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Hydrogen and Decarbonised Gas Market Package
In connection with the European Green Deal and the Fit for 55 package, in December 2021 the Commission released its Hydrogen and Decarbonised Gas Market package, consisting of revisions of the Gas Directive and Gas Regulation, which set the common rules for the internal market in natural gas, and with the proposed revision also for renewable gases and hydrogen. Thus, aligning the existing legislation with the Clean Energy Package provisions on incentives for clean energy solutions, prosumer behaviour, easier switching of providers and clear certification for low carbon hydrogen. The role of low-carbon hydrogen as an enabler of decarbonisation in the short and medium term is foreseen, with the intent to support the uptake of renewable fuels such as renewable hydrogen.
In general, the enshrined internal market rules for hydrogen are similar to the existing ones for the natural gas and electricity sectors. Yet, they also establish a degree of flexibility to ramp-up the development of the hydrogen market.
Networks
The two legislative files lay down the common rules for the transport, supply, and storage of hydrogen. Furthermore, the rules on the organisation and functioning of the sector, including market design, main regulatory principles, such as unbundling and third-party access.
Moreover, the regulation enshrines the establishment of an independent body for hydrogen networks - the European Network for Network Operators of Hydrogen (ENNOH). Its tasks will include writing the relevant non-binding ten-year network development plans for hydrogen, cooperating with ENTSO-E and ENTSO-G, developing recommendations for technical cooperation, amongst others.
The Package describes the differentiation between hydrogen transmission and distribution networks, which allows for a reasonable and efficient unbundling regime (horizontal and vertical) to be applied to new infrastructure.
Extending the exemption from unbundling and third-party access rules for existing hydrogen networks and including considerations on heating and cooling plans to distribution network development plans are all aimed to help building a coherent and efficient market for decarbonised gases.
Markets
The proposal by the Commission included definitions for ‘low-carbon fuels’, ‘low-carbon hydrogen’ and ‘low-carbon gases’. Concerning low-carbon hydrogen, initially a 70% GHG emission reduction threshold was set in the proposal. However, the final Package leaves the definition of the exact content of the methodology used to count the threshold to be defined in a delegated act by the Commission. Already in the works at the Commission at the time of publishing this summary, it is to be adopted maximum 12 months after the entry into force of the Gas Package.
As to the question of incentives, there are no targets for industry offtake, nor a direct funding mechanism. The only incentives consist of discounts for renewable and low-carbon gases in the form of entry-exit tariffs. Still, the co-legislators introduced a five-year pilot project to bring together demand and supply of hydrogen and create market transparency under the European Hydrogen Bank.
The regulation also provides for a limit of 2% by volume of hydrogen blending into natural gas at interconnection points. This means that while at different points of the system the blending percentage can be higher, at interconnection points TSOs can refuse gas with a higher blending ratio but cannot do so if the ratio is lower than 2%. The reasoning behind this is to avoid that blending becomes a market restriction, and to safeguard end-users in different markets, where hydrogen uptake is slower.
On the question of cross-subsidisation, the regulation emphasises the incompatibility of cross-subsidies with the principle of cost-reflective tariffs. In exceptional cases, the benefits of the former are acknowledged in terms of societal benefits and predictable tariffs for early network users. The final decision on this topic lies with the Member States.
Consumers
On the consumer side, the package includes several provisions relating to consumer protection, which already exist in the electricity sector. These include faster switching of providers, access to comparison tools for households, billing information and facilitation of smart meters for natural gas and hydrogen. In addition, the Package also includes a provision stipulating that long-term contracts for unabated fossil gas should not last beyond 2049.
What’s in it for hydrogen?
The Package clearly recognises the importance of hydrogen as a key vector for the decarbonisation of the natural gas sector. Nevertheless, the development of the hydrogen market is taken a step further. This is done through creating a clear regulatory framework which is applicable for the next regulatory cycle. This set of common European rules will bring clarity to the sector and create legal certainty for investors along the entire hydrogen value-chain. It is expected that the provisions of the Package will in effect lower the administrative costs relevant to hydrogen development.
Generally, however, while the main regulatory pillars of the natural gas market are laid down, some provisions might be perceived as overregulation for a nascent sector and endanger its development.
Links to the original document and additional information:
Hydrogen and decarbonised gas market package
Proposal for a Regulation on the internal markets for renewable and natural gases and for hydrogen
Regulation on the internal markets for renewable and natural gases and for hydrogen
