Important step for renewable hydrogen: Commission adopts two Delegated Acts on RED II
EU/Competition – Legal Update – Status: 13 March 2023
For the time being, the European Commission (Commission) is ending the years-long deadlock over the production conditions for “renewable fuels of non-biological origin” (RFNBO) and is thus finally creating the legal framework for the production of “green hydrogen” which had already been promised for the end of 2021. To this end, the Commission has adopted two separate Delegated Acts (link) to the "Renewable Energy Directive" (RED II) which are now being examined by the European Parliament (Parliament) and the Council before they may enter into force. The legislative bodies now have a total of 4 months for the examination, after the Parliament obtained an extension of the examination period by two months. The legislative procedure does not provide for a further extension. Parliament and Council cannot propose amendments, but they can each prevent entry into force by majority vote. Whether the Delegated Acts will enter into force will hence be clear by 13 June 2023 at the latest.
The decision on when (grid) electricity may be used for the production of (fully renewable) hydrogen was a balancing act between effective climate protection, incentivising the market ramp-up for green hydrogen and the expansion of renewable energies. The Commission therefore repeatedly delayed the adoption of the Delegated Acts to balance the different interests.
In essence, it was agreed that RFNBO (which include green hydrogen and its derivatives in particular) should be produced in a climate-neutral manner via electrolysis in the future. How this can be achieved without depriving the already tense electricity market of urgently needed renewable energy capacities is now governed by the Delegated Act based on Art. 27 (3) RED II. The second Delegated Act pursuant to Art. 28 (5) RED II specifies how to determine whether RFNBO (as well as recycled carbon-containing fuels within the meaning of RED II) achieve the prescribed greenhouse gas (GHG) savings quota of 70%.
Currently, the legal acts only concern the crediting of electricity-based fuels consumed in the transport sector towards the renewable energy targets of RED II for the transport sector. For Germany this means that fuel suppliers may count emission reductions achieved through RED II-compliant renewable hydrogen supplied to the transport sector towards their GHG reduction obligations. If the hydrogen does not meet the RED II requirements, this crediting option is withheld. Only the renewable share of such fuels can be credited, and only if the fuel achieves GHG savings quota of 70% compared to the fossil alternative. The renewable share of fuels produced with grid electricity is generally calculated based on the share of renewable energies in the electricity mix of the country of production. The Delegated Act on Art. 27 (3) RED II now specifies under which conditions hydrogen produced with electricity may be considered fully renewable. Producers can switch between the different variants (partially or fully renewable).
Having said that, the Delegated Act will be of greater importance in the future. As early as July 2021, the Commission proposed an amendment to RED II that would extend the RFNBO definition to all sectors and introduce minimum RFNBO quotas in industry and transport. The proposal is currently negotiated in the so-called trilogue and an agreement is expected to be reached in March 2023. If an agreement is reached in the trilogue (which is considered likely) the Delegated Acts would gain relevance beyond the transport sector; those acts would then likely set the EU-wide standard for green hydrogen (and its derivatives).
In detail, the Commission specifies the requirements for two operating models in the Delegated Act on RFNBO production (pursuant to Art. 27 (3) RED II):
- Operating the production installation with electricity from a direct connection to renewable energy generation
- Operating the production installation with grid electricity
If there is a direct connection between the hydrogen production installation and the electricity production installation and if the electricity production installation is connected to the electricity grid then it is mandatory to prove that despite the grid connection no grid electricity was used for production. In any case, it is required that the electricity generation installation was commissioned not more than 36 months before the fuel production installation (additionality). In this case, the Commission therefore assesses the risk of fossil generation capacities being activated to cover the general electricity demand as low.
To ensure that the operator uses low-carbon energies as primary energy without increasing GHG emissions in the overall system, the requirement of additionality also applies to the supply of grid electricity for RFNBO production. In addition, other requirements such as temporal and geographical correlation are stipulated.
