Part 2

Hy-Politics – political considerations shaping the evolution of clean hydrogen policy

The German government has laid down the use cases it envisions for the deployment of hydrogen in Germany in its National Hydrogen Strategy (Nationale Wasserstoffstrategie – “NWS”). The NWS was first published in June 2020 (BT-Drs. 19/20636) and again in July 2023 in an updated version (BT-Drs. BT-Drs. 20/7910 | English version). It is intended to create a coherent framework for the production, transport, consumption and further use of hydrogen and its derivatives including ammonia, methanol or synthetic fuels (together “hydrogen products”) in Germany, as well as for innovation and investments in the hydrogen sector.

The 2023 update mainly focusses on the necessary actions to enable the supply of Germany’s expected additional hydrogen needs of 40-75 TWh in 2030 on top of the 55 TWh currently covered by (grey) hydrogen from fossil sources which shall also be converted to climate friendlier sources in the future.

Predominant colour: green

According to the NWS 2023 direct financial support shall only be made available to producers of green hydrogen products. However, on the demand side, the German government plans to also promote blue (natural gas), turquoise (methane pyrolysis) and orange (waste) hydrogen deploying CCS-technologies and meeting life-cycle emissions savings which are comparable with those of the EU’s Taxonomy Regulation (EU) 2020/852 and any other (also future) EU rules demanding higher emission savings. The extent to which carbon capture technologies will be deployed on a larger scale in Germany is still unclear, as the regulatory framework is incomplete and public debate is only just gaining momentum.

Industry: Steel and chemical industry

According to the NWS, the German government expects hydrogen and its derivatives to be used in particular in the industrial sector by 2030. Hydrogen-based technologies are seen as a suitable transformation option for those industrial sectors where they replace fossil fuels such as natural gas, crude oil or coal which are otherwise hard to abate. Regarding the of supply of heat hydrogen is expected to be used mainly in high-temperature applications where the use of electricity is not possible or too expensive, esp. in steel production and parts of the chemical industry.

Transport: Aviation, shipping and heavy duty vehicles

The NWS identifies hydrogen products as an important building block for sustainable climate-friendly mobility, complementing the use of electricity. The German government envisions a use case for hydrogen and electricity based “e-fuels” especially in aviation and shipping and for special purposes, e.g., in the military. The use of e-fuels in road traffic will probably be limited to (heavy) duty vehicles and is currently under further scrutiny. NWS announces a “National Port Strategy” examining the development of a port infrastructure for the refuelling of ships with hydrogen and its derivatives. Additionally, it contains a plan for the development of an overall strategy for the hydrogen transformation of shipping within the framework of a “National Action Plan for Climate-Friendly Shipping” to come including a technology-neutral funding framework for demonstration projects for alternative propulsion systems and fuels based on hydrogen technologies.

However, the aviation and shipping sectors so far still depend on liquid and gaseous fuels, as emission-free and low-emission driven solutions are not expected to reach the market until 2030 or even later.

Electricity generation and system stability

Germany is planning to phase-out power generation from fossil fuels to become climate neutral by 2045.

The NWS refers to hydrogen power plants to step in and provide balancing services as a last resort where more efficient flexibility options or storage are not available. It assumes an increase of the annual hydrogen demand in the conversion sector (electricity and heat grids) from currently 0 TWh to around 80–100 TWh in 2045.

Already now, new investments in gas-fired power plants must ensure that they can be converted to operate with hydrogen at a later date at low additional cost (so-called “H2 readiness”): This relates to CHP plants with an electrical output of at least 10 MW that are approved from July 2023 on as well as biomethane plants if they want to receive support under the Renewable Energies Act (Erneuerbare-Energien-Gesetz “EEG”) in effect as of 1 January 2023.

In August 2023, the German Federal Ministry of Economic Affairs and Climate Protection (BMWK) presented outlines for its future power plant strategy (Kraftwerksstrategie). It described Germany’s back-up system for electricity supply on the way to an electricity supply mostly based on renewable energy sources. In the long run, power plants fuelled with renewable fuels (such as green hydrogen) are to secure electricity supply times with little wind and sun.

To this end, the BMWK planned to hold tenders for new gas fired power plants that will either run on renewable hydrogen from the start or from a later point in time. In February 2024, the government declared that it would start with tenders for new hydrogen-ready gas-fired power plant capacity of up to four times 2.5 GW. These plants would need to be fully converted to hydrogen between 2035 and 2040 and are to be set up in locations where they are useful to the system.

Building Heat: possible but not the norm

The NWS expects the use of hydrogen for heating single buildings to play a subordinated role as it can be assumed that the demand for hydrogen in the industry and transportation sectors will probably remain constant even with relatively high or rising prices, while in many buildings, the demand for hydrogen will remain low. However, hydrogen can be a necessary technology option in buildings that are not connected to a heating network and in which heat pumps cannot be operated efficiently, if there are large hydrogen consumers in the neighbourhood anyway and a sufficient hydrogen supply is available at low prices.

