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06.01.22

The EU takes first steps toward defining green hydrogen

By , Ben Reiter

In response to Russia’s unprovoked war on Ukraine and the pressing need to eliminate its dependence on Russian energy imports, the European Union (“EU”) recently announced plans to accelerate its renewable energy deployment and industrial decarbonization efforts through its REPower EU Plan. A central component of REPower EU is the plan’s target of producing ten million tonnes of domestic renewable hydrogen—also referred to as green hydrogen—along with securing an additional ten million tonnes of renewable hydrogen imports by 2030. The EU’s ambitious green hydrogen goals are largely focused on replacing the use of natural gas, coal, and oil in hard-to-decarbonize industries as it has set a sub-target of 75% green hydrogen utilization for European industry by 2030.

The EU’s ambitious and laudable green hydrogen goals, however, raise a key question confronting policymakers not only in the EU but across the globe: how to define green hydrogen. Unlike the most common method for producing hydrogen today with natural gas through steam methane reformation (i.e., gray hydrogen or if the carbon dioxide emissions are captured, blue hydrogen), green hydrogen is produced by using an electrolyzer powered by renewable energy that splits water into its two components of hydrogen and oxygen. While the definition of green hydrogen may thus appear straightforward and in some cases indeed will be (e.g., an electrolyzer energized solely by a wind project), many green hydrogen projects will require power from a complex mix of energy resources, including on-site and off-site renewable generation, renewable power purchase agreements, and grid energy sourced from markets. Whether and how these differing sources of electricity are counted as renewable for purposes of producing hydrogen will be an important component of determining the pace and scale of the build out of the green hydrogen market.

The EU took initial steps toward answering these questions on May 20, 2022, with the its draft Delegated Act Establishing a Union Methodology Setting Out Detailed Rule for the Production of Renewable Liquid and Gaseous Transport Fuels of Non-biological Origin (the “Green Hydrogen Rulebook”). While the application of the Green Hydrogen Rulebook’s criteria represents the EU’s attempt to answer these difficult questions for Europe, given that it will apply to hydrogen produced “inside or outside the territory of the Union,” it is also of significance to global hydrogen producers hoping to help the EU meet its 10 million tonnes green hydrogen import goal.

Green Hydrogen Rulebook

The EU’s draft Green Hydrogen Rulebook recognizes that renewable liquid and gaseous transport fuels of non-biological origin—i.e., green hydrogen—are expected to play a key long-term role in decarbonizing maritime, aviation, and industrial sectors. But the EU finds that the production of hydrogen through electrolysis using electricity generated from fossil fuels as opposed to renewables generates greenhouse gas emissions that are “substantially higher” than the greenhouse gas emission intensity of traditional gray hydrogen produced from natural gas. If green hydrogen is to play a key role in reducing greenhouse gas emissions and weaning Europe off of Russian natural gas, the EU concludes that production of green hydrogen must incentivize the deployment of new renewable electricity generation capacity or make use of excess renewable generation that is already online. The Green Hydrogen Rulebook’s principal of additionality is aimed at ensuring that electrolysis-based hydrogen production does not simply displace renewable generation needed for decarbonizing the electric and other sectors of the European economy, but is actively supported by its own, additional renewable generation capacity.

To accomplish this goal, the Green Hydrogen Rulebook proposed essentially two sets of “strict criteria” pursuant to which hydrogen produced from electrolysis can qualify as green or renewable hydrogen and the accompanying EU incentive structure. The first set of criteria—set forth under Article 3 of the Green Hydrogen Rulebook—relates to hydrogen production facilities that are essentially co-llocated with the renewable generation that the hydrogen facilities will rely on for electricity. To qualify as renewable hydrogen under Article 3, the hydrogen production facility and renewable generation must be either connected via a “direct line” or take place within the “same installation.” The renewable energy resource must come online no earlier than 36-months prior to the time a hydrogen production facility comes online—presumably excluding most renewable resources that are currently online from supporting green hydrogen production. Article 3 further prohibits a co-llocated green hydrogen production facility from being connected to the grid unless such connection is accompanied by a smart meter that can demonstrate that no electricity has been removed from the grid for purposes of producing hydrogen.

Article 4 of the EU’s draft Green Hydrogen Rulebook establishes a more complex set of rules governing how hydrogen produced from electricity removed from the grid can qualify as green hydrogen. Under the Article 4 framework a hydrogen production facility’s hydrogen can, subject to a number of qualifications, meet the EU’s proposed definition of renewable hydrogen if it (i) is produced in a “bidding zone” that has been nearly fully penetrated by renewable energy resource capacity, (ii) is fully supported by one or more power purchase agreements (“PPAs”) from a new renewable generating resource, or (iii) the hydrogen is produced from grid-derived energy during an imbalance period when renewable generating resources would have otherwise been curtailed. These three qualification approaches for hydrogen produced from grid-derived energy are further detailed below:

High Renewable Penetration Zones. If the renewable hydrogen facility is located in a bidding zone where the average proportion of electricity produced was more than 90% renewable electricity in the previous calendar year and the annual time spent producing the hydrogen does not exceed the proportional annual hours that such bidding zone produced renewable energy during the same time frame, the hydrogen produced will qualify as green hydrogen. For example, assuming a bidding zone’s proportion of electricity produced in the previous year was 95% renewable—something that even in the most renewable resource rich regions seems years away—a hydrogen production facility could produce hydrogen for 8,322 of the 8,760 hours in a year and have such hydrogen qualify as renewable.