Depending on the case of application, not all requirements have to be fulfilled. No further requirements need to be met by production facilities located in a bidding zone with a renewable energy share of more than 90%. The share also determines for how many full load hours in a calendar year the production facility may be operated. The same applies if the electricity is purchased during a “redispatch” of renewable energy installations, i.e., while the power feed-in from renewable energy generation plants is curtailed. If the electricity purchase leads to a reduction in the redispatch of renewable energy installations, the hydrogen produced with this renewable electricity is considered 100% renewable.
If the above exceptions do not apply the Delegated Act requires a close geographical connection (geographical correlation) between the renewable electricity generation installation and the fuel production installation in addition to the additionality requirement. The geographical correlation is given in any case if the installations are in the same bidding zone. This requirement avoids the purchase of electricity along grid bottlenecks which would place additional stress on the electricity grid. Until December 2029, electricity generation and consumption must be balanced on a monthly basis. From 2030 onwards, the balance must even be proven on an hourly basis (so-called temporal correlation).
Compared to the original draft, the Delegated Act contains a further exception from the general requirements, the so-called “French rule”. According to media reports, it was included in the Delegated Act at the request of the French government, hence the nickname. The rule applies to fuel production installations in bidding zones that are particularly low in emissions, usually due to a high proportion of nuclear power. A prerequisite for the application of the rule is that the emission intensity of the electricity mix in a bidding zone is below 18g CO² / MJ. In addition, the operator of the electrolyser must conclude a PPA on the amount of electricity consumed with a producer of renewable energies and fulfil the requirements for geographical and temporal correlation. In fact, only the additionality requirement is waived, i.e., the fuel producer can conclude a PPA with existing renewable energy installations. France, Sweden, and Finland are so far the only countries where compliance with this requirement may be expected.
If the producer – as will usually be the case – is not located in such low-emission bidding zones, the producer must either produce the consumed renewable electricity with their own installations or conclude a PPA for the amount of electricity consumed with a producer of renewable energies. Furthermore, the requirement of additionality applies, as already in the case of a direct connection. This means that the electricity generation installation may have been connected to the grid no earlier than 36 months before the fuel production installation came into operation. This is to ensure that there is a strong incentive to build new, additional electricity generation facilities and avoid the withdrawal of renewable capacities from the electricity market. In addition, the electricity generation installation must not have received any subsidies in the form of operating or investment aid. If the production facility goes into operation by 2028, the producer, as a first mover, will be granted a grace period until 2037 before having to purchase the electricity for the RFNBO production from such an additional generation installation.
The second Delegated Act pursuant to Art. 28 (5) RED II defines calculation methods by the means of which compliance with the required 70 % GHG savings by RNFBO is to be determined. The relevant emissions are those during the entire life cycle of the fuels, including upstream emissions, emissions in connection with electricity supply, process emissions, and emissions from transport and combustion of the fuels. The Delegated Act also stipulates eligible CO2-sources for the production of electricity-based fuels that contain CO2.
Even though the Delegated Acts currently lack any binding effect and are limited to the transport sector, it is already becoming apparent that they represent the European blueprint for a comprehensive renewable hydrogen definition. This is underpinned by the fact that the criteria were referred to in the H2.Global tender (link). The Commission also refers to the requirements of the Delegated Acts in the latest relaxation of EU State Aid law in favour of green hydrogen production. The German legislator has announced that it will implement the requirements in the 37th German Federal Emission Control Ordinance (Bundesimmissionsschutzverordnung) as soon as possible. However, investors and project developers of production installations for hydrogen and hydrogen derivatives will likely have to wait until the end of the review period to know for certain which requirements for electricity supply their projects will have to comply with.
The Chatham Partners’ EU/COMP-team is specialized in complex issues in the areas of EU and German competition, State aid and public procurement law and has extensive practical experiences in these fields.
We would like to thank Sonja Maria Brücker for her valuable support in the compilation of this article.