When can electricity-based hydrogen be deemed ‘Renewable’ and ‘Sustainable’ and why do the labels matter?

Following the launch of the RePowerEU package, the European Commission continues to develop the regulatory framework applicable to renewable fuels of non-biological origin (RFNBO, mainly renewable hydrogen). Two draft Delegated Acts that will have a significant impact on the hydrogen market have been published for public consultation under the Renewable Energy Directive recast (REDII, Directive (EU) 2018/2001).

Additionally Delegated Act

The first act is in relation to the so-called additionality requirements applicable to the electricity-based production of RFNBOs (“Additionality Delegated Act”).

This act is hugely important because it specifies the conditions under which hydrogen or fuel produced from electricity — within or outside the EU — can qualify as renewable.

Under the existing legislation (i.e., the REDII), where a production facility produces hydrogen/fuel from electricity, the share of RFNBOs produced is equal to the average share of renewable electricity on the electricity network of the country in which the hydrogen/fuel production facility is located.

In EU Member States with a very high share of renewable electricity on the grid (such as Austria or Sweden), this default rule may be sufficient to ensure the viability of the business model of producers of renewable hydrogen or RFNBOs simply using electricity taken from the grid. However, in many other Member States with a lower share of renewable electricity on the grid, this is unlikely to be the case.

The Additionality Delegated Act extends the scope of when hydrogen can qualify as renewable when produced using electricity. Under the current proposal, the hydrogen/fuel produced can be counted as fully renewable in the following two situations:

  1. The “direct line” setup, where the hydrogen/fuel production facility is connected directly to a new renewable electricity installation and does not use grid electricityTo fall under this setup, the renewable electricity installation must (mainly) have been commissioned at most 36 months before the hydrogen/fuel production facility. This “36-month” deadline established by the draft delegated condition is significantly less stringent than the requirement of Article 27(3) of the REDII itself, which provides that the renewable electricity installation should come into operation “after, or at the same time as” the hydrogen/fuel production facility.
  2. The “grid connection” setup, where the fuel/hydrogen production facility is connected to the grid but the electricity used is “demonstrably” renewable. There are three alternative scenarios under which a hydrogen/fuel production facility using grid electricity can be considered to use “demonstrably” renewable electricity and hence to produce RFNBOs.
    • In practice, the scenario involving the conclusion of a power purchase agreement (PPA) with a renewable electricity installation is the most common. To fall under this PPA scenario, the following four conditions must be met:
    • The hydrogen/fuel producer must conclude one or more PPA(s) with one or more renewable electricity installation(s) for an amount that is at least equivalent to the amount of electricity used for the hydrogen/fuel production process.
    • For hydrogen/fuel production facilities that come into operation from 2027, the electricity generation installation(s) must be “new” — i.e., have come into operation no earlier than 36 months before the fuel/hydrogen facility — and “unsubsidized”. Those rules will never be applicable to hydrogen/fuel production facilities that come into operation before 2027.
    • The production of the hydrogen/fuel must meet temporal correlation requirements, which essentially require that electricity is taken from the grid during either (i) the same one-hour period (up to 2027, one-month period) as the renewable electricity production under the PPA, or (ii) that hydrogen/fuel is produced during a one-hour period when the electricity price is below EUR 20/MWh or below 36% of the EU carbon price, thus indicating that the electricity consumption would help balance the grid.The production of the hydrogen/fuel must meet spatial correlation requirements, i.e., the renewable electricity installations under the PPA must either be (i) located in the same bidding zone (or in an adjacent offshore bidding zone) as the hydrogen/fuel production facility, or (ii) in a neighbouring bidding zone where electricity prices are equal or higher than in the production facility bidding zone.

This could be highly advantageous for potential RFNBO producers that wish to enter into a PPA if their electrolyser enters into operation before 1 January 2027. Indeed, before 2027, the renewable electricity installation with which the fuel/hydrogen production facility concludes a PPA (i) does not have to be new or even recent, and (ii) can receive or have received any kind of public support.

Methodology Delegated Act

The second act (“Methodology Delegated Act“) is in relation to the life cycle methodology for assessing the greenhouse gas emissions savings of renewable fuels of nonbiological origin (again, mainly renewable hydrogen) and recycled carbon fuels (RCF).

