On 21 May 2024, the Council of the EU adopted the Hydrogen and Decarbonized Gas Market Package. It aims to shift the gas system to low-carbon and renewable gases, and provides for the highly anticipated framework on dedicated hydrogen networks.
Background
The first draft of the Hydrogen and Decarbonized Gas Market Package (the "Package") was initially published in December 2021. The Package contains the "H2 Directive", a recast of the Gas Directive (2009/73/EC) and the "H2 Regulation", a recast of the Gas Regulation (EC 715/2009), which have been in force since 2009. After intense sector discussions, negotiations between the EU Commission, the EU Parliament and the Council of the EU took place in March 2023 (the so-called "Trilogue Procedure"). The Trilogue Procedure ended in November 2023 and resulted in a provisional agreement on the Package, which has been formally adopted by the EU Parliament on 11 April 2024 and now also by the Council of the EU.
Two main goals
The new rules pursue two main goals: The decarbonization of the gas market and the regulation of hydrogen networks.
Decarbonization of the gas market
The Package aims at the decarbonization of the gas market by fostering the ramp-up and network integration of renewable and low-carbon gas, such as hydrogen. Renewable and low-carbon gas are set to replace conventional, fossil-based natural gas as the backbone of the gas system.
Ramp-up of renewable and low-carbon gas
Renewable and low-carbon gas are extensively privileged under the H2 Directive. Any investment in such gas may not be unduly hindered, and non-discriminatory market access shall be enabled. Privileged gases may be certified and advertised. Consumers shall be eligible to supply such gases as prosumers.
These gases are also favored regarding network access: For manufacturers, network connection and network access must be provided and maintained pursuant to the H2 Directive. Also, under the H2 Regulation, network operators must ensure firm network capacity and substantial network tariff discounts of 75 percent for low-carbon gases and 100 percent for renewable gases may apply.
Ramp-down of the natural gas system
The Package aims at a ramp-down of unabated natural gas, which is going to be progressively replaced by its more-climate friendly alternatives. Specific rules are included in the H2 Directive: Any new long-term supply contract for unabated natural gas cannot exceed the year 2049. As a result, the need for existing natural gas infrastructure, which must not be utilized for the distribution of renewable and low-carbon gas or repurposed as hydrogen infrastructure, will decrease and might become obsolete by 2050. Network operators are obliged to consider obsolete natural gas infrastructure in their network development plans. For such infrastructure, no more construction or operation permits may be issued, and network operators may cease network services. Consumers must be notified in a timely manner. The respective operator shall be liable for the subsequent decommissioning of the infrastructure.
Definition of low-carbon hydrogen and harmonization with RED-legislation
As regards gas quality, the Package is harmonized with the requirements laid out in the Renewable Energy Directive II/III-legislation of the EU (RED II/III) and supplements it, in particular by providing the long-awaited definition of low-carbon hydrogen.
Under the RED-Legislation, renewable gas includes biogas derived from biomass and renewable fuels of non-biological origin (RFNBO), which essentially means green hydrogen. RFNBO have to be derived from renewable electricity (usually by way of electrolysis) and can be used to fulfill the renewable electricity quotas in the transportation, industry and heating/cooling sector as governed under the RED II/III. Further requirements for the renewable electricity used in the production of RFNBO are defined by the Delegated Act, which was adapted in February 2023. Main requirements are a temporal and geographical correlation between the electricity generation and the hydrogen production as well as the "additionality" of the electricity generation plant, meaning that the electricity generation plant from which the power stems has to be built in addition to the already existing renewable generation plants in order to avoid shifting renewable electricity generation from one to another sector.
Under the H2 Directive, low-carbon gas may be derived from non-renewable sources. Eligible gases are recycled carbon fuels from waste streams and low-carbon hydrogen, as well as low-carbon hydrogen products. The gases qualify as low-carbon gases if the gas meets the greenhouse gas emission reduction threshold of 70 percent compared to the fossil fuel comparator of 94 grams of CO2-equivalent per megajoule, as established in the RED-Legislation. Thus, the total emissions from its use may not exceed 28,2 gCO2eq/MJ. The total emissions may be ensured and reduced by emissions savings, like carbon capture and storage (CCS).
Albeit the low-carbon gases, in particular the low-carbon hydrogen, cannot be used to fulfill the renewable electricity quotas under the RED II/III-legislation, they can in particular be used to fulfill the sustainable aviation fuel (SAF) mandates as established under the ReFuelEU Aviation Regulation.
Hydrogen networks
The Package establishes the regulation of hydrogen networks. In order to provide the necessary regulatory framework, the Package essentially applies the familiar rules for the gas network also to the hydrogen networks.
Network access & network connection
Network access and network connection must be provided on a non-discriminatory basis and can only be denied for exceptional reasons under the H2 Directive. The access to hydrogen networks and hydrogen storage units shall be regulated, whereas the access to hydrogen terminals shall be subject to negotiated access. However, until December 31, 2032, Member States may allow for a negotiated access to hydrogen networks and hydrogen storage units as well.
Unbundling
Unlike the first drafts of the Package, the H2 Directive now provides for a differentiation between hydrogen distribution and hydrogen transmission networks. Different rules apply in particular with regards to unbundling obligations: Hydrogen transmission network operators must comply with the strict rules of ownership unbundling, unless the Member States implement the option to unbundle as an independent hydrogen system network operator or independent transmission network operator (so-called integrated hydrogen transmission network operator). However, in particular, the latter only applies in case the hydrogen transmission belonged to a certified gas transmission network operator or a vertically integrated undertaking active in the hydrogen production or supply at the time the H2 Directive will have entered into force. Also, hydrogen transmission operators and gas transmission operators will in general have to be separated into separate legal entities (so-called horizontal unbundling). However, the Member States can implement exemptions from this requirement, e.g., in case a positive cost-benefit analysis speaks for this option. Existing hydrogen networks and geographically confined hydrogen networks may be exempted from the unbundling obligations under very strict requirements. Exemptions also apply for small hydrogen network operators with no more than 100.000 customers.
Network planning
The TSO are obliged to issue a ten-year network development plan for hydrogen under the H2 Directive. Hydrogen networks shall particularly be available to hard-to-decarbonize sectors. Repurposing obsolete gas networks as hydrogen networks shall be the first choice to establish the hydrogen network. To ease repurposing, gas permits now extend to hydrogen. Under the H2 Regulation, the network planning will be coordinated and overseen by the new EU entity for Hydrogen Network Operators (ENNOH), which will be established analogous to ENTSO-E and ENTSO-G in the electricity and the gas sector.
Further provisions
- Besides the Package's two main goals, the decarbonization of the gas market and the regulation of hydrogen network, it also includes further provisions.
- In particular, with regards to natural gas, the H2 Regulation enables the Member States to establish a voluntary scheme to jointly purchase natural gas to meet demands. It also provides rules that allow Member States to temporarily restrict network access for natural gas from the Russian Federation and Belarus.
- With regards to hydrogen, the H2 Regulation provides a Union-wide cap of 2 percent for hydrogen blended into the natural gas system at interconnection points between Member States to prevent market segmentations on gas quality. The H2 Regulation also sets forth further rules for temporary market development supervision and support for hydrogen. A respective mechanism shall be implemented by the EU Commission under the EU Hydrogen Bank.
What's next
As a next step, the Package is going to be published in the Official Journal of the EU. It enters into force 20 days after the day it was published. The H2 Directive is going to apply as of its entry into force and has to be implemented by the Member States within two years. The Regulation is going to apply from six months after its entry into force, which is likely to happen in the first months of 2025.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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