EU “Fit for 55”: Decarbonising Gas Markets

The Commission proposes to expand the scope of the Gas Directive and Regulation to include renewable and low-carbon gases. This includes proposals to:

• Introduce an EU-wide certification system for low-carbon fuels (including low-carbon hydrogen) which will need to achieve at least 70% greenhouse gas (GHG) emissions savings. To avoid carbon leakage, it will apply to imported and domestic production equally. By the end of 2024, the Commission will come with delegated acts setting out the methodology to be used to assess such GHG emissions savings. The certification system for low-carbon fuels will complement the certification system foreseen in the Commission’s July proposal for a revised Renewable Energy Directive.
• Oblige TSOs as well as operators of hydrogen networks to work together to avoid restrictions to cross-border gas or hydrogen flows due to quality differences. Regarding blends of hydrogen in the natural gas systems, TSOs shall accept a 5% blend in cross-border gas flows.
• Introduce discounts on capacity-based tariffs for renewable and low-carbon gases at entry points to the natural gas grid or storage facilities of up to 75%. A 100% discount shall apply to regulated tariffs at interconnection points, including entry points from LNG. For TSOs facing a reduction of revenues of 10% or more, an inter-TSO-compensation mechanism shall be established.
• Grant firm capacity to production facilities of renewable and low-carbon gases for accessing the natural gas grid on transmission and distribution level. Where necessary, reverse flow shall be introduced on DSO level.

In line with the EU Hydrogen Strategy, the proposal introduces a regulatory framework for a staged development of a competitive dedicated hydrogen infrastructure with a transition phase until 2030.

Target regulatory framework for hydrogen networks

Under the target regulatory framework operators of hydrogen networks shall be obliged to;

• Offer their services on a non-discriminatory basis to all network users and use non-discriminatory and transparent congestion-management procedures (as of 2031, the more specific requirements for natural gas TSOs will apply in addition).
• Limit the maximum duration for capacity contracts to 20 years for infrastructure completed before the Regulation’s entry into force and 15 years for infrastructure completed after this date.
• As of 2031, organise hydrogen networks as entry-exit systems, apply the general tariff rules and follow the general balancing rules.

  Users of hydrogen networks shall enjoy the benefit of regulated third-party access, based on pre-approved and published tariffs, applied objectively and without discrimination, in the same way as it applies today to natural gas networks.

  Users of hydrogen networks shall enjoy the benefit of regulated third-party access, based on pre-approved and published tariffs, applied objectively and without discrimination, in the same way as it applies today to natural gas networks.

  As for gas and electricity networks, the Commission proposes to separate the operation of hydrogen networks from activities in energy supply and production – and to some extent other forms of network operation:

• The general rules on unbundling of accounts shall apply to hydrogen network (as well as storage and terminal) operators which are part of an undertaking that are not only active in transport of hydrogen.
• In addition, transmission and network operators shall have to keep separate accounts of their regulated activities for gas, hydrogen and/or electricity and shall keep their regulated asset bases (RABs) for each of these separate. To avoid cross-subsidisation, financial transfers between each of these RABs shall be a limited exemption that needs to be approved by the regulatory authorities. While this may keep tariffs lower for natural gas consumers, it is likely to drive up the risk premium and therefore the funding cost of the extensive investments in hydrogen infrastructure ahead.
• In relation to gas or electricity DSOs and TSOs, hydrogen network operators shall need to be independent in legal form, so-called horizontal unbundling.
• Also, under the general rules on ownership unbundling, hydrogen network operators shall not be allowed to engage in production and supply activities of neither hydrogen, natural gas nor electricity.
• However, for existing hydrogen networks being part of a vertically integrated undertaking (VIU) at the time of entry into force of the Directive, member states shall be able to implement the model of the independent system operator (ISO), meaning the VIU can continue to own the network assets but not the company actually operating them.

Transition phase for hydrogen networks until 2030

Until and including the year 2030, the Commission proposes different measures that will allow member states to set aside the rules of the target regulatory framework in order to facilitate the market ramp-up of hydrogen:

• For hydrogen networks that belong to a VIU on the date of entry into force of the Directive, member states can decide to grant a derogation from almost all the obligations under the target framework, in particular including the rules on unbundling and third-party access.This would for example allow natural gas TSOs to continue to be active in the field of hydrogen generation and transmission. However, if the hydrogen network is connected to another network, it is expanded in size or capacity, such derogation shall end already before 31 December 2030.
• For all (other) hydrogen networks member states can:
  • Introduce a system of negotiated access instead of the regulated access rules of the target framework. In this case, regulatory authorities shall issue guidance on how the future introduction of regulated access will impact the negotiated tariffs.
  • Introduce an unbundling model equivalent to the rules for the independent transmission operator (ITO) allowing a network operator to be part of a VIU also active in the fields of production or supply, provided certain ring-fencing measures guaranteeing the independence of the network operation are in place. The ITO model can make it easier for financial investors holding interests in production or supply of hydrogen, natural gas and/or electricity to also invest in hydrogen network operation.
  • Grant a derogation only from the ownership unbundling rules to closed hydrogen networks transporting hydrogen to a limited number of customers within a geographically confined, industrial or commercial area. This derogation shall be valid also beyond 2030, as long as no other producer of renewable hydrogen requests access to the hydrogen network or the network is not connected to another hydrogen network.

