been curtailed is used for the RFNBO production. The fuel producer must demonstrate, based on the evidence from the national transmission system operator, that power-generating installations using renewable energy sources were redispatched downwards and the electricity consumed for the production of RFNBOs reduced the need for redispatching by a corresponding amount.
Compliance with the requirements of additionality and temporal and geographical correlation
The fourth option provides that the electricity taken from the grid may be considered fully renewable if the fuel producer complies with the conditions on additionality and temporal and geographical correlation.
Additionality is complied with if the fuel producer produces an amount of renewable electricity in their own installations that is at least equivalent to the amount of electricity claimed as fully renewable or have concluded, directly or via intermediaries, one or more renewable power purchase agreements (the “PPAs”) in one or more installations generating renewable electricity, and the electricity claimed is effectively produced in such installation(s). In addition, the following criteria shall be met:
(i) the installation generating renewable electricity came into operation not earlier than 36 months before the facility producing RFNBOs; and
(ii) the installation generating renewable electricity has not received support in the form of operating aid or investment aid with certain exceptions.
The requirements to comply with temporal and geographical correlation are discussed above in connection with the option relating to the emission intensity of the electricity in the bidding zone.
Transitional Period Rules
Due to the time needed for the planning and construction of installations generating renewable electricity, the delegated act provides that the additionality requirement, as required in connection with the fourth option necessitating the compliance with the requirements of additionality and temporal and geographical correlation, does not begin to apply until 1 January 2038 to installations producing RFNBOs that come into operation before 1 January 2028. However, this transitional period exception does not apply to added RFNBO production capacity after 1 January 2028.
The delegated act is now subject to the Parliament’s and the Council’s approval. Both co-legislators have two months to either accept or object to the Commission’s proposal but no powers to amend it. The scrutiny period may, at their request, be extended further by two months.
Original article is published on Hannes Snellman’s website at https://www.hannessnellman.com/news-views/blog/new-rules-adopted-for-renewable-hydrogen/
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.