This act (i) sets the greenhouse gas savings threshold for RFNBOs and RCFs and (ii) outlines the methodology to determine when a given batch of renewable hydrogen meets the REDII’s requirement of 70% greenhouse gas emissions savings.

If the greenhouse gas emissions savings of a particular batch of hydrogen do not meet this threshold, it will still technically qualify as renewable hydrogen, but will not count towards Member States’ EU target for renewable energy and, hence, is very unlikely to receive support at a national level (public funding, tax exemptions, etc.).

For all RFNBOs and RCFs, the total emissions from the “fossil fuel comparator” (i.e., the fossil fuels against which cleans fuels are compared) is set to 94 gCO2e/MJ in line with the value set out for biofuels and bioliquids in the REDII. Using this reference point and this definition, one can deduce that the greenhouse gas savings threshold of 70% is equivalent to a requirement that the total greenhouse gas emissions from the use of RFNBOs or RCFs, as calculated based on the methodology, must be below 28.2 g CO2e/MJ. For hydrogen (but not for other RFNBOs/RCFs), this is equivalent to 3.38 tCO2e/tH2.

One of the crucial points of the draft methodology is that it essentially prohibits the production of clean fuels (RCFs/RFNBOs) using CO2 captured from industrial activities using carbon capture and used after 2035.

Impact on the EU Taxonomy

As a matter of principle, the notion of “renewable hydrogen” under the REDII and that of “sustainable hydrogen production activities” under the EU Taxonomy are distinct concepts subject to separate legal regimes. The advantages conferred on “renewable hydrogen” under EU and national laws are not necessarily applicable to hydrogen produced in a “sustainable” way under the EU Taxonomy, and vice versa. In particular, under the EU Taxonomy, the production of hydrogen — and other hydrogen-based fuels — can be deemed “sustainable” even if the energy used is not renewable, so long as such production meets the greenhouse gas emissions thresholds outlined in Section 3.10 of Annex I of the Climate Delegated Act under the Taxonomy Regulation.

One could therefore expect that the Additionality Delegated Act, which is adopted under the REDII and only covers the requirements under which hydrogen and hydrogen-based fuels can be deemed renewable, would have no effect on the EU Taxonomy. However, the Additionality Delegated Act will have an indirect effect on the EU Taxonomy’s assessment of which hydrogen methods for the production of hydrogen — and other hydrogen-based fuels — can be deemed “sustainable”.

Indeed, the legal frameworks applicable to hydrogen under the EU Taxonomy and under the REDII are indirectly linked because (i) the section of the EU Taxonomy applicable to hydrogen production activities refers to the Methodology Delegated Act as the default methodology for assessing the life cycle greenhouse gas emissions of such production activities, and (ii) the Methodology Delegated Act provides for “electricity used to produce [RFNBOs] that is considered fully renewable according to [the Additionality Delegated Act], a carbon intensity of zero should be applied”. This rule will thus also apply for the purposes of the EU Taxonomy, making the Additionality Delegated Act also relevant for such purposes.

Why Do the Labels Matter?

So why is this so important?

These delegated acts are fundamental to determine which type of hydrogen production processes will produce “renewable” or “sustainable” hydrogen. Hydrogen qualifying as “renewable” under the REDII will be able to benefit from the various types of public support at both EU and national levels, such as direct and indirect subsidies, tax exemptions, etc. Hydrogen qualifying as “sustainable” under the EU Taxonomy will contribute to improving the disclosure of companies subject to reporting under the Taxonomy Regulation and can be supported using private capital within the context of sustainable finance (i.e., benefit from “green” funds).

Mastering the working and nuances of the Additionality Delegated Act and Methodology Delegated Act will therefore be fundamental for any project aiming to produce renewable hydrogen, sustainable hydrogen or sustainable/renewable hydrogen-based fuels, as well as recycled carbon fuels, and benefit from their regulatory and financial benefits.

The consultation has now closed, but the delegated acts have not been adopted yet. However, we expect that both acts are likely to be adopted, possibly with a few modifications to the draft versions.