Building Europe’s Hydrogen and Renewable Gas Markets

On 15 December 2021, the European Commission put forward the Hydrogen and Decarbonised Gas Markets Package, designed to enable the decarbonisation of natural gas consumption by boosting the use of hydrogen and renewable gases within the European Union.

The gas supply disruption following the war in Ukraine has revealed the delays in completing the energy transition away from fossil fuels and the lack of coordination in this process among Member States. It also created a new momentum for hydrogen and renewable gases.

With this new revised legislative package, the European Commission (EC) seeks to lay out ground rules to provide clarity and allow for the formation of a market that is bound to fall under a comprehensive regulatory framework by 2030/2035.

This legal-dogmatic analysis of the legislative package, authored by CERRE Research Fellow Catherine Banet (University of Oslo), formulates recommendations on key regulatory issues that need to be addressed at the EU level in the short-term, as they will shape the hydrogen and renewable gases market in Europe.

Despite a common legislative framework, the European Commission proposal defines differentiated rules for hydrogen and methane gases. This raises the fundamental question of whether the EU legislator can achieve a level playing field between the different gases in one single legislative framework for the different gases. If one common set of rules is certainly desirable, the report questions what should be the common pillars of this new market design legislation for renewable and decarbonised gases.

The author identifies grid regulation as the critical element for the short-term development of renewable and decarbonised gases, that should be guided by the following four key guiding principles:

• Integrated energy system planning, across energy carriers, including through the use of EU governance tools;
• efficient and coordinated permitting procedures for infrastructure projects;
• safe, effective and smart operation of networks and related infrastructures;
• evolutive access regime to the grid, based on common minimum rules.

Below are some of the key takeaways for building Europe’s hydrogen and renewable Gas Markets. A longer list of policy recommendations and the full analysis can be found in the report. For more information, get in touch with Annika Brack, CERRE Director for Energy, Mobility and Sustainability.

Conclusions and Recommendations for Improvement

The report raises three central questions related to the regulatory approaches to follow in the package, and formulates recommendations on how to address them:

1. Under which regulatory models may hydrogen and renewable gas value chains and markets develop across EU Member States?

• Regulatory models existing in mature markets cannot be copied to markets which are still emergent. This calls for an evolutive and adaptive regulatory approach, based on a mix between EU harmonised legislation and elements of dynamic regulation.
• The proposal should introduce a distinction between transmission and distribution for pure hydrogen infrastructures. The distribution level should be better acknowledged.
• ENTSO-G should be tasked to promote the development and functioning of hydrogen infrastructures, in addition to natural gas.
• By imposing the ownership unbundling model, TSOs operating under the independent transmission operator (ITO) model will be prevented from engaging in hydrogen network activities, while other TSOs in countries operating under the ownership or independent system operator (ISO) model will more easily invest in the same activities. To ensure regulatory alignment, the ITO model should continue to be available beyond the threshold date, as proposed in the Council negotiations.
• Less stringent unbundling rules should be made available for small HNOs under a certain threshold, as proposed by the Agency for the Cooperation of Energy Regulators (ACER) and the Council of European Energy Regulators (CEER).

2. Does the Hydrogen and Decarbonised Gas Markets Package provide both the visibility and regulatory flexibility required for the development of these value chains and markets, as well as energy system integration?

• The right degree of EU harmonisation should be targeted. There is still a large amount of uncertainty on the role of hydrogen in the energy system, and how widespread its use will be. Some requirements, such as the blending threshold of hydrogen, are too strict and lack justifications.
• Many practical implementation rules will be adopted in the form of network codes and guidelines, by delegated or implementing acts of the EC. The need for implementation legislation should be better anticipated, as it might be too late to wait for the adoption of the relevant acts.
• The regulatory framework should better enable energy system integration, with a central role for grid operators. This requires encouraging the planning of the decarbonisation of the gas grids with biomethane, blends and pure hydrogen in a more holistic manner. This also requires allowing grid operators to ensure, at least temporarily, cross-vector activities, in full respect of the unbundling and competition law rules.

3. How does the Hydrogen and Decarbonised Gas Markets Package interact with other pieces of EU legislation adopted or proposed by the European Commission?

• There is a need for a more consistent wording and clearer structure of the Directive and Regulation.
• Regulatory consistency needs to be ensured across the EU legislation with regards to definitions, legal regimes, cross-sector policy goals, avoidance of overlaps, and addressing contradictions with REDII.