Decarbonising EU’s Gas Market: Hydrogen

 by Jenay Randall

Currently, 95% of the fuel consumed and used in electricity and heat production in the EU comes from natural gas. The reliance on natural gas represents a considerable barrier to reaching the 2030 emissions reduction target (55%) established in the July 2021 Fit for 55 energy and transport-related policy package [1].

The legislative proposal, adopted in December 2021, aims to address this barrier by facilitating renewable energy and storage. It builds on the EU Hydrogen Strategy adopted in July 2020, which aimed to understand how renewable hydrogen can be produced and employed in a cost-effective manner [2].

The goal of the new EU framework is primarily to phase out fossil fuels and ensure energy system resilience and security. It plans to achieve this following a two-pronged approach: (1) provide the legislative framework for the decarbonisation of the gas market and (2) establish a hydrogen market with dedicated infrastructure [3]. 

Since the legal framework and the ability to establish a hydrogen market are inextricably linked, this article will briefly outline how both aspects of the EU’s approach work in tandem and in short to mid-term timeframes. 

Providing A Legal Framework 

The legislative proposal seeks to apply models previously utilised in developing the natural gas and electricity markets to that of hydrogen. The package sets up a system of exceptions and incentives to attract private sector investment into building cost-effective low-carbon infrastructure and repurposing natural gas plants. 

The proposed plan appears foolproof due to the effectiveness of the gas and electricity markets; however, stakeholders have expressed considerable concern about the access to infrastructure. 

The proposal addresses this by acknowledging the importance of guaranteeing non-discriminatory access to the pipeline networks to ensure competitiveness. It also understands the significance of promoting investment. Therefore, it seeks a compromise. 

The proposal’s approach to the liberalisation (de-regulation) of infrastructure is three-fold: (1) allow non-discriminatory third-party access to hydrogen networks but with some room for negotiation; (2) prevent monopolistic activity by way of unbundling (see below); and (3) ensure some flexibility (exceptions) to mobilise private investment.  

  1. Access to electricity and gas markets is based on an open and objective third-party access tariff system; however, the hydrogen proposal introduces some latitude for network users to negotiate amongst themselves. 
  2. Unbundling broadly means separating competitive activities (production and supply from transport and distribution), preventing ownership monopoly. The proposal follows current energy market models by putting forth legal and financial unbundling, however, offering network operators the exception to apply for the Independent System Operator model after 2030. 
  1. Nonetheless, existing private hydrogen networks are exempt from the previously mentioned access and unbundling rules to offer flexibility to investors [3]. 

Establishing A Hydrogen Market

There has been great concern about the efficacy of transposing the regulatory models of the gas and electricity markets to that of hydrogen because the former regulatory frameworks were adopted gradually and in a mature market environment. Meanwhile, the hydrogen market is still in its early stages. Hesitant stakeholders, therefore, emphasise the importance of a market-based approach to production and supply in the long-term [3].

The second point of contention amongst stakeholders is ‘who will assume the risk?’

The proposal allows for a cross-subsidisation, which refers to charging higher prices to one type of user to lower the costs to another. This entails hydrogen networks using revenues from natural gas networks to fund infrastructure in a hydrogen market context, but only under certain conditions. Long-term cross-subsidisation should be limited even further, especially between users of different networks, because the cost of infrastructure should be on their users [3]. 

Energy System Resilience and Security

The other primary aim of the legislative proposal is to ensure energy system resilience and energy security for consumers. 

Paraphrasing remarks made by EU Commissioner for Energy Kadri Simon, the legislative proposal promotes energy supply security in the event of price shocks and enhances the solidarity between Member States [4]. 

As is the case for electricity and gas, it will become easier for consumers to switch suppliers based on open and streamlined access to comparison tools. Consumers should also be able to choose renewable energy sources. 

Moreover, the volatility of the global market threatens energy security. The proposal, therefore, puts forth an integrated approach to storage which entails including it in risk assessment at the regional level as well as allowing the Member States to pool together funds to purchase stocks [4].

Concluding thoughts

Although stakeholders have expressed concern about the viability of some of the policies laid out in the proposal, the legislation puts forth a convincing short to mid-term plan. It concurrently builds on the regulatory models that currently work in other markets while also acknowledging the need to provide sufficient flexibility to mobilise private sector investment and guarantee competitiveness. 

Reference List

[1] Questions and Answers on the Hydrogen and Decarbonised Gas
Package, European Commission, [Accessed 5th May 2022].
[2] Hydrogen, European Commission, [Accessed 5th May 2022].
[3] Tanase, Lavinia & Herrera Anchustegui, Ignacio, The EU Hydrogen and Decarbonised Gas Market Package: Revising the governance and creating a hydrogen framework, Florence School of Regulation, [Accessed 5th May 2022].
[4] Commission Proposes New EU Framework to Decarbonise Gas Markets, Promote Hydrogen and Reduce Methane Emissions, EU Commission, [Accessed 5th May 2022]. 
Categories EU - Policies

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