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EU’s proposed gas package lays path to market for blue hydrogen

16 December 2021 Cristina Brooks

The European Commission (EC) this week proposed rejigging its natural gas infrastructure rules to make way for "renewable and low-carbon gases" set to make up two-thirds of the EU's gaseous fuel consumption by 2050.

The EC announced reforms that tweak EU gas markets, targeting Paris Agreement-linked and net-zero aligned Fit-for-55-policy goals in its 15 December hydrogen and gas markets decarbonization package.

It seeks to replace much of the bloc's pipeline natural gas, now mostly meeting domestic and industrial needs, with gases such as biogas, bio-methane and low-carbon hydrogen.

Doing so led the EC to propose the new rules for the pricing and running of gas networks, gas storage, and LNG facilities, which will enable network access for new hydrogen players. The proposed rules would replace the Gas Regulation and Gas Directive, adopted in 2009 to liberalize gas markets.

One of the standout aims is to facilitate new markets for both renewable-origin "green" and fossil fuel-origin "blue" hydrogen, both of which are currently available only in small quantities, by allowing their blending in existing gas networks as well as dedicated "pure hydrogen" networks.

Blending small amounts of renewable gases in networks is more likely because existing gas pipelines would need major retrofitting to accommodate pure hydrogen.

A new regulatory body, the European Network of Network Operators for Hydrogen (ENNOH), will manage dedicated hydrogen infrastructure as well as national network development plans for electricity, gas, and hydrogen.

The package also enables certification of low-carbon fuels and blue hydrogen, adding to the certification criteria for green hydrogen proposed in the revised Renewable Energy Directive.

Specifically, certified hydrogen needs to create 70% less emissions when it is produced than traditional hydrogen does, although no one knows yet how this is going to be measured.

The EC's decision to open the door to fossil fuel-origin blue hydrogen drew criticism from green groups favoring a managed decline of gas networks and an exit from fossil fuels altogether.

US Secretary of Energy Jennifer Granholm recently warned that blue hydrogen sourced from natural gas with current technology creates more pollution than regular natural gas.

Changes for gas network operators, producers

The gas policy proposal does not set targets for how much biogas or hydrogen should be used in networks, or require new subsidies, leaving that to states seeking to fulfil their renewable fuel targets under the upscaled Renewable Energy Directive.

Instead, it sets up a 5% maximum level for hydrogen gas blends in networks crossing international borders, while improving producers' bottom line by ending trading costs and easing grid connections for production facilities.

It remains up to states and markets to determine the level of blending into the network. "It's probably not going to make a lot of difference in the near term … I think what it does is it creates the framework so that if it is required, and if large quantities of biomethane become available in particular areas, as I understand the French are very keen on, then it solves the problem," IHS Markit Senior Advisor Alex Barnes said.

If the policy goes ahead as planned, small agricultural producers of biomethane, or hypothetical small hydrogen producers, will have a license to use the gas grid and will enjoy discounted fees for doing so. "Network operators now have obligations to make it easy for low-carbon gas producers to connect to the networks. So, I think it is a useful step, but it is not revolutionary," said Barnes.

National regulators will have the authority to conduct "market tests" on the need for future hydrogen pipelines. In addition, joint planning between countries is required for future hydrogen and CO2 transportation by gas and electricity network operators, linking up with the EU-mandated National Energy and Climate Plans, wrote Barnes in a recent strategic report on the gas decarbonization package.

One of the aims of the package is to support renewable developers installing more wind or solar power, for example, which can in theory be converted into green hydrogen and sold via gas networks, said Barnes.

But he warned that clear, timely, and cost-reflective pricing for hydrogen in networks will be essential to avoid distorting the cost of transmission for renewable electricity. The EC had appeared to "copy-paste" highly regulated existing gas market rules for hydrogen, a move that risked overregulating pricing for use of the grid and stunting investment.

Issues with paying for hydrogen infrastructure were warned against in a position paper by the European Network of Transmission System Operators for Gas, which said that without planning for the long-term "the revenues derived from initial levels of hydrogen demand will not be sufficient to finance the required infrastructure."

But in the long run, limits on longer-term gas contracts and added demand for renewable and low carbon gases could lead to a decline in gas import volumes, as lower-carbon gases are imported more and more, the EC said in a consultation on the proposal.

Blue hydrogen stance criticized

The EU's proposal drew fire for including blue hydrogen, which it says would cut emissions from traditional "grey" hydrogen in the short and medium term and spur uptake of "green" hydrogen, which it seeks to maximize from 2030 onwards.

Several green groups, including Greenpeace, said the gas package was not aligned with the EU's Paris Agreement pledge to limit global warming to 1.5 degrees Celsius. It should facilitate a fossil fuel gas phase-out by 2035 and not drive the market uptake of so-called "low carbon" gases, Greenpeace said.

Recently the EU has given fossil fuels a boost through rules including natural gas and blue hydrogen in the EU's new green investment criteria, the EU Taxonomy, and revised state aid guidelines, said Esther Bollendorff, CAN Europe's EU Gas Policy Coordinator.

She complained that the package does not prepare for phasing out fossil fuels by decommissioning existing gas infrastructure, but she did not offer a plan for how to deal with existing public debt for these assets.

Scarce hydrogen should not be used up on heating buildings, she said, rather it should be conserved for use in certain sectors for which there were no greening alternatives, like industrial and transportation sectors.

Legal charity ClientEarth saw the package as a victory for the existing gas infrastructure operators. "This reform was meant to drive the transition to a climate-neutral energy system. Yet it continues to focus predominantly on the operation and further development of the gas system instead of the priority being to put a clear limit on its emissions as the EU's climate commitments would demand," said ClientEarth law and policy advisor Alexia Falisse.

Despite efforts to pave the way for new gas producers, gas network operators were politically influential and continued to design the scenarios for new infrastructure, she warned.

Posted 16 December 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability

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