On 13 February 2023 the European Commission (“Commission”) presented criteria for when hydrogen should be considered green in the EU. The new definition will have a major impact on the EU’s entire legal framework for hydrogen, which includes rules on energy infrastructure investments and State aid. The Commission’s aim is to create legal certainty for investors, with clear criteria and a certification scheme, in order to meet the ambitious goals of the European Green Deal and the REPowerEU plan.
Scope and purpose of the new rules
European legislators have been paying increasing attention to hydrogen over recent years. Hydrogen can be used to both carry and store energy, as well as for numerous other industrial and transport applications, and does not cause any CO2 emissions. For these reasons, it plays a crucial role in the EU’s strategy for achieving a cost-effective energy transition. This is evident from the Commission’s hydrogen strategy, published in 2020, which sets out hydrogen’s decisive contribution to decarbonising industry and heavy goods traffic. The Commission has also put together the “Fit for 55” package, which creates incentives for hydrogen use, including binding goals for industry and the transport sector. The REPowerEU plan, presented in 2022, also assigns an important role to hydrogen in freeing the EU from its dependency on fossil fuels from Russia. To achieve this goal, the plan envisages producing 10 million tonnes of renewable hydrogen within the EU and importing the same amount into the EU by 2030.
The Commission presented two delegated acts on 13 February 2023 that form part of this regulatory framework. They are based on Directive (EU) 2018/2001 of the European Parliament and of the Council on the promotion of the use of energy from renewable sources (RED II, the “Renewable Energy Directive”). This Directive aims to increase the share of renewable energies in the electricity, heating and transport sectors by 2030, but does not regulate the matter exhaustively. In particular, the Directive does not explicitly stipulate in what cases hydrogen should be considered renewable or how producers can prove its renewability. The Commission was empowered to define criteria for this, and after a lengthy decision-making process, has now done so. The two delegated acts propose criteria for determining what should be considered green hydrogen in the EU. The Commission has explained that both acts are required so that fuels, including motor fuels, can count towards meeting Member States’ goals for increasing the share of renewable energies.
The first delegated act defines the requirements for classing hydrogen, hydrogen-based fuels or other energy carriers as Renewable Fuels of Non-Biological Origin (“RFNBOs”). For this purpose, the principles of additionality and temporal and geographical correlation have been made more precise. They have already been incorporated into the EU’s Renewable Energy Directive. In other words, the first delegated act sets out the criteria for hydrogen to qualify as green in the EU, and defines how hydrogen producers can prove that these criteria have been met. The second delegated act sets out the method for calculating the greenhouse gas emission savings that RFNBOs generate over their entire life. This second act also defines a minimum threshold: RFNBOs can only count towards the EU’s renewable energies goal if they generate greenhouse gas emission savings of more than 70% compared with fossil fuels.
What makes the new definition relevant?
How green hydrogen is defined will be primarily relevant in the context of the Renewable Energy Directive and its regulatory scope. The definition determines whether hydrogen can count towards meeting the Member States’ goals for increasing the share of renewable energies in the transport sector. This also means that the definition will be of major importance in the respective national systems for promoting renewable energy. In Germany, this will be the case with the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, “EEG”) and Federal Immission Control Act (Bundes-Immissionsschutzgesetz, “BImSchG”).
The Federal Environment Ministry has already announced that it will be transposing the delegated acts “in the very near future” in order to promote green hydrogen in the transport sector. An amendment to Germany’s 37th Federal Immission Control Ordinance (“BImSchV”) is envisaged for this purpose. Germany’s existing green hydrogen criteria will also be harmonised with European provisions by amending the EEG (cf. Bundesrat document 162/22). So the new definition will impact the national regulatory framework for hydrogen in the near future. This will be of interest to hydrogen producers, as various rules in Germany confer privileges on them if the hydrogen qualifies as green or renewable. Section 69b EEG, for example, exempts installations producing green hydrogen from the EEG surcharge completely. In addition, section 39p EEG provides for auctions for installations generating power from green hydrogen. Section 39q EEG stipulates special payment conditions for these installations. But green hydrogen enjoys special privileges in other laws too, such as the Energy Financing Act (Energiefinanzierungsgesetz, “EnFG”). Section 25 EnFG, for example, exempts installations that come into operation before 1 January 2030 from a surcharge when producing green hydrogen.
