European Commission proposes Delegated Acts to define renewable hydrogen.

The two so-called Delegated Acts (DAs) submitted by the Commission on 13 February 2023 serve to implement the requirements of Art. 27 (3) and Art. 25 (2), 28 (5) of the Renewable Energy Directive 2018/2001 (RED II). They are part of the still rudimentary EU legal framework for renewable hydrogen and define the conditions for counting fuels towards the Member States' renewable energy targets.

The background for this is the EU's REPowerEU target to produce and import 10 million tons of renewable hydrogen in 2030. According to RED II, the two DAs should have been submitted by 31 December 2021 at the latest. 

Contrary to this timetable, however, the Commission did not present the first drafts until May 2022. After controversial discussions and a partial rejection in the European Parliament (EP), the Commission proposed slightly revised new drafts on 1 December 2022. As a result of the subsequent consultation, it adopted the two DAs that have now been submitted.

The first DA defines renewable hydrogen for all consumption sectors

The first DA, which is based on Art. 27 (3) RED II, defines the requirements for the production of hydrogen, and fuels based on these, so they can be counted as Renewable Fuels of Non-Biological Origin (RFNBOs) within the meaning of Art. 2 no. 36, 25 (2) RED II towards the minimum share of renewable energies in the transport sector. Therefore, in addition to hydrogen, the definition also refers, in particular, to derivatives such as ammonia, methanol, paraffin and other hydrogen-based e-fuels. 

Although Art. 27 (3) RED II refers exclusively to the transport sector, the definition has significance far beyond this, as the Commission has proposed in the context of RED III that RFNBOs can count towards the renewable energy targets regardless of the sector in which they are consumed. In other words, the first DA determines what is to be understood by green hydrogen and its derivatives for the whole of EU law and is, therefore, of central importance for ramping-up the hydrogen economy. 

The requirements apply both to production in the EU and to third countries, which explains the global interest in the Commission's proposals. In order to prove the sustainability criteria, a system of voluntary certification has been proposed in accordance with Art. 9 of the first DA. The Member States are to be required to recognise the certificates if the Commission has approved the certification scheme in question in accordance with Art. 30 (4) RED II.

Additionality for renewable electricity used in RFNBO production 

The main objective in determining the sustainability criteria for RFNBOs according to Art. 27 (3) RED II was the creation of additional facilities for the production of renewable electricity. The expected increase in electrolysis capacity should not be achieved by falling back on the existing renewable energy plants (RE plants) so as to avoid an otherwise likely increase in fossil generation. This criterion of additionality, which is relevant for the described option 3, is flanked by the requirements of a temporal and geographical correlation between electricity generation and electrolysis. The aim is to ensure that RFNBOs are only produced if the renewable energy is generated at the same time and in the same area.

Against this background, the first DA envisages the scenarios described below, in which the sustainability criteria are met with regard to the RE plants used for electrolysis or the renewable electricity purchased for electrolysis.

Option 1 – Direct connection to the RE plant

In the case of a direct connection, the electrolysis must take place in the same plant as the renewable production in accordance with Art. 3 of the first DA, or there must be a direct line between the two. If the RE plant is connected to the electricity grid, it must be proven via smart meters that no electricity was taken from the electricity grid for the electrolysis. In addition, the RE plant must have been put into operation no earlier than 36 months before the electrolyser. If electricity is taken from the grid, it will be considered renewable if it meets the requirements of option 2. 

Option 2 – Drawing power from the grid: green power grid

With this option, the electrolyser must be located in the same bidding zone as the RE plant according to Art. 4 of the first DA. An additional requirement is that either the average renewable energy share in the bidding zone has exceeded 90 % in the previous year (in which case the 90 % excess is assumed for the following five years) or the emission intensity in the grid is below 18 gCO2-eq/MJ, in which case the temporal and geographical correlation described in option 3 must also be met. Ultimately, the electricity used will also be deemed renewable if it has been consumed during an imbalance settlement period interval and thereby the redispatch requirement has been reduced accordingly.

Option 3 – Drawing power from the grid: PPA or own power

According to Art. 5, 6 of the first DA, electricity taken from the grid is also deemed renewable if the operator of the electrolyser actually generates it itself in the corresponding quantity or purchases it from the operator of a RE plant via a Power Purchase Agreement (PPA), whereby the following conditions must be cumulatively fulfilled.

