FEATURE: New European Commission draft hydrogen rules draw industry, NGO ire

The European Commission is set to publish much-anticipated draft rules on green hydrogen Dec. 15, with a leaked draft drawing criticism from industry and environmental groups alike, as project developers await the policy clarity needed to finalize investment decisions.

Industry body Hydrogen Europe has criticized the leaked draft for not going substantially beyond a position set out in a consultation in May.

"The new proposal by the European Commission has not substantially changed since it was consulted in May," Hydrogen Europe Chief Policy Officer Daniel Fraile told S&P Global Commodity Insights in an email Dec. 8, noting "numerous calls" by industry and the European Parliament to ease rules.

The latest leaked draft "Delegated Act" from the EC include a condition that renewable electricity from the grid used to power electrolyzers for hydrogen production must be produced in the same calendar quarter as the hydrogen production until March 2028.

From April 2028, the renewable power must be produced in the same hour as the hydrogen production.

After 2027, the renewable power must also come from new production assets, coming online no more than three years before the electrolyzer.

Additionality debate

MEP Markus Pieper, European Parliament Rapporteur on the Renewable Energy Directive and member of the center-right European People's Party Group said the EC had moved on the principle of additionality.

The new proposal allows subsidized wind or solar plants to produce hydrogen for a certain period, Pieper said in a statement Dec. 6. "However, we are still critical that the Commission insists on additionality from 2027 onwards."

Other industry members have welcomed the additionality clause, saying it was the only way to guarantee truly green hydrogen. And some have pointed to the cheapest clean electricity supply coming from new renewables regardless.

Under the EC proposal, power taken from directly-connected renewables or from a grid that is over 90% renewable is also considered as renewable for hydrogen production, if the production does not exceed a maximum number of hours set in relation to the proportion of renewables in the bidding zone.

"If electrolyzers powered the grid without renewable power purchase agreements in places like Poland, the carbon intensity of hydrogen production would be around 40 kgCO2/kg H2, far higher than the 8-9 kg CO2/kg H2 for conventional gray production, whereas for places like Norway it would be round 1 kgCO2/kg H2 due to the level of renewables on the grid," S&P Global hydrogen analyst Matthew Hodgkinson said.

Hydrogen Europe said the absence of exemption from the rules after April 2028 for renewable hydrogen production facilities coming online before that date made it difficult for project developers to meet the criteria, as the quarterly correlation would underpin PPAs and investment decisions over the long term. Switching to hourly accounting after that date would be difficult for project developers, the group said.

Fraile said with hourly temporal correlation from 2028, producers would not be able to supply green-hydrogen hungry consumers such as steel and ammonia producers, which need a large, constant hydrogen supply at high utilization rates. "It is not simply a question of the hydrogen final price; it is a question of the project's viability," he said.

The EU is targeting 10 million mt/year of renewable hydrogen production and another 10 million mt/year of imports by 2030.

Platts assessed the cost of producing renewable hydrogen via alkaline electrolysis in Europe at Eur22.96/kg ($24.21/kg) Dec. 8 (the Netherlands, including capex), based on month-ahead power prices, S&P Global data showed.

By contrast, costs in potential exporting regions such as the Middle East were assessed much lower at $3.55/kg (Oman, including capex).

The industry had already called for monthly correlation between renewables generation and hydrogen production, which Hydrogen Europe said was "already challenging and a significant change to today's market design. No other sector is exposed to such requirements."

The EC declined to comment on the leaked proposals.

Investment delays

Wrangling over the rules set to define green hydrogen has extended for much of 2022.

The EC's proposal and consultation on the Delegated Act in May was met with widespread industry criticism, warning that the strict additionality and temporal correlation rules would deter investment.

The European Parliament in September passed an amendment to the proposed Renewable Energy Directive, effectively overruling the Delegating Act and scrapping the additionality criteria.

The move was initially welcomed by industry bodies, but project developers soon paused investment decisions as the decision led to uncertainty over the rules and the timeline of their implementation.

Total announced clean hydrogen capacity in Europe is 29.7 million mt, according to the S&P Global Hydrogen Production Asset Database. But just 0.3% of this is operational, permitted or under construction.

Hydrogen Europe warned that a failure of the Parliament and the Commission to reach agreement over the Delegated Act could leave rules within the RED legislation, leading to the possibility of further delays and a fragmented market as EU member states transpose the rules into national legislation.

Cautious welcome

The industry group did, however, welcome changes to geographical correlation in the EC's new proposal, which require the renewable power facility to be in the same bidding zone as the electrolyzer or an interconnected bidding zone.

The EPP Group welcomed the EC's new proposal, but also demanded further changes. EU member states have been discussing the new draft in the week to Dec. 9.

"It makes green hydrogen too expensive and threatens to make hydrogen a luxury," Pieper said.

An extension to the exemption from additionality requirements was critical to ensuring sufficient supply from local production and imports, he said.

"The Commission proposal creates an artificial bureaucratic shortage which would make green hydrogen extremely expensive," he added.

But, Hydrogen Europe's Fraile said, without a longer transitional period to 2030, Europe would "remain slave to a fossil fuel economy and will surely not see new technologies such as DRI steel and renewable e-fuels emerge in its territory."

Environmental NGO Transport & Environment, which published the leaked draft, also criticized the EC proposal. It said the rules around additionality were too lax, allowing for electrolytic hydrogen to be produced from a grid running on fossil fuel-powered generation.

"While hydrogen is badly needed to decarbonize shipping and aviation, without additional renewables tied to hydrogen targets, the Commission's plan may well end up doing more harm than good," T&E Electricity and Energy Manager Geert Decock said Dec. 1.