The new criteria for green hydrogen are likely to increase in importance in future, and significantly so. The Renewable Energy Directive is currently being revised on the European level, and the Commission has proposed that in conjunction with the updated Directive, the two delegated acts of 13 February 2023 become the central regulatory instrument for green hydrogen’s market ramp-up in all sectors.
When is hydrogen green or renewable?
Hydrogen produced by electrolysers is considered renewable if and only if it was produced using electricity from renewable sources. This is the general principle. So hydrogen producers must prove that the electricity they use comes from renewable sources.
The electricity can be obtained from an installation directly connected to the hydrogen production facility (mostly electrolysers), or else from the electricity grid. For both scenarios, the Commission’s rules contain criteria that hydrogen producers can employ to prove that they have used renewable electricity. The principles of additionality and temporal and geographical correlation are crucial here.
Additionality is intended to ensure that higher demand for hydrogen entails new capacity for power generation from renewable sources. Temporal and geographical correlation is supposed to make sure that renewable hydrogen is only produced at times when and in places where sufficient renewable energy is available. Member States have the option of setting additional criteria for geographical correlation. Such criteria may affect what location is chosen for electrolysers, for example.
An electrolyser can be connected directly to a new installation generating electricity. The hydrogen thus produced is considered renewable or green if the hydrogen producer can prove the following cumulative requirements have been met:
The installation generating electricity
- generates electricity from renewable energy sources,
- is directly connected to the hydrogen production facility or is part of it,
- was commissioned no earlier than 36 months before the hydrogen production facility, and
- is not connected to the electricity grid, or if it is, has a smart metering system. This system must show that no electricity has been taken from the grid to produce hydrogen.
A special rule will apply where the capacity of a hydrogen production facility has been expanded. If capacity is expanded at the same location no later than 36 months after the facility has come into operation, the 36-month deadline will be calculated from when the original facility started to operate. Without this rule, creating new production capacity might mean that the hydrogen produced is not green.
But hydrogen producers can take the electrolysis current from the grid as well. The hydrogen thus produced is considered green or renewable if the electricity used can be counted as fully renewable. The Commission sets out four scenarios in which this will be the case:
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The electrolyser is located in a bidding zone in which the average share of electricity from renewable energies was more than 90% in the previous calendar year. In addition, RFNBO production must not exceed a defined maximum number of hours proportionate to electricity from renewable energies in the bidding zone. The delegated act stipulates how to calculate this.
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The electrolyser is located in a bidding zone in which electricity emissions are lower than 18 gCO2eq/MJ. The hydrogen producer must also conclude one or more power purchase agreements (PPAs) for renewable energies under which at least as much power is generated as that stated to be fully renewable. In addition to these two requirements, the conditions of temporal and geographical correlation must also be met.
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The electricity used to manufacture hydrogen is consumed during an imbalance settlement period. In this case, the hydrogen producer must provide certain proof based on information from the national grid system operator. The producer will need to prove that installations generating electricity from renewable energy sources were redispatched and that the electricity used to produce RFNBOs has reduced the need for redispatching accordingly.
- The electricity used can also be counted as renewable if none of these alternatives applies. But the preconditions of additionality and temporal and geographical correlation must have been fulfilled. The delegated acts specify what these principles require.
Hydrogen from nuclear energy can be green
On the political level, controversy continues as to whether hydrogen from nuclear energy should qualify as green.
The two delegated acts are based on the EU’s Renewable Energy Directive, which does not include nuclear energy as a renewable energy source. According to the Commission’s new criteria, however, hydrogen produced using nuclear energy can still be classed as green under certain circumstances. Grid power can be counted as green if it originates from a bidding zone where electricity is produced at less than 18 gCO2eq/MJ. A grid with a high share of electricity from nuclear energy will have low CO2 emissions. If this electricity is used for electrolysis, then the hydrogen thus produced can also be green, according to the new definition. But further criteria must also be met, as set out above. The decision that hydrogen from nuclear power is green under certain circumstances is in line with the EU’s Taxonomy Regulation, which classes nuclear energy as a green transitional activity if particular requirements are met.
Rules also apply to importers of hydrogen into the EU
The requirements for green hydrogen production will not only apply to producers within the EU. Producers in third countries will also need to pay attention to them if they want to import hydrogen as a renewable fuel that can be counted towards the EU’s goals.
A new certification scheme is being introduced to allow hydrogen producers (both within and outside the EU) to prove their compliance with European Union rules. This is intended to facilitate trade in renewable hydrogen on the internal market, making it as uncomplicated as possible for producers.
