EU gas market rules aim to promote hydrogen and decarbonise gas consumption

The European Parliament has endorsed a provisional deal on the hydrogen and gas markets decarbonisation package, paving the way for new rules on, amongst others, a dedicated hydrogen infrastructure within the next few months. 

The package, initially published by the European Commission on 15^th December 2021, comprises proposals for the revision of two important legislative acts: firstly, a proposal for a Directive on common rules for the internal markets in renewable and natural gases and in hydrogen (Directive), recasting Gas Directive 2009/73/EC; and secondly, a proposal for a Regulation on the internal markets for renewable and natural gases and for hydrogen (Regulation), recasting Gas Regulation (EC) No 715/2009. With these acts, the package seeks to facilitate the penetration of renewable and low-carbon gases into the energy system, enabling a shift from natural to renewable and low-carbon gas and thus working towards the EU’s goal of climate neutrality in 2050. This blog post analyses the changes that the package will bring and looks at next steps for the deal. 

Unbundling of hydrogen infrastructure

The new directive introduces unbundling rules for hydrogen infrastructure. On the one hand, hydrogen distribution network operators and hydrogen transmission network operators are obliged to vertically unbundle. This means that the activities of operating a hydrogen network must be separated from the other areas of energy supply activity, in particular hydrogen production and hydrogen distribution. To comply with this obligation, the models of unbundling already familiar from the electricity and gas sector are available: ownership unbundling, the designation of an integrated hydrogen network operator (ITO) and the model of the independent hydrogen transport network operator (ISO). 

With regard to horizontal unbundling, the Directive stipulates that a hydrogen transmission network operator that is part of an undertaking active in the transmission or distribution of natural gas or electricity must be independent at least in terms of its legal form. This would mean that a transmission system operator wishing to remodel part of its infrastructure to hydrogen systems would have to do so through an independent legal entity. However, the Directive provides for exemptions from horizontal unbundling: Member States may derogate from the obligation of horizontal unbundling on the basis of a public cost-benefit analysis provided that the competent regulatory authority determines that the derogation has a positive effect in terms of transparency, cross-subsidisation, network tariffs and cross-border trade. This faculty would likely have been introduced in response to the fierce criticism which the legal unbundling obligation has received from the industry as it discourages the conversion of gas pipelines into hydrogen pipelines. In order to profitably utilise synergy effects, it is widely assumed that the German legislator will make use of the exemption option. The unbundling requirements must be implemented by the EU Member States within two years of the date of entry into force. Implementation into German law would then have to take place by spring 2026 at the latest.

A European Network of Network Operators for Hydrogen

A new entity will be established to represent hydrogen operators – ENNOH - which will work closely with existing entities for electricity (ENTSO-E) and gas (ENTSOG). ENNOH will be responsible for devising harmonised technical and operational rules to ensure the efficient and safe operation of an interconnected hydrogen system. Until ENNOH is established, ENTSOG will be responsible for the development of EU-wide network development plans for hydrogen. While ENTSOG is still responsible for the establishment of the Ten-Year Network Development Plan for 2026, ENNOH is set to take over this work from 2027 onwards. This rejects the Parliament’s proposal to entrust ENTSOG with governing the hydrogen network which may have triggered conflicts of interest within ENTSOG. 

Biomethane

The final compromise text recognises the EU’s ambitions to increase production of biomethane. Under the EU’s Net Zero Industry Act proposal (NZIA), the EU will streamline investment and improve permitting procedures for strategic technologies including biomethane (see our NZIA blog post here). However, a proposal by the European Parliament to introduce a binding biomethane production target of 35 billion cubic meters (bcm) for 2030 did not make it into the final text. 

Integrated network planning

Furthermore, the deal aims to increase the level of integration between the network development plans for hydrogen, electricity and natural gas. Network development plans are to be built on sector integration, follow the ‘energy efficiency first’ principle and prioritise the use of hydrogen in hard-to-decarbonise sectors. The aim of these measures is to mitigate the differences between national and EU-wide planning approaches, allowing investments in the different networks to be more cost effective.

Concerning network tariffs, the Parliament and the Council agreed that for the hydrogen market, every national regulatory authority shall consult the neighbouring national regulatory authorities on the draft tariff methodology before taking a decision on it, and also submit it to the Agency for the Cooperation of Energy Regulators (ACER).

Energy security

To ensure continued energy security, the Parliament and Council also agreed on an extension of the emergency demand aggregation and the joint purchasing mechanism for gas. The joint purchasing mechanism aims to prevent member states from competing against each other when bidding for gas. Participation by gas undertakings remains voluntary and will be extended to support the development of hydrogen, linked to the European Hydrogen Bank.

On an individual level, the compromise text obliges member states to ensure customers’ right to switch supplier or market participant in a non-discriminatory manner as regards cost, effort, and time. Member States must also take measures to protect vulnerable customers affected by energy poverty from disconnections.

Finally, EU Member States may adopt restrictions on the supply of natural gas, including LNG, from Russia and Belarus.

Looking forward

The content of the agreement was welcomed by the industry, in particular the increased flexibility of unbundling rules (compared to the 2021 draft) and the creation of ENNOH. Both the draft Regulation and the draft Directive were endorsed by the European Parliament’s Industry and Energy Committee on 23^rd January 2024, and adopted directly during the plenary session on 11^th April 2024. The Council must now consent which, following the trilogue negotiations, should be a formality at the Transport, Telecommunications and Energy Council on 30^th May 2024 at the latest. After their adoption, the acts will be published in the Official Journal of the EU and enter into force 20 days later.