On 10 February 2023, the European Commission finally adopted the Additionality Delegated Act, which outlines conditions under which hydrogen, hydrogen-based fuels or other synthetic fuels can be considered as renewable fuels of non-biological origin (RFNBOs), and the Methodology Delegated Act, which provides the methodology for calculating life-cycle greenhouse gas emissions for RFNBOs, which is necessary to determine whether or not they comply with the EU’s GHG emissions thresholds applicable to such fuels.
Once these Delegated Acts have been sent to the European Parliament and the Council, both institutions will have two months (potentially extended by another two months) (pursuant to Article 35(7) of the 2018 Renewable Energy Directive) to approve or veto the Delegated Acts. Neither the European Parliament nor the Council can amend those Delegated Acts.
This alert analyses the Additionality Delegated Act and its impact on the hydrogen market. Our alert on the Methodology Delegated Act can be found here.
The Additionality Delegated Act specifies the conditions under which hydrogen or fuel produced from electricity – within or outside the EU – can qualify as renewable (i.e., as an RFNBO) under Article 27(3) of Directive (EU) 2018/2001 (REDII).
It is important to note that these conditions will apply to both domestic producers as well as producers from third countries that want to export renewable hydrogen – or other hydrogen-based fuels, such as renewable ammonia or renewable methanol – to the EU to count towards the EU renewables targets.
As a default rule (under Article 27(3) of REDIIf), where a production facility produces hydrogen/fuel from electricity, the share of RFNBO 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.
By way of derogation from this default rule, the hydrogen/fuel produced can be counted as fully renewable in the following two scenarios (i.e., the subject of the Delegated Act):
- The ‘direct line’ setup, where the hydrogen/fuel production facility is connected directly to a new renewable electricity installation and does not use grid electricity. For the electricity produced under this setup to be fully renewable, the renewable electricity installation must (mainly) be connected via a direct line to the fuel production plant and have come into operation at most 36 months before the hydrogen/fuel production facility.
- The ‘grid connection’ setup, where the fuel/hydrogen production facility is connected to the grid but the electricity used is ‘demonstrably’ renewable.
There are four alternative scenarios under which grid electricity can be considered to use ‘demonstrably’ renewable electricity:
- Where the fuel/hydrogen production facility is located in a ‘bidding zone’ (i.e., the geographical zone in which electricity is traded, typically a country or a region thereof) containing a very high (90%+) level of renewables, and the number of production hours is capped at the same percentage of the year (i.e., 90%+ of the hours in a given calendar year).
- Where the fuel/hydrogen production facility is located in a bidding zone (outside scenario 1) in which the emission intensity of electricity is lower than 18 g CO2eq/MJ (i.e., a “low-carbon/nuclear bidding zone“), relies on electricity produced under a renewable power purchasing agreement (PPA) and complies with ‘temporal’ and ‘spatial’ correlation requirements (see below).
- Where the fuel/hydrogen is produced with electricity consumed during an imbalance settlement.
- The ‘default’ scenario – in which the renewable electricity is (either produced on site or) procured via a renewable PPA, and ‘additionality’, ‘temporal’ correlation and ‘spatial’ correlation requirements are met.
In practice, scenarios 2 and 4 featuring the conclusion of a PPA with a renewable electricity installation will be the most common. The only difference between these two scenarios is that, in a “low-carbon/nuclear bidding zone”, fuel producers are not required to comply with additionality requirements (see below).
The sets of requirements relevant for the main scenarios under the grid connection setup (scenarios 2 and 4) are as follows:
- PPA: With respect to the PPA, the hydrogen/fuel producer must use renewable electricity by concluding 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.
- Additionality: For hydrogen/fuel production facilities/capacity that come into operation as from 2028, the electricity generation installation(s) under the PPA must be ‘new’ – i.e., have come in operation not earlier than 36 months before the fuel/hydrogen facility – and be ‘unsubsidised’, i.e., have not received investment or operating aid (with a few exceptions). Hydrogen/fuel production capacity that comes into operation before 2028 are exempted from these rules for 10 years, up until 1 January 2038. These requirements are never applicable in a low-carbon/nuclear bidding zone.
- Temporal correlation: In essence, the production of the hydrogen/fuel must either (i) use electricity taken from the grid during either the same one-hour period (or one-month period until specific dates, see below) as the renewable electricity production under PPA, or (ii) be produced during a one-hour period when the electricity price is below €20/MWh or below 36% of the EU carbon price, thus indicating that the electricity consumption would help with balancing the grid and would not involve fossil-based production. The hourly correlation requirement is relaxed for a number of years: up to 31 December 2029 until when the correlation must in principle only be achieved on a monthly basis. However, Member States are allowed to impose the hourly correlation requirement from 1 July 2027 for RFNBOs produced in their territory.
- Spatial correlation: The renewable electricity installations under PPA must either be (i) located in the same bidding zone (or in an interconnected 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’s bidding zone. Member States are also allowed to introduce additional criteria concerning the spatial correlation requirements to “ensure compatibility of capacity additions with the national planning of the hydrogen and electricity grid”, but without negatively impacting the functioning of the internal electricity market.
The publication of the EU’s rules on what constitutes “renewable” hydrogen is a critical development. These rules underpin both hydrogen market players’ ability to access the various state support packages and incentives, as well as the creation of new renewable electricity generation capacity in the EU. As such, they are key both to scaling up domestic hydrogen production in the EU and the import of hydrogen into the EU.
We expect these rules to provide some level of regulatory certainty to investors as the EU seeks the investment necessary to reach its targets of 10 million tonnes of domestic renewable hydrogen production and 10 million tonnes of imported renewable hydrogen by 2030 in line with the REPowerEU plan. At the same time, these complex rules will not be easy to navigate and satisfy in practice which may delay project implementation and increase project costs.