Renewable PPAs. For hydrogen produced from a facility relying on renewable PPAs, the PPAs must generate an amount of electricity that is at least equivalent to the amount of electricity relied on to produce hydrogen on an hour-for-hour basis. The renewable generating facility associated with the PPA must have come online no earlier than 36 months prior to the time the hydrogen production facility achieves commercial operation and be either located in the same bidding zone, a neighboring bidding zone where day-ahead prices during the relevant hour period are equal to or higher than the bidding zone where the hydrogen facility is located or, an offshore bidding zone adjacent to the hydrogen production facility. Article 4 also allows for a hydrogen facility that stores energy behind-the-meter that is sourced from a renewable PPA to continuing producing hydrogen based on such stored renewable energy (although it is hard to imagine a collocated green hydrogen/battery storage facility penciling out at this point in the energy transition).

Renewable Resource Curtailment. Finally, electricity taken from the grid and used to produce hydrogen at times of imbalance when renewable resources would otherwise have to be curtailed qualifies as clean hydrogen. The amount of electricity that would have otherwise been curtailed by a transmission system operator must be equal to or greater than the amount of electricity consumed during that time period by the hydrogen producer.

EU Member States may introduce other criteria to ensure compatibility with their national clean hydrogen strategies and the operation of their electric grid. In order to ensure compliance with the above green hydrogen regimes, a hydrogen producer must document, among other things, the amount of electricity sourced from the grid that does or does not count as renewable and the basis under which such electricity qualifies, the amount of renewable energy sourced from associated renewable energy generating facilities, and the amount of renewable or non-renewable hydrogen produced.

A High Bar for Green Hydrogen

The green hydrogen criteria set out above is, as the EU itself recognizes, quite strict. Industrial and energy organizations, including the German energy industry association BDEW, have already pushed back on the proposal arguing that the criteria are “so strict that they could significantly slow down or even prevent the emergence of a liquid hydrogen market.” The EU has granted some leeway to hydrogen producers as this industry ramps up by delaying the hour-for-hour matching requirement under the PPA qualification approach until 2027. Up until 2027, a producer will have to demonstrate that the electricity associated with its hydrogen production matches its associated renewable resource energy purchases on a more manageable monthly basis.

The Green Hydrogen Rulebook also takes a stricter approach than has been proposed in other jurisdictions. For example, under the clean hydrogen tax credit proposal contained in the now moribund Build Back Better Act—what was referred to as 45X—a hydrogen producer was explicitly allowed to claim the credit without affecting its ability to also claim a Production Tax Credit or Investment Tax Credit for its associated wind or solar project. The Green Hydrogen Rulebook takes a different approach by prohibiting a renewable generator associated with a hydrogen production facility from receiving financial incentives for both facilities.

Balancing Competing Energy Transition Priorities with Scaling Up Green Hydrogen

There is a pressing need, as the Green Hydrogen Rulebook notes, for “a rapid clean energy transition and the reduction of the [EU’s] dependency on fossil fuel imports has become even clearer and stronger than ever.” Clean hydrogen will play a key role in advancing both the EU’s climate and energy security goals. The recent high costs of natural gas have already pushed green hydrogen into a range where its roughly $5 per kilogram costs are competitive with that of gray or blue hydrogen. And as the EU itself recognizes, with the implementation of the European Green Deal, there will be a time when renewable energy resources will be plentiful enough that the Green Hydrogen Rulebook’s criteria will be unnecessary or easily satisfied. But if the balance between the EU’s goals of both ensuring that green hydrogen is in fact purely green and scaling up electrolysis-based hydrogen production is not properly struck, the EU could face a future in which there is not sufficient electrolyzer-based hydrogen capacity to put its renewable resources to use producing green as opposed to gray hydrogen.

Getting this balance right will be essential to ensuring the deployment of this clean energy fuel source that appears increasingly likely to play a pivotal role in the energy transition. The EU’s Green Hydrogen Rulebook represents the first significant formal attempt to strike this balance and because of its application to both domestic hydrogen production and foreign hydrogen imports it is almost certain to have a global impact on this nascent clean energy sector.

Comments on the draft Green Hydrogen Rulebook are due June 17, 2022.

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Author

Ellen S. Friedman

Partner

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Author

Ben Reiter

Associate

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