The need to diversify our sources of energy has become more and more compelling, aggravated by the current geopolitical context and climate change. Many countries have expressed their willingness to use hydrogen as part of a greener energy mix and see it as a staple of their energy transition efforts. Hydrogen is available in abundance in the environment, but to become a viable alternative to carbon-intensive energy sources, it will have to overcome a high cost of production, challenges regarding its transportation and storage due to technology and infrastructure constraints, and the absence of a market so far. This will also have to be supported by a sufficiently real regulatory push. In this piece, we will address where the European Union and the United Kingdom regulators are at in the sector.
The most common hydrogen “colors” when it comes to the energy transition are “green” hydrogen, which is produced from renewable sources such as solar or wind, “blue” hydrogen produced from natural gas and supported by carbon capture and storage (CCS) to capture and store—as its name suggests—the carbon produced in the process, and “pink” hydrogen produced from nuclear energy. “Grey” hydrogen, on the other hand, is produced from fossil fuel. Brown, purple, turquoise, yellow are also sometimes used to color-code hydrogen.
Both the EU and the UK’s hydrogen strategy incentivize low-carbon hydrogen (i.e., mainly blue and green hydrogen).
EU’s Approach to Hydrogen
EU Hydrogen Strategy
The EU adopted its hydrogen strategy for a climate-neutral Europe in 2020 (the EU Hydrogen Strategy) and recommended policy action in five sectors: support for investments, encouragement of demand and production, development of a market and infrastructure for hydrogen, collaboration in research and development, and global cooperation.
The EU strategic roadmap to support development of hydrogen envisages the following phases:
- Phase 1 (2020-2024) strategic objective is to
- install 6 GW of renewable hydrogen electrolysers in the EU;
- scale production up to 1 million tonnes of renewable hydrogen;
- decarbonise existing hydrogen production, e.g., in the chemical sector; and
- facilitate hydrogen consumption in new end-use applications, such as other industrial processes and possibly in heavy-duty transport.
In Phase 1, the electrolysers could be installed next to existing demand centers in larger refineries, steel plants, and chemical complexes.
- Phase 2 (2024-2030) aims to
- establish hydrogen as a crucial part of an integrated energy system with a strategic objective to install at least 40 GW of renewable hydrogen electrolysers by 2030;
- reach production of up to 10 million tonnes of renewable hydrogen in the EU;
- expand hydrogen into new sectors, including steelmaking, trucks, rail, and some maritime transport applications;
- additionally, further retrofit the existing fossil-based hydrogen production with carbon capture is planned to continue to reduce greenhouse gas (GHG) and other air pollutant emissions in view of the EU’s increased 2030 climate ambition.
- Phase 3 (from 2030 to 2050) would be an ultimate step towards renewable hydrogen technologies’ maturity and deployment at large scale to reach all hard-to-decarbonize sectors.
The EU has reported being on track with successful implementation of all action points of the EU Hydrogen Strategy.
However, support schemes are likely to be required to scale up hydrogen. One potential instrument considered by the EU Hydrogen Strategy is tendering systems for carbon contracts for difference (CCfD). The CCfD would be a long-term contract with a public counterpart to remunerate the investor by paying the difference between the CO2 strike price and the actual CO2 price in the Emission Trading System (ETS) in an explicit way, bridging the cost gap as compared to conventional hydrogen production. The CCfD, however, requires further analysis and development in terms of EU competition rules.
European Clean Hydrogen Alliance
To support required investment and developments, the EU established the European Clean Hydrogen Alliance, which plays a crucial role in facilitating and implementing the actions of the EU Hydrogen Strategy and supporting investments to scale up the implementation of hydrogen. The European Clean Hydrogen Alliance has been developing investment agenda to stimulate the roll out of production and use of hydrogen and build a concrete pipeline of projects. Currently, the pipeline of viable investment projects developed by the European Clean Hydrogen Alliance includes over 750 projects.
REPowerEU
To advance the EU’s objective for phasing out Europe’s dependency on Russian energy imports, in May 2022, the European Commission published the REPowerEU plan, which includes the development of renewable hydrogen as a major energy carrier.
Among other things, the REPowerEU proposes a “hydrogen accelerator” aiming to scale up the deployment of renewable hydrogen. By 2030, the EU’s ambition is to produce 10 million tonnes and import 10 million tonnes of renewable hydrogen.
Fit for 55 Package
The European Commission adopted the “Fit for 55” package to adapt existing climate and energy legislation to meet the new EU objective of a minimum 55% reduction in GHG emissions by 2030.
The Fit for 55 package proposes to revise and update EU legislation to gradually replace fossil gas in the EU with renewable and low-carbon gases, including hydrogen. In light of the “Fit for 55 package,” it is proposed to review of EU gas market design. The hydrogen and decarbonised gas market package includes proposals to revise the gas regulation and gas directive adopted in 2009 and amend the security of gas supply regulation from 2017. The EU member states agreed on the Council’s position (“general approach”) on the proposed rules in March 2023. The next step is negotiations with the European Parliament.
Renewable (Green) Hydrogen
The EU has a specific focus on renewable (green) hydrogen. Earlier in 2023, the European Commission, through delegated acts, required under the Renewable Energy Directive, proposed regulations for renewable hydrogen in the EU.
The proposal in its first delegated act establishes a criteria to determine under which conditions hydrogen-based fuels or other energy carriers can be considered as renewable fuels of non-biological origin. One condition is that new renewable electricity generation will need to be connected to electrolyzers to produce hydrogen.
