Key points

  • European Union requirements for certification of “green” hydrogen and other Power-to-X fuels continue to evolve.
  • Most recently, the European Parliament has proposed a set of amendments to the criteria for renewable electricity used in hydrogen production which would:
    • remove the requirement for the renewable electricity to originate from a plant constructed within three years from the construction of the hydrogen plant; and
    • relax the timing and geographic linkage required between generation of renewable electricity and production of green hydrogen.
  • The proposed amendments could facilitate rapid scaling-up of green hydrogen production and reduce production costs. However, they have proven contentious and we await to see whether they will be accepted and ratified by the European Council.

Background

Mandated emissions reduction targets and the need to replace natural gas from Russia in Europe’s energy mix continue to drive the European Union’s (EU) policies in relation to green hydrogen. Recent years have seen a rapid growth in the number of sectors in the EU subject to greenhouse gas emissions regulation[1], which is driving demand for cleaner fuels such as green hydrogen.

For producers and consumers of green hydrogen (and other Power-to-X fuels) alike, regulatory certainty on the criteria for certification of the commodity as “green” is critical.

The EU’s requirements for production of “renewable fuels of non-biological origin” (RFNBOs), which include green hydrogen, are contained in the Renewable Energy Directive 2018/2001/EU (RED II). The RED II requirements have been subject to scrutiny and criticism in industry for defining a set of narrow parameters for accepting renewable electricity (RE) used to produce RFNBOs.

Procuring RE directly from source or from the grid

There are two options to source the RE required for an electrolyser to produce green hydrogen (or other RFNBO):

  • directly, from a “captive” RE generation plant (located at the same site or connected directly by private wire); or
  • from the electricity grid.

Electricity is taken from the grid where it is not possible to locate the electrolyser (or RFNBO installation close to the RE plant (e.g. a wind farm or solar PV plant)). However, as the grid can at any point in time contain a mix of renewable and non-renewable electricity, all of which is fungible in practical usage, this can make it difficult to identify whether the electricity consumed from the grid originated from an RE source.

Move to amend RED II

The scope of the RED II rules for production of RFNBOs was originally limited to use in the transport sector in the EU.

In the Fit for 55 package of measures introduced by the EU in July 2021 to achieve a 55% reduction in greenhouse gas (GHG) emissions by 2030, the European Commission (the Commission) extended the scope of RED II to apply more widely in industries such as cement, metals and chemicals, and set down minimum targets for use of RFNBOs in transport and in industry by 2030. The Commission also undertook to develop, through a subsequent Delegated Act, an EU-wide methodology to ensure that the electricity used to produce RFNBOs was of renewable origin (replacing the existing RED II rules).

Following the outbreak of war between Russia and Ukraine in February 2022 and the subsequent curtailment of natural gas flows from Russia to Europe, the Commission introduced the REPower EU Plan intended to end reliance on imported Russian fossil fuels, including through the production of 10 million tonnes per annum (tpa) of green hydrogen domestically (within the EU), with an additional 10 million tpa of imported green hydrogen. While this constituted a significant scaling-up in the Commission’s ambitions for the role of green hydrogen in the EU, it brought renewed focus on the limitations in RED II which could inhibit the realisation of the targets contained in the REPower EU Plan.

The European Commission’s Delegated Act

The Commission’s draft Delegated Act (published in May 2022) proposed the following requirements for RE used in production of an RFNBO:

  1. Electricity from a direct connection with an RE source: the RE plant must not have come into operation earlier than 36 months prior to the RFNBO installation and is not connected to the electricity grid (to demonstrate additionality[2]).
  2. Electricity from the grid (with Power Purchase Agreement (PPA)): the RFNBO producer has concluded one or more PPAs with an RE generator(s) and each of the following criteria have been satisfied:
    • Additionality:
      • the RE plant must not have come into operation earlier than 36 months prior to the RFNBO installation;[3] and
      • the RE plant has not received any state aid or subsidies (e.g. feed-in tariffs or CfDs);
    • Temporal correlation: the RFNBO must be produced within the same hour that the RE was generated (hourly matching); and
    • Geographic correlation: the RE plant must be located:
      • in the same “bidding zone”[4] as the RFNBO installation; or
      • in a neighbouring bidding zone, provided the RE price is at least equal to the RE price in the bidding zone in which the RFNBO installation is situated; or
      • in an offshore location/bidding zone, adjacent to the bidding zone where the RFNBO installation is situated.
  • Electricity from the grid (no PPA): electricity taken from the grid without a PPA with an RE generator can still be counted as fully renewable provided that the average amount of RE as a proportion of total electricity in the grid in the bidding zone in the previous calendar year was at least 90% (in reality, this will exclude most European electricity markets, for the time being)[5].

Recognising the practical concerns about delays in building out new RE generation capacity in most European countries, the Commission proposed that the additionality requirements would be phased in from 2027 (i.e. older RE plants would be grandfathered for RFNBO production prior to 2027).

However, the Commission’s proposals did not go far enough to address industry’s concerns about the stringency of the RED II requirements.

European Parliament’s Amendments to the Delegated Act

The European Parliament’s review of the draft Delegated Act resulted in an amendment, published on 14 September 2022 (the Amendment), proposing the following key changes:

  • Additionality: the additionality requirement has been excluded in its entirety, meaning that the RE may be sourced from any RE installation (regardless of when it was constructed).
  • Temporal correlation: the balancing period during which the production of the RFNBO is to be matched with RE production has been extended from hourly to quarterly.
  • Geographic correlation: with regard to the location of the RFNBO installation, one of the following conditions must be satisfied:
    • the RE installation must be in the same country as the RFNBO installation or in a neighbouring country (without any reference to the “bidding zone” concept); or
    • the RE installation is located in an offshore bidding zone adjacent to the country where the RFNBO installation is situated.

The narrow margin with which the Amendment was passed through the European Parliament[6] illustrates that finding an outcome which will balance the concerns of industry and the environmental lobby remains challenging. Whilst there is widespread support for increasing the production of RFNBOs to meet the GHG reduction targets set out in Recharge EU, it is increasingly challenging to achieve this while satisfying strict requirements on the sustainability of the energy consumed in their production.

The Amendment will go forward for further review by the European Council (the Council). If the Council approves the Amendment, it will be adopted into the Fit for 55 RED II amendments.

Importance

The ongoing flux in the RED II requirements is unhelpful to a nascent green hydrogen/Power-to-X industry in need of certainty around whether its fuel will be RED II compliant. This will impact project structuring and investment decisions.

However, if adopted, the Amendment would simplify the administrative burden for green hydrogen producers to certify their product and could also play a key role in reducing the marginal production costs because:

  • the removal of the additionality requirement will significantly broaden the pool of eligible RE plants helping reduce power supply costs (the cost reductions will be greater where older plants, whose original PPAs have expired, are used); and
  • the relaxation of the strict hourly matching requirements will help flatten the intermittency curve from the generation of RE, which will avoid electrolysers lying dormant during periods of low generation.

The RED II amendments would apply not just to RFNBOs produced and consumed within the EU, but also for RFNBOs produced outside the EU but exported into the EU and required to be recognised as “green”.

Therefore, project developers outside the EU, but who are targeting export to the EU market, or whose customers are supplying products to the EU (e.g. steel and cement) will need to ensure that their product is RED II compliant.