What makes hydrogen "renewable"? - a quick look at the Commission's draft delegated act

In May 2022, the European Commission (Commission) published an energy package which includes draft legislation concerning the production of renewable hydrogen and hydrogen-based fuels used in the transport sector.

Background

According to the currently applicable Renewable Energy Directive II (RED II), each Member State shall set an obligation on fuel suppliers to ensure that the share of renewable energy within the final consumption of energy in the transport sector is at least 14 % by 2030. The draft amendment of RED II (informally referred to as RED III) provides for a new and de facto stricter rule: each Member State shall set an obligation on fuel suppliers to ensure that the amount of renewable fuels and renewable electricity supplied to the transport sector leads to a greenhouse gas intensity reduction of at least 13 % by 2030 (compared to a predefined baseline). The Commission's communication ‘REPowerEU plan’, published on 18 May 2022, indicates that this reduction target will be tightened in the course of the legislative process.  

Both under the current and under the future regime, renewable liquid and gaseous fuels of non-biological origin (RFNBOs) can be used to meet these quotas or reduction targets respectively. In the aviation and maritime sectors, it can be assumed that RFNBOs will be the medium of choice. The energy content of nearly all RFNBOs is based on renewable hydrogen produced via electrolysis. Therefore, Article 27 of the RED II requires the Commission to adopt a delegated act to establish a Union methodology setting out detailed rules on electricity used where RFNBOs can be considered fully renewable. On 23 May 2022, the Commission finally published an official draft of this delegated act.

Rules for electricity used to make RFNBOs

As already specified in Article 27 RED II, the Commission’s draft distinguishes between electrolysers directly connected to an electricity generating installation and electrolysers sourcing electricity from the grid:

• For directly connected installations, there must either be a direct line between electricity generator and electrolyser, or the renewable electricity production and electrolyser must take place within the same installation. Infrastructure generating electricity must have come into operation no earlier than 3 years before the RFNBO-producing facility. Electricity-producing installations should not be connected to the grid. If they are connected, a smart meter system must demonstrate that no electricity is taken from the grid for the purpose of producing RFNBOs.
• For electricity coming from the grid, fuel producers can count this as fully renewable if the RFNBO-producing facility is located in a bidding zone where the average share of renewable electricity is 90% and the production of RFNBO does not exceed a maximum number of hours corresponding to the share of renewable electricity in the bidding zone. This maximum number of hours shall be derived by multiplying the total number of hours in each calendar year by the share of renewable electricity reported for the bidding zone where the renewable hydrogen is produced.
• Alternatively, electricity supplied through one or more renewable power purchase agreements (PPAs) can be counted, especially so long as: the installation came into operation no earlier than 3 years before installation producing RFNBO (‘additionality’); the installation under the PPA is located (i) in the same bidding zone, (ii) in a neighbouring zone provided that the day-ahead price for the relevant period is equal or higher than in the bidding zone where the electrolyser is located, or (iii) in an offshore bidding zone adjacent to the bidding zone where the electrolyser is located (‘geographical proximity’); and that the RFNBO (i) is produced during the same one-hour period as the renewable electricity produced under a PPA, (ii) comes from a storage asset located behind the same network connection point that has been charged during the production of renewable energy under the PPA, (iii) or is produced during a one-hour period where the clearing price of electricity in the bidding zone is lower or equal to 20€ per MWh or lower than 0,36 times the price of an EU ETS allowance (‘temporal correlation’).

Scope and timeline

The draft act was open for public consultation until 17 June. After having evaluated the consultation, the Commission will propose the final draft delegated act to the European Parliament and the Council, who have two months to scrutinise and either accept or reject the proposals. Following that, the final act would become law.

Most rules will enter into force 20 days after publication in the Official Journal of the EU. That said, there will be some derogations: namely the condition that the installation generating the renewable energy came into operation no earlier than 36 months before the installation producing the fuel, as well as the hourly matching of the production of renewable hydrogen and the production of the renewable electricity, will only apply from 1 January 2027. Until 31 December 2026, monthly matching will apply. The rules will be binding across all Member States. 

Impact

The economic implications of the delegated act on industry are expected to be considerable. In particular, economic studies find that the requirements of temporal correlation and additionality will increase the costs of renewable hydrogen production. Possibly, these implications will go beyond the transport sector: it is conceivable that both the European and national legislator will refer to this delegated act when defining a standard for renewable hydrogen that is applicable to state aid schemes or regulatory frameworks specific to other sectors, such as chemicals or steel.