The certification scheme is based on “voluntary schemes”, which are already being used worldwide to certify biofuels and biomass. The Commission will review and recognise voluntary schemes centrally. A voluntary scheme will be certified by the Commission if the scheme ensures that legal requirements for producing renewable hydrogen are being duly verified. Hydrogen producers will be subject to duties to provide detailed documentation and go through certification procedures. If specific criteria (such as bidding zones) cannot be implemented outside the EU, then alternative rules will be introduced. The Commission’s act already contains guidelines on this. If a hydrogen producer presents evidence from a recognised scheme, then all Member States will have to accept it.
In Germany, the criteria for when non-EU hydrogen production is green will have particular relevance for the “H2Global” support scheme. As part of H2Global, imports of green hydrogen produced outside the EU will be supported by a double auction mechanism. For the hydrogen thus imported to count towards Germany’s targets under the Renewable Energy Directive, the financial support will need to be based on the criteria set by the European Commission.
Staggered introduction of rules
The Commission’s acts provide that the new rules will be introduced in stages. In parallel with the hydrogen industry’s planned development, regulations are being tightened to help stakeholders adjust to the new regulatory framework and to take account of existing investment commitments.
A transitional period for meeting additionality requirements is therefore envisaged. This exemption applies to hydrogen projects that come into operation before 1 January 2028. Hydrogen produced by such projects can also be green if long-term contracts for renewable electricity are concluded with existing installations. The idea of the transitional period is to avert any delays in imports of electrolysers, as a great deal of time and effort is involved in planning, permitting and installing new facilities for generating additional renewable energy.
There will also be an introductory phase with regard to the temporal correlation, lasting up to and including 31 December 2029. During this period, producers of renewable hydrogen will be able to match energy generation from renewable sources with renewable hydrogen production linked to that generation on a monthly basis. In this introductory phase, therefore, electrolysers can be operated at any time as long as the aggregate volume of renewable electricity consumed corresponds to the aggregate volume of renewable hydrogen produced in that calendar month of the year. But Member States have the option of issuing stricter rules on temporal correlation from 1 July 2027 (e.g. hourly matching). The introductory phase will end on 1 January 2030, and from this date all producers of renewable hydrogen will have to match purchased electricity on an hourly basis.
Impact on financial support from EU and Member States
From a business perspective, how green hydrogen is defined is of major importance when it comes to the options for financial support. The definition is intended to guide national State aid approval and steer existing European funds towards renewable hydrogen. It can therefore be assumed that qualifying as green hydrogen will be a key criterion when funds are awarded.
On the national level, the new criteria will have particular relevance for the H2Global support scheme, as mentioned above. But many European funding requirements also refer explicitly to renewable hydrogen. In 2021, for example, State aid rules were updated in the “Fit for 55” package, aiming to provide targeted support for the production of renewable hydrogen. In this connection, EUR 10.6 billion of Member State support has already been approved for two Important Projects of Common European Interest (IPCEIs) concerning hydrogen. According to the Commission, moreover, the EU’s Innovation Fund will also be supporting fixed-premium auctions for renewable hydrogen from 2023. An expected EUR 800 million will be available in the first pilot auction.
Qualifying as green hydrogen will also be relevant under the REPowerEU plan, whose guidelines the delegated acts will complement, the Commission states. So the new definition will be crucial for whether hydrogen can count towards the European goal of producing 10 million tonnes of renewable hydrogen within the EU by 2030 and importing the same volume into the EU. This is important from a business perspective, since the EU intends to offer financial support towards achieving this goal. EUR 200 million, for example, are available for “Hydrogen Valleys” (regional ecosystems combining hydrogen production, transport and various end applications).
Summary and outlook
The two delegated acts see the European Commission finally providing a definition of when hydrogen should be considered green in the EU. This definition will have a major impact on the entire legal framework for hydrogen. The Commission’s two delegated acts will now be notified to the European Parliament and the Council for approval, which have two months to review the proposals and to accept or object to them. The review period can be extended by a further two months if requested, but neither body has the power to amend the proposals. The legal acts are expected to be adopted no later than these deadlines. The provisions will come into effect on the twentieth day following that of their promulgation in the Official Journal of the European Union.
But there remains political controversy (especially between France and Germany) as to whether hydrogen from nuclear energy should qualify as green. Similar controversy occurred over the Taxonomy Regulation, in which ultimately the ECJ was seized of the matter, at Austria’s request. Things could turn out the same way here.
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