Fit for 55 – Hydrogen and the Reform of the European Gas Market

Briefing

The first part of the Fit for 55 package published last summer was followed by further legislative proposals from the European Commission at the end of December 2021. In particular, these were the proposals for the reform of the European gas market, which had already been previously leaked and which primarily aim at its decarbonisation. Hydrogen plays a central role in this process.

You can read about what “Fit for 55” actually involves, which projects are included in the overall package and which projects are of key importance for the energy industry in our Q&A Energy & Infrastructure: #8 Fit for 55.

Below, we answer the most important questions surrounding the Commission’s proposals for the reform of the European gas market, focusing on hydrogen.

Question: What are the key proposals of the draft legislative package on the EU gas market with respect to hydrogen?
Answer: For the first time, hydrogen is included in a legislative package to reform the European gas market, primarily within the framework of the amended Gas Internal Market Directive. Until now, no regulatory concept existed at the European level. The current legal framework for gaseous energy carriers has so far not been geared towards the use of hydrogen as an independent energy carrier and its transportation via dedicated hydrogen networks. At EU level, there are no rules for tariff-based investments in networks or concerning ownership and operation of hydrogen networks. There are also no harmonised rules for the quality of (pure) hydrogen. According to the European Commission, the present proposal is intended to remedy this situation and promote the development of a cost-efficient, cross-border hydrogen infrastructure and a competitive hydrogen market.

The importance of hydrogen in the present legislative package is particularly evident in the objectives associated with the proposals of the EU Commission. In addition to the orientation of the European gas market towards the goal of climate neutrality, the legislative package pursues four central goals:

the creation of a legal framework for a hydrogen market,
facilitated feed-in of renewable and low-CO2 gases into the existing gas grid,
the phasing out natural gas by 2050 and
the empowerment of gas consumers and prosumers.

Planned amendments concern the Gas Directive and Regulation from 2009. In addition, the EU Commission presented a proposal for a regulation on methane emission reduction in the energy sector. The main contents of the package concern specifications for the unbundling of gas and hydrogen networks, the definition and feed-in of low-CO2 and renewable gases, and the organisation of transmission and distribution networks. The package proposes rules on the operation and financing of hydrogen networks, on the transparency of gas quality parameters and hydrogen blending, on the reallocation of natural gas networks for the transport of hydrogen, and on unbundling and non-discriminatory access to the network.

Question: What is the significance of the proposed regulations for Germany’s legal requirements for hydrogen regulation?
Answer: The German regulation for pure hydrogen networks, which came into force in mid-2021 and was intended from the start as a transitional solution, will not last longer than 2030. This is because the Commission’s draft for an internal gas market directive provides for a transitional period until 2030, during which the national legislators do not yet have to fully implement the stricter regulatory requirements.
In Germany, following the amendment of the Energy Industry Act (EnWG) in June 2021, operators of pure hydrogen networks can submit to regulation in accordance with Section 28 j et seq. by submitting a declaration (“opt-in regulation”). The declaration is irrevocable, unlimited in time and applies to all networks of the operator. It is questionable whether this will actually create the economic conditions for a market ramp-up, especially with regard to the generation, transport and use of pure hydrogen. So far, no “opt-in” applications have been submitted to the BNetzA, but the first applications are expected in spring 2022. At that time, funding for hydrogen will also be possible within the framework of the Important Projects for Common European Interest (IPCAI); these projects will be subject to a simplified needs assessment by the BNetzA.

The German legal framework stipulates that the operator of a hydrogen network may neither own nor operate a hydrogen production, storage or distribution facility. In addition, the confidentiality of commercially sensitive information must be ensured, especially vis-à-vis affiliated companies. If information is disclosed, this must be done in a non-discriminatory manner (informational unbundling). Access to the pure, regulated hydrogen networks is to be granted by way of negotiated access in accordance with Section 28n EnWG, in deviation from the other regulatory model. Conditions and fees for network access are approved by the BNetzA. Incentive regulation does not apply.

In the EU Commission’s draft directive on the internal gas market, the operation of hydrogen networks is to be separated from the activities of energy production and supply in order to avoid the risk of conflicts of interest on the part of network operators. However, the Member States should be able to rely on the alternative unbundling model of the “integrated hydrogen network operator” until 2030 in order to grant the existing vertically integrated hydrogen networks a transition period. Member States should also have the possibility to allow the “independent hydrogen network operator” model so that vertically integrated hydrogen network owners remain owners of their networks and at the same time the non-discriminatory operation of these networks is guaranteed after 2030. In contrast to the first draft, transmission system operators should be allowed to operate hydrogen networks without ownership unbundling until 2030.

Question: What do the proposed regulations of the draft Internal Gas Market Directive mean for the independence of the German Federal Network Agency?
Answer: The stricter requirements formulated by the CJEU in September 2021 for electricity and gas will also have to be observed for hydrogen from 2031 at the latest according to the Commission’s draft for the Gas Internal Market Directive.

The CJEU ruling of 2 September 2021 has strengthened the independence of national regulatory authorities and formulated doubts about the sufficient independence of the BNetzA in Germany. The CJEU found that Germany had not implemented the requirements of EU Directives 2009/72/EC (Internal Electricity Market Directive) and the still applicable 2009/73/EC (Internal Gas Market Directive) in accordance with European law. In particular, the CJEU stated that the BNetzA, as a regulatory authority, must be independent and that the conditions for network access and charges must be set free from political influence. Section 24(1) EnWG, which authorises the federal government to issue corresponding ordinances, however, allows political influence on the BNetzA to an impermissible extent, according to the CJEU.

However, the German Federal Government is convinced that this ruling will have no impact on the hydrogen sector - at least not with regard to the Hydrogen Network Charges Ordinance (Wasserstoff-NEV), which came into force in September 2021. The judgement only covers the areas of electricity and natural gas (in particular on the basis of the still valid Directive on the Internal Market for Natural Gas), but does not cover the regulation of pure hydrogen networks. Whether such a strict separation of the different energy carriers was actually the basis of the judgement may be doubted - especially since the European legislator seems to include hydrogen under the term gas in addition to natural gas. On the other hand, the draft of an internal gas market directive that has now been presented deliberately provides for a transitional period. This is because according to this draft, the regulatory authorities will only have to be in a position to set or approve charges and calculation methods for access to hydrogen networks from 1 January 2031. This will have to be understood as an exclusive competence, which, against the background of the CJEU ruling that the draft directive takes up, excludes any political influence, including through framework requirements in the form of regulations, even if this requirement can be critically questioned, not least against the background of the democratic legitimisation of the legislator.

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