The second delegated act sets out a methodology for calculating life-cycle of GHG emissions for renewable fuels of non-biological origin. The methodology takes into account GHG emissions throughout the whole fuel lifecycle, including upstream emissions, emissions related to processing, getting power from the grid, and delivering these fuels to the final user. For hydrogen, it specifies how to evaluate GHG emissions of renewable hydrogen.
European Hydrogen Bank
In March 2023, the European Commission proposed a legislative framework for the European Hydrogen Bank aimed to incentivize early projects, by covering and, eventually also lowering, the cost gap between renewable hydrogen and the fossil fuels.
The European Hydrogen Bank will consist of two new financing mechanisms to support renewable hydrogen production within the EU and internationally. Furthermore, the European Hydrogen Bank will provide increased demand visibility by linking with offtakers, parallel member state initiatives and existing data centers. Finally, it will also play a coordination role and facilitate blending with the existing financial instruments to support hydrogen projects.
To conclude, in addition to hydrogen-specific initiatives discussed above, hydrogen benefits from a potential for a financial support within the EU’s sustainability efforts in general, including under the framework in the Renewable Energy Directive and the ETS, the EU Industrial Policy, and the InvestEU program. The EU also encourages supporting hydrogen through public funding, such as Important Projects of Common European Interest (IPCEIs), and encouraging member states to deploy state aid for this purpose.
Hydrogen Policy Efforts in the UK
The Department of Energy Security and Net Zero (DESNZ) took on the government’s energy policy responsibilities following the dissolution of the Department for Business, Energy, and Industrial Strategy (BEIS) in February 2023. A few weeks later, the DESNZ published its latest plans to scale up carbon capture, hydrogen production and bioenergy with carbon capture and storage. The UK’s ambitions are high, and the government is now aiming for up to 10GW of hydrogen production by 2030, with at least half of this to come from electrolytic hydrogen.
The government has set a low-carbon hydrogen standard (LCHS) at 20gCO2e/MJLHV (lower heating value) of hydrogen at the point of production—the maximum threshold for the amount of GHG emissions allowed in the production process for hydrogen to be considered low-carbon hydrogen and for the related project to be eligible for government funding support. A guidance and a calculator tool have been released for hydrogen producers to use for GHG emissions reporting and sustainability criteria under the LCHS, required to apply for net-zero hydrogen fund (NZHF) and hydrogen business model funding. A government consultation on the design elements of a low-carbon hydrogen certification scheme closed at the end of April 2023.
In parallel, the downstream gas industry is mobilized to consider ways to develop a hydrogen-friendly transportation and delivery network (e.g., building new pipelines, repurposing existing gas pipelines to enable the transportation of a hydrogen blend).
Low-Carbon Hydrogen Production Business Model
The first electrolytic hydrogen allocation round (HAR1) 2022 of the UK jointly offered Hydrogen Production Business Model revenue and Net Zero Hydrogen Fund (NZHF) capex support. In March 2023, the DESNZ announced (1) the winning projects from the £240 million NZHF and (2) the shortlisted projects that will proceed to the “agreeing an offer stage” (i.e., due diligence from the DESNZ and value for money assessment) of the joint business model and NZHF allocation process. The hydrogen producers of the successful projects will enter into a low-carbon hydrogen agreement (LCHA) with the Low Carbon Contracts Company (LCCC), a government-owned company. Heads of Terms of the LCHA business model were released in December 2022 and set out the main items of the business model; the final agreement is expected to be published by the end of 2023.
The LCHA will have several items in common with the Contracts for Difference (CfD), the government’s main mechanism for supporting low-carbon electricity generation. Under a CfD, developers are paid a flat indexed rate for the electricity they produce over a 15-year period, which is equal to the difference between the “strike price” (a price for electricity reflecting the cost of investing in low-carbon energy) and the “reference price” (a measure of the average market price for electricity in the British market)—that is, the hydrogen producer will receive a subsidy to cover the incremental cost of producing low-carbon hydrogen compared to the higher carbon-intensive alternative energy.
A consultation is currently ongoing to seek views on the proposed design of the second hydrogen allocation round (HAR2).
Hydrogen Transport and Storage Business Models
In April 2022, the government confirmed that by 2025 it will design new business models for hydrogen transport and storage infrastructure. Following a consultation that year, the government published a fact sheet in May 2023, in which it states that an external subsidy mechanism is required to support the business models “to help removing market barriers associated with hydrogen transport and storage infrastructure.” The subsidy would be delivered through revenue support contracts between a counterparty and a hydrogen transport or storage provider receiving the subsidy. The government is also considering the allocation of a regulated asset base (RAB)—that is, a regulated return on the costs incurred by the investor to facilitate and support the financing of certain hydrogen pipeline projects.
Offshore Hydrogen Pipelines and Storage Licensing
The DESNZ published a consultation, closed on May 22, 2023, for offshore hydrogen pipelines and storage. This consultation regarding a plan for secondary legislation to extend offshore oil and gas pipeline construction and use consenting responsibility of the North Sea Transition Authority (NSTA) to also apply to hydrogen pipelines. It also proposes to extend certain environmental and decommissioning regulations to apply to relevant hydrogen activities and grants the NSTA powers to issue hydrogen storage licenses.
As a result of these proposals, the DESNZ and the Offshore Petroleum Regulator for Environment and Decommissioning (OPRED) would be responsible for offshore environmental impact assessments and habitats assessments prior to the NSTA granting relevant approval(s).
The UK regulator is still shaping the hydrogen regulatory framework, with several consultations of the industry’s stakeholders still ongoing and demonstrating the government’s commitment to support this nascent market.
Law clerk Maciej Plotka co-authored this article.