  • According to the principle of additionality, the RE plant must have been put into operation no earlier than 36 months before the electrolyser. Furthermore, the RE plant must not have received any subsidies for its construction and operation. Electrolysers that have been put into operation by 1 January 2028 will be exempt from these requirements until 1 January 2038. This transitional provision will not apply to capacity expansions in electrolysers after 1 January 2028. The aforesaid deadlines were each extended by one year compared to the draft of the first DA dated 1 December 2022.
  • According to the principle of temporal correlation, from 2030 RFNBOs must be generated within the same hour as the renewable electricity used. This can also be taken from a new electricity storage unit that is located downstream of the same grid connection point as the electrolyser and was charged within the same hour in which the renewable electricity purchased was produced. Member States can apply this narrow timeframe as early as mid-2027. 
  • By way of a transitional provision, until 31 December 2029 (preliminary draft: until 31 March 2028), the requirement of temporal correlation will be deemed met if the generation takes place within the same month (preliminary draft: within the same quarter).  A further possibility to fulfil the temporal correlation – granted without a transitional provision – is met if the RFNBO production takes place within an hour in which the clearing price in the day-ahead market in the relevant bidding zone (cf. Art. 39 (2a) Regulation (EU) 2015/1222) is at most EUR 20 per MWh or lower than 0.36 times the price of an emission allowance to emit one ton of carbon dioxide equivalent.
  • The principle of geographical correlation states that the electrolyser and the RE plant must be located in the same bidding zone at least at the time they are put into operation. The plants may also be located in adjacent bidding zones; in this case, however, the day-ahead electricity price in the bidding zone of the RE plant must be at least equal to that in the bidding zone of the electrolyser. Finally, the RE plant can also be located in an adjacent offshore bidding zone.

The second DA regulates the calculation of greenhouse gas emissions

The second DA based on Art. 25 (2) and 28 (5) RED II contains the methodology for calculating greenhouse gas emissions and, therefore, implements the target set out in Art. 25 (2) RED II of greenhouse gas savings for RFNBOs of at least 70 % from 1 January 2021 compared to the fuels to be replaced. The calculation of greenhouse gas emissions takes into account (almost) the entire life cycle of RFNBOs from generation, including electricity withdrawal from the grid, through transport to the end consumer. Emissions from the manufacture of machinery and equipment will not be taken into account (Annex A.1.).

The fossil benchmark for RFNBOs is set at 94g CO2-eq/MJ (Annex A.2.). Taking into account the savings target of at least 70 %, this results in emissions of max. 28.2g CO2-eq/MJ for RFNBOs. For hydrogen, this means a limit value of 3.38t CO2-eq/tH2. Hydrogen and hydrogen-based fuels that exceed this value are not automatically excluded as renewable fuels, but they cannot be counted towards the Member States' renewable energy targets. This is likely to make marketing them more difficult and therefore affect their market value. Electricity that is to be considered fully renewable according to Art. 27 (3) RED II will be assessed with greenhouse gas emissions of zero. 

An important consideration in the production of RFNBOs from renewable hydrogen is the classification of the CO2 used in the process. The Annex to the second DA regulates the conditions under which captured CO2 can be considered as an avoided greenhouse gas emission, i.e. its use in the production of RFNBOs is possible. The following case groups are envisaged:

  • CO2 from industrial processes that are covered by an emissions trading scheme. However, this option is only available for CO2 from electricity production until 2036, in all other cases until 2041;
  • CO2 that is captured from air;
  • CO2 from the production or combustion of biofuels or biomass that meet the sustainability criteria and that have not received greenhouse gas emission saving credits;
  • CO2 from the combustion of RFNBOs that meet the criteria of the second DA;
  • CO2 from a geological source.

It is unclear whether the electricity used for the production of renewable hydrogen derivatives must also meet the sustainability criteria described above in order to qualify as RFNBOs. Following the logic of RED II and the two DAs, there is a lot to be said for this outcome.

Legal and planning certainty for the hydrogen economy is long overdue

The process of submitting the two DAs by the Commission has taken a considerable amount of time. The main reason for this was the intense and sometimes controversial debate among the economic operators involved and the EP on the definition of renewable hydrogen and the RFNBOs based on it, which was considered ground-breaking. Criticism was particularly directed against the Commission's concept of additionality and temporal correlation. According to the critics this created unnecessary hurdles and has, therefore, hindered the development of the hydrogen economy. In September 2022, for example, the EP had rejected the principle of additionality altogether and demanded an initial time window of one quarter for the temporal correlation and one month in the long term. The industry criticised, in particular, what it saw as too close a temporal correlation, because it ran counter to achieving the highest possible baseload utilisation of the electrolysers. They also said the restriction on the use of CO2 from industrial processes in the production of RFNBOs was counterproductive because these quantities would be needed permanently in the expected expansion of RFNBO production. Environmental organisations, on the other hand, criticised that the transitional provisions were too generous. 

The Commission has essentially stuck to its original concept, even though it has approached the EP and the business community on the transitional provisions. The EP and the European Council now have two months to adopt or reject the proposal. The deadline can be extended by a further two months. 

For the sake of legal and planning certainty, adopting the proposal would be desirable. Lots of projects for the production of RFNBOs are ready to start but cannot currently be implemented because it is unclear which sustainability criteria will apply to renewable hydrogen. In addition, clarity on the definition of RFNBOs is also needed for the indispensable development of certification systems. The US Inflation Reduction Act shows that Europe cannot really afford to be in this type of limbo in the global competition for investment. Adopting the two DAs proposed by the Commission would break the deadlock. The market ramp-up could finally pick up speed. 

We have been successfully involved in advising many clients in connection with hydrogen and its derivatives for years and offer comprehensive advice in this regard.