Hydrogen storage and terminals

Given that currently neither hydrogen storage nor hydrogen terminals exist, the Commission proposes a basic regulatory framework for these asset types for the time being. This includes also applying the general rules (but not the obligation to offer certain capacity products) for natural gas storage and LNG to hydrogen storage and terminals, as well as the general rules on unbundling of accounts.

Whereas third-party access to hydrogen terminals shall be organised via negotiated access, for hydrogen storage only regulated access shall be possible. This deviates from the current rules for natural gas storage where member states can choose between negotiated and regulated access (which remain unchanged), but the Commission argues that the availability of large-scale hydrogen storage is limited and distributed unevenly across Member states and should therefore be fully regulated.

Exemptions for new hydrogen infrastructures

Under the general exemption rules for new infrastructures, new hydrogen interconnectors (to which the rules for hydrogen networks apply) may be exempted from the rules on tariffs, third-party access and the general unbundling rules for a certain period of time. However, an exemption from the minimum obligation of horizontal unbundling at least in legal terms as well as the need to unbundle accounts shall not be possible.

Terminals or storage facilities can be granted an exemption from their respective rules on third-party access, but not from the need to unbundle accounts.

As the production park changes (more distributed generation) and roles of distribution and transmission system operators evolve (e.g., to allow for more flexibility, demand-response and market participation), and with hydrogen and other power-to-gas assets like electrolysers in the game, the Commission has identified a clear need for more coordination between different infrastructure operators.

The Commission therefore proposes to develop future national ten-year network development plans (TYNDPs) on the basis of a joint scenario for electricity, gas and hydrogen and align them with the National Energy and Climate Plans, as well as the unionwide TYNDP.

An interesting innovation is that the plan will need to include information on infrastructure planned for decommissioning. The proposal also stresses the need to consider alternatives to system expansion in the TYNDPs, such as demand-response and energy efficiency measures, in accordance with the Energy Efficiency First principle of the proposed new Energy Efficiency Directive.

In addition to all this, the proposal sets specific reporting rules for hydrogen network development. 

An extensive new chapter on consumer empowerment and protection has been added, which is meant to give new impetus to the retail markets, allow all users to participate and enable all energy customers to make more informed and sustainable choices. The rules mirror to a large extent what is already in place for the power markets since the adoption of the Clean Energy Package.

The rules cover consumer protection, comparison and billing, switching rights, energy communities, smart metering for gas and hydrogen including data access, interoperability of systems and out-of-court dispute settlement, among other things.

The recast of the Regulation contains changes to the Security of Supply Regulation. In the future, member states are to take a closer look at their storage levels and shall be obliged to consider counter measures whenever risk assessments identify a risk at regional level. The Commission proposes minimum storage obligations, tendering or auctions to incentivise storage bookings, introducing strategic stocks held by TSOs or – if a storage facility would otherwise stop operations – to integrate it into the TSO network.

Furthermore, the proposal enables Member States that wish to do so, to set up a mechanisms for voluntary joint procurement by TSOs of strategic gas stocks, which could be released in case of emergency. The voluntary mechanism should be in line with the energy market and competition rules and should also allow other member states to join at a later stage.

Besides the predominant measures to integrate green gases into the natural gas infrastructure and to build a stand-alone hydrogen infrastructure, the proposals include different measures to modernise the current regime, some of which we would like to mention here:

• Entry-exit system: In order to establish a level playing field for renewable and low-carbon gases connected to either the transmission or distribution level, the Regulation proposes a new definition for “entry-exit system”, now also including the distribution system level.
• Virtual interconnection points shall be established for capacity bookings between entry-exit systems that share two or more interconnection points.
• Revenues of TSOs: To allow for more transparency of TSOs’ allowed/target revenue, ACER shall prepare and publish a comparison of the TSOs’ efficiency based on a comparison of their costs.
• Long-term supply contracts: To avoid lock‑ins, it shall no longer be possible to enter into long-term contracts (i.e. contracts with a duration of more than one year) for the supply of unabated fossil gas (i.e. without CCUS) with a duration beyond 2049.
• EU DSO entity: Gas DSOs shall cooperate through the EU DSO entity, which so far only includes electricity DSOs. In future, the EU DSO entity shall also be tasked with the development of gas network codes and network planning as well as measures regarding the mitigation of fugitive methane emissions from the natural gas system.
• ENNOH: Operators of hydrogen networks are to organise themselves in a “European Network of Network Operators for Hydrogen (ENNOH)”, responsible among other things for drafting hydrogen grid codes and accompanying the development of a network development plan for hydrogen targeted at the needs of the developing hydrogen markets.