Germany’s revision of the Energy Industry Act: a highway for hydrogen?

Following Germany’s recent revision of the Energy Industry Act (Energiewirtschaftsgesetz – EnWG), the legislator significantly strengthened the Federal Network Agency’s (Bundesnetzagentur – BNetzA) role in regulating the gas and electricity grid, together with regulations on the development of a core hydrogen network in Germany (Wasserstoffkernnetz).

We addressed the issues surrounding German grid regulation in part 1 of this blog. Here in part 2, we outline the key elements of the core hydrogen network, its financing and associated risks and challenges. The aim of the regulations is to facilitate the establishment of infrastructure to access to hydrogen as an energy source across Germany.

Solving the ‘chicken and egg’ problem?

Hydrogen infrastructure has a ‘chicken-and-egg problem’: the lack of end users produces a lack of incentives for expansion of hydrogen infrastructure, a prerequisite for increased demand from end users. 

The build out of hydrogen infrastructure requires significant upfront investment from network operators – with uncertain prospects of profitability. The hydrogen core network and its subsidised financing concept aims to overcome this by connecting the main hydrogen sites in Germany (eg large industry centres, energy storage sites, power plants and import corridors), extending over 9,700km. Sixty per cent of this network will be made up of repurposed gas pipelines, with the remaining 40 per cent to be newly built, allowing the network to span all 16 of Germany’s Federal States. 

The network’s function is comparable to federal highways, Germany`s Minister for Economic Affairs and Climate Action Robert Habeck explained. Additional sub-networks connected to the core network could be added where there is specific need for hydrogen. The entire network is intended to be operational by 2032. 

State of play: who, what, when and how?

Preparations for the core hydrogen network were completed by the German transmission system operators (TSOs) in summer 2023. On 10 November 2023, the German parliament (Bundestag) adopted the amendment to the EnWG introducing a legal basis for the network. 

In an additional legislative proposal submitted to the Federal Council for a statement on 16 November 2023, the legislator proposed a further amendment to the EnWG which includes regulations on financing the core hydrogen network. 

The existing TSOs will act as core hydrogen network operators and will be tasked with submitting a joint application for the establishment of the network to the BNetzA. The application shall specify which hydrogen infrastructure projects will participate, when the projects will become operational, as well as what companies will be responsible for their implementation. 

BNetzA takes a pivotal role in the application process, in line with its increased capacities, being able to request amendments to an application as well as leading the consultation process. Once approved, it will expedite necessary permissions and the construction of hydrogen infrastructure. The construction and operation of the core hydrogen network will be treated with overriding public interest to facilitate planning approvals which are deemed ‘necessary and urgent for the energy industry’ (energiewirtschaftliche Notwendigkeit und Vordringlichkeit). Network infrastructure will not require assessment of needs-based appropriateness (Bedarfsgerechtigkeit). Regulation effectively guarantees the applicability of a standardised grid tariff regime and financing as described below.

‘Intertemporal’ cost allocation

Major investment (in the region of €20bn) is required in the short term to build infrastructure for energy that may not immediately see high demand. As a result, in the first years of operation, cost-covering grid tariffs would (without intervention) be prohibitively high given the small number of end users, and hence be an obstacle to the ramp-up of the hydrogen industry. 

To address this, a nationwide grid tariff (so-called postage-stamp tariff) will apply in two phases until 2055. In the first phase, the tariff is capped and does not cover the actual costs incurred by network operators. This will allow end users to make economically reasonable use of the network even if the number of users is initially low. 

The tariff will be raised in a second phase to exceed the actual costs, offsetting earlier losses (so called intertemporal cost allocation). As it is not certain whether and when grid tariffs will amortise investment costs (ideally by 2055), the German Federal Government is hedging parts of the investments by covering the difference between actual costs and revenues of network operators in a so-called amortisation account. 

For the first few years, this account will be in deficit due to capped grid tariffs in phase one. This difference is expected to decrease gradually because of the increased fees in phase two. If the account is still in deficit at the end of the financing phase in 2055, the German Federal Government will compensate for a large part of the remaining deficit. However, the TSOs must absorb 24 per cent of any deficit (a ‘self retention’), shared pro rata according to their respective share of network revenues. 

Pros and cons of network participation

TSOs are not obliged to participate in the core hydrogen network without consent or make any of their existing natural gas networks available for this purpose. However, if a company has agreed to participate, it must implement the project assigned to it. A TSO may decide to convert part of its infrastructure to hydrogen outside the core network since this allows more flexibility in terms of construction and in some cases may present opportunities to charge competitive grid tariffs without cap. However, not being subject to the regulation of the network entails significant risks, including a review of the network's needs-based appropriateness (Bedarfsgerechtigkeit) which may lead to delays. Planning approval procedures would also be subject to third-party interests as the infrastructure would not qualify as being in the ‘overriding public interest’. Most importantly, the financing plan for the core network would not apply, and investment risks would solely remain with the relevant TSO.

The future of hydrogen in Germany

The introduction of the core hydrogen network is intended to nudge network operators into a long-term, national scale programme of investment. The financing plan of intertemporal cost allocation, underpinned by a German Federal Government guarantee and amortisation account, significantly reduces ramp-up risks. Since this financing is likely to constitute State Aid, approval by the European Commission will be required. 

It remains to be seen whether the legislator’s initiative will lead to profitable operation of a hydrogen network in the long term, and whether the German Federal Government will have to bear losses. Certainly, the industry is now actively engaged in the network’s development: on 15 November 2023 the TSOs submitted a draft application to BNetzA and the Federal Ministry for Economic Affairs and Climate Protection (BMWK), marking the start of the first consultation. 

Once the amendment to the EnWG enters into force, TSOs are expected to submit a final joint application in Q1 of 2024, followed by a consultation process, review and ultimately approval by BNetzA.