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30 November 2021
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austria

Drafts of the recast of Gas Directive and Regulation leaked: First glimpse of the regulation of hydrogen networks

Drafts of the eagerly awaited recast of the Gas Directive1 as well as of the Gas Regulation2 were leaked to the press on 23 November 2021.3 The official presentation of the drafts is scheduled for 14 December 2021. The leaked drafts reveal that hydrogen ("H2") networks are going to be regulated under the Gas Directive and Gas Regulation. It must be stressed, however, that changes may be expected as part of the official presentation of the draft and the following legislative process considering the diverging and manifold interests of stakeholders. In this article we will present an overview of the leaked drafts with regards to the regulation of H2 networks. For easier reading, the terms "Gas Directive" and "Gas Regulation" refer to the leaked drafts.

H2 networks about to get regulated

The Gas Directive explicitly extends the scope of application to dedicated H2 networks, i.e. networks that are exclusively used for transporting hydrogen. Accordingly, functions as well as infrastructure relating to H2 networks have been defined (e.g. H2 storage facility, H2 network, H2 network transport, supply). H2 networks are defined as "[…] a network of pipelines used for the transport of hydrogen of a high grade of purity with a view to its delivery to customers […]" (Art 2 para 18 Gas Directive). The circumstances under which a "network of pipelines" is present and, hence, regulated, is left to interpretation. The judicature of the European Court of Justice with regard to the characterisation of electricity networks could serve as a point of reference.4 Interestingly, the Gas Directive does not differentiate between distribution and transmission H2 networks. This might be because H2 networks are not widely available right now.

Non-discriminatory access to H2 networks

The access to H2 networks should follow a system of regulated third-party access ("TPA") based on published tariffs. The conditions for access should be applied without discrimination and objectively. Tariffs or the methodologies underlying their calculation must be approved by the National Regulatory Authority ("NRA") upfront. Hence, access to H2 networks mirrors the system with regards to natural gas. However, it differentiates insofar as, until 31 December 2030, Member States may choose to implement a system of negotiated TPA (Art 33 Gas Directive). Negotiated TPA differentiates from regulated TPA, as the conditions for access are not predetermined by decision of the NRA but negotiated between parties. In this regard, H2 network operators must publish contractual terms and tariffs charged for network access on their website (Art 6 Gas Regulation).

Unbundling of H2 networks

As with Transmissions System Operators for natural gas, H2 network operators must unbundle from production and supply activities. Hence, the provisions on the unbundling of TSOs for natural gas are applicable to H2 network operators. Member States must therefore implement ownership unbundling and may choose to implement the independent system operator ("ISO") and/or independent transmission operator ("ITO") if the H2 network belonged to a vertically integrated company at the entry into force of the recast of the Gas Directive. The ITO model, however, is temporally limited until 31 December 2030 (Art 65 Gas Directive).

Furthermore, H2 network operators must be legally and organisationally independent from undertakings active in the transmission and/or distribution of natural gas or electricity (Art 66 Gas Directive). For example, this means that existing TSOs for electricity/natural gas may not act as an H2 network operator in the same legal person.

Lastly, unbundling of accounts applies to H2 network operators. This means, among other things, that separate accounts must be established for each of their supply, LNG, H2 network, production, transmission, distribution and storage activities (Art 67, 72 Gas Directive). 

As with TSOs for electricity and natural gas, H2 network operators must be certified by the Member States' NRAs (Art 68 Gas Directive).

Separate regulated asset bases in case of combined network operators

In case of the combined operation of H2, electricity and/or gas networks, operators must have separate regulated asset bases. The regulated asset base ("RAB") encompasses all networks assets used for the provision of regulated network services. Based on the valuation of these assets, tariffs for the provision of network services are calculated. Assets may be transferred from one RAB to another RAB, but to avoid any cross-subsidisation they must be valued. The ascertained value will be reimbursed by means of a dedicated charge on users of the RAB who benefit from the transfer (Art 4 Gas Regulation). This aspect is particularly relevant when it comes to the repurposing of natural gas infrastructure for H2.

Regulatory exemptions

Regulatory exemptions (e.g. from TPA and unbundling) are foreseen for existing H2 networks, closed H2 networks, geographically confined H2 networks and new infrastructure (for more details see our overview article).

Blending of H2 into gas networks

With regards to the admixture of H2 into the natural gas system, it is proposed that TSOs must accept cross-border flows of gases with an H2 content of up to 5 % from 1 October 2025 onwards (Art 20 Gas Regulation). This harmonisation of gas quality standards on interconnection points should limit the risk of market fragmentation due to widely varying gas quality standards in the Member States. However, besides interconnection points Member States may freely decide on the allowed H2 limits for blending.

Conclusions and outlook

A key requirement for stimulating investment in the energy sector is creating regulatory certainty. The leaked drafts delivered in this respect when it comes to H2 networks, applying a static approach where regulation applies from the outset (although grace periods are foreseen).5 However, Member States are provided flexibility by means of options to foresee exemptions for specific types of H2 networks (e.g. closed H2 networks, geographically confined H2 networks) and less intrusive regulation over a transition period (e.g. negotiated TPA to H2 networks until 31 December 2030). Notwithstanding the importance of setting out a clear regulatory framework for investment security, it may be questioned whether the level of flexibility provided is adequate and efficient considering the varying paces of H2 market uptake in the Member States. It will be interesting to see what changes are applied to the draft officially presented by the European Commission and its development in the following legislative process. Changes may be expected considering the diverging and manifold interests of stakeholders.

 


1 Directive 2009/73/EC of 13 July 2009 concerning common rules for the internal market in natural gas, OJEU L 211/94.
2 Regulation (EC) No 715/2009 of 13 July 2009 on conditions for access to the natural gas transmission networks, OJEU L 211/36. 
3 Leaked draft Gas Directive: <https://www.euractiv.com/wp-content/uploads/sites/2/2021/11/New-gas-Directive.pdf> (accessed 30 November 2021).
Leaked draft Gas Regulation: <https://www.euractiv.com/wp-content/uploads/sites/2/2021/11/New-Gas-Regulation.pdf> (accessed 30 November 2021).
4 ECJ 17 October 2019, EAD, C-31/18; ECJ 22 May 2008, citiworks, C-439/06.
5 To this regard, the drafts did not follow ACER/CEER's position, who advocated for a dynamic approach to regulation, meaning that it should only apply if the network infrastructure indicates signs of a natural monopoly. See: ACER/CEER, White Paper: When and How to Regulate Hydrogen Networks? (2021).

authors: Bernd Rajal and Franz Kienzl

Bernd
Rajal

Partner

austria vienna

co-authors