Grid, NGO voices warn weak hydrogen “additionality” may raise power prices

Responses to a policy framework for new green hydrogen-linked fuels showed division on the rules for renewable energy sources used in their production but agreed the EU's hydrogen targets seemed out of reach.

The European Commission (EC) on 17 June closed its consultation on a pair of delegated acts to the Renewable Energy Directive (RED), now being revised to add stricter targets for hydrogen and renewables in line with the EU's net-zero emissions and energy security aims.

More hydrogen production is needed to achieve EU climate goals, but investments in large-scale hydrogen electrolyzers have so far been hindered by a delay in publishing the acts, according to interest group eFuel Alliance.

The long-awaited pair of draft delegated acts not only decide which hydrogen-based fuels count towards state quotas for renewable transportation fuel under both the existing and revised directives, but could also apply to subsidies in future hydrogen production markets.

The acts concern fuels based on hydrogen — renewable liquid, and gaseous fuels of non-biological origin (RFNBOs) — that are expected to be particularly important in the aviation and maritime sectors, according to a blog by law firm Freshfields Bruckhaus Deringer.

The first draft act details the requirements for hydrogen to be considered fully renewable and the second act defines a methodology for the assessment of GHG savings from RFNBOs and carbon-based fuels.

The first act's rules around renewable energy used in hydrogen production attempt to take a middle road between the concerns of green groups and hydrogen developers seeking to lower costs.

Even so, green groups were critical of concessions made to hydrogen developers in the act in a 15 June letter to the EC.

Nonprofit T&E has for years criticized policies allowing certain biofuels, which it sees as damaging to carbon sinks, to count towards EU renewable fuel targets.

After the feedback is analyzed and co-legislators have approved them, the delegated acts could enter into effect this fall.

Renewable criteria a sticking point

Starting in 2027, the first delegated act requires qualifying green hydrogen to be produced using power from newly constructed, unsubsidized wind and solar farms so it doesn't detract from renewable electricity penetration goals, a concept known as additionality.

Exemptions to the additionality rule are possible if electricity is taken from the grid in areas that have 90% renewable electricity penetration, the renewable hydrogen and the renewable power are produced simultaneously during the same one-hour period at a renewable project that was built in the past three years, or the power produced was surplus to grid demand, according to a brief by law firm Bird & Bird.

It noted that after the consultation ended on 17 June, revisions are possible as the "draft regulation was not well accepted by everyone when first published."

Due to the additionality rule making hydrogen production difficult, Bird & Bird questioned whether the EU could reach its hydrogen targets. "With the strict rules on the additionality requirements and the simultaneous production of renewable energy, the target production by 2030 seems very ambitious, if not impossible to reach," it said.

Freshfields Bruckhaus Deringer cited a study by German utility RWE which found the same two requirements, by limiting the uptake of subsidies, increased the cost of producing green hydrogen.

Attacks on the additionality proposals also came from envrionmentalist groups. The 15 June NGO letter argued against the three exceptions to the additionality rule, saying they would lead to overuse of electric grids and renewable energy sources, in turn forcing electricity buyers to consume more fossil fuel-sourced power.

At the same time, citizens and power consumers would face higher tax rates to pay for hydrogen subsidies.

Agreeing with the potential for the abuse of grids and renewable electricity sources by hydrogen fuel players, a network of green transmission system operators, Renewables Grid Initiative, warned "hydrogen production would end up redirecting renewable electricity from more efficient uses, increasing fossil fuel consumption, electricity prices and GHG emissions."

The 15 June letter also pointed out that during a transitional period of looser rules for projects starting up before 2027, renewable electricity could be double-counted towards RED targets, and suggested legal action against the EC was possible.

Grid operators alone favor additionality

The fledgling hydrogen sector took the opportunity to voice its own responses, revealing a reluctance to accept the additionality rules.

German renewable energy company GP JOULE said that its existing hydrogen project eFarm, and other similar existing projects, would not comply with additionality rules in the proposals.

The company, which also provides engineering, procurement, and construction services, asked the EC to amend the draft to embrace older projects.

The eFuel Alliance on 20 June suggested loosening the requirement for same-hour hydrogen and renewable power production and not allowing renewable projects older than three years to produce renewable hydrogen, which it called "a massive obstacle to meeting the EU's hydrogen targets."

It hinted that the principle of technology neutrality had been violated because electric vehicles and heat pumps did not have to comply with additionality rules.

The eFuel Alliance also said that the acts restrained the use of industrial carbon for use in RFNBOs before 2035, which "discouraged" investment in RFNBOs linked to carbon capture markets. Several oil producers, most recently Norwegian state-owned oil producer Equinor, have announced plans to capture carbon from fossil fuel projects for use in RFNBOs.

The chemical industry regards hydrogen as a "critical pathway to reducing GHG emissions in our sector" but does not favor some of the additionality rules. "Requirements regarding correlation in time and location are especially difficult for chemical sites with limited regional [or] local renewable energy capacities," said the European Chemical Industry Council (CEFIC) in October.

Eurochlor, a group within CEFIC specializing in chlor-alkali production for which hydrogen is a byproduct, noted in May that the use of battery energy storage to help get around the hourly timing requirement would increase electricity demand by 4.6%, while the use of hydrogen storage for the purpose would more than double the draw on electricity supplies. It recommended a monthly requirement.

The power sector had its own concerns. On 17 June, the Association of European Energy Exchanges Europex, suggested a "more flexible" definition of renewable hydrogen that would see hydrogen markets develop faster.

On additionality, it recommended instead requiring producers to use renewable guarantees of origin (GOOs) to certify the renewable generation is used for emissions reduction purposes, which it said would let electrolyzers produce for more hours of the day.

It suggested delaying the 2027 deadline to begin applying additionality rules in new projects to at least 2032, to clear long renewable project permit wait times.

Europex heaped scorn on the idea additionality should apply to imported RFNBOs, noting differences between jurisdictions. "To only mention a few: most non-EU countries do not have a GOOs system in place that tracks whether electricity is produced from renewable sources," it said.

German power generator RWE suggested there should be "no limiting criteria" around electricity purchases needed for hydrogen production, noting that if there were limits large-scale green hydrogen production would be delayed until 2030.

"The transformation of industry will be unnecessarily delayed because the green hydrogen that is urgently needed will not be available quickly enough in the volumes required. The current detailed rules proposal will put the brakes on a good plan. Europe needs green gases as soon as possible to achieve our climate targets and for more independence from Russia," said RWE.

Grid operators, on the other hand, are lonely power industry voices favoring additionality. "For hydrogen to be considered renewable, it must be ensured that the production facilities are operated simultaneously when there is additional renewable electricity generation in the electricity system," the Renewables Grid Initiative noted. It "strongly believed" electrification should always take precedence over hydrogen production.

Posted 27 June 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.