However, in principle, German legislation also allows for the use of renewable and low-carbon hydrogen products for heating in the newly introduced German Building Energy Act (Gebäudeenergiegesetz) and the German Heat Planning Act (Wärmeplanungsgesetz). For more information see part 5 below and our blog post.

Import and domestic production

The updated strategy doubles the envisaged amount of domestically produced hydrogen products from 5 to 10 GW by 2030.

• Import: The German government expects that 50 to 70% of the hydrogen products needed must be imported – at first via shipping of hydrogen derivatives and in the future more and more via a yet to be built (after 2030) hydrogen network. Germany is currently developing a dedicated import strategy to secure the availability of hydrogen through import from partner countries and has begun to secure import quantities of hydrogen derivatives from third countries.

• Domestic production: The current hydrogen strategy sets the target for domestic production of hydrogen to 10 GW in 2030. However, as of mid-2023, the installed electrolyser capacity amounted to only about 0.1 GW.

Storing hydrogen

Currently, German gas storages are still connected to the natural gas network and needed to ensure the security of gas supply, especially in the winter months. In the future, cavern storages which allow for quicker changing between injection and withdrawal are likely to play a role in the hydrogen market. In the long term, pore storage facilities with longer injection and withdrawal periods might also play a role to cover hydrogen need over the winter period. First conversion projects have already commenced.

Trading hydrogen

For the time being, hydrogen is mostly traded on the basis of long-term bilateral agreements. To accompany the developing market for renewable hydrogen, the European Energy Exchange (EEX) introduced the “HYDRIX” index for green hydrogen in May 2023. The index is based on voluntary contributions of market participants and reflects the weekly prices in EUR/MWh for green hydrogen delivered to the German market. In addition, EEX is to provide a platform for the sale of the green hydrogen products to be delivered to Germany under the import auctions conducted under the German H2Global funding (see part 4 below) by way of auctions for standardised products with one-year delivery periods.

Besides the market-based HYDRIX index, E-Bridge Consulting GmbH publishes a cost-based spot price index for hydrogen, the “hydex”. Hydex is based on short-term electricity, gas and EUA quotations without capital costs and is calculated for green hydrogen as well as blue and grey hydrogen.

Part 5

Hy-ly Volatile? making it safe, sustainable and transportable

Germany has begun to adapt and enhance the existing legal framework to accommodate hydrogen, albeit some legislation – mostly executing ordinances – has yet to be implemented. Fields of legislative activity (other than already described above) regard the following:

Defining (green) hydrogen: EEG, GEG and WPG

German legislation contains different definitions for renewable (“green”) and other types of hydrogen (or its derivatives). For example,

• A definition of "green hydrogen" is provided in Sec. 3 no. 27a EEG requiring that to be “green”, hydrogen has to be produced electrochemically with renewable electricity by consuming electricity from renewable energy sources, which may also be stored chemically or physically in other energy carriers for storage or transport and which fulfils the requirements of an ordinance yet to be enacted under Sec. 93 EEG. Sec. 93 EEG empowers the government to issue such ordinance and requires that only renewable electricity may be used to produce green hydrogen that has not received funding under the EEG. The government is empowered to referring to the definition of green hydrogen in the 37. BImSchV instead of coming up with a new definition. As long as such ordinance has not been enacted, several other provisions under German law cannot enter into effect, e.g., the exemption from electricity price surcharges when producing green hydrogen or extra points promoters of offshore wind projects could make in the tenders for grid connections when they prove that green hydrogen has been used in the production process of the offshore wind turbines to be installed (Sec. 51, 53 EEG).

• The German Building Energy Act (Gebäudeenergiegesetz – “GEG”) directly refers to the definition of “green hydrogen” in the RED and in addition defines “blue hydrogen” as hydrogen produced from natural gas which in addition fulfils the criteria of the EU Taxonomy Climate Delegated Act, esp. its GHG emission requirements. Both green and blue hydrogen may be counted towards the 65% renewable heating source quota building owners must fulfil.

• A similar but not identical definition is made in the German Local Heat Planning Act (Wärmeplanungsgesetz – “WPG”) which differentiates between blue hydrogen (from natural gas using CCU/S technologies), turquois hydrogen (from methane pyrolysis) and orange hydrogen (from biomass or with electricity from the waste sector), as well green hydrogen as defined in the GEG. All these types of hydrogen may serve to decarbonise a district heating system as long as they meet requirements of of the EU Taxonomy Climate Delegated Act, including the applicable life-cycle GHG emission savings.

Guarantees of origin

In January 2023, the new German Guarantees of Origin Register Act (Herkunftsnachweisregistergesetz – “HkNRG”) was introduced. It lays the legal foundation for introducing a system of GoOs for renewable and low-carbon gases and hydrogen as well as their use for heating and cooling in Germany, as envisaged by RED II.

In January 2024, the German government presented its draft for an implementing ordinance (Gas-Wärme-Kälte-Herkunftsnachweisregister-Verordnung – “GWKHV”). According to the draft, renewable or low-carbon gas GoOs may be issued for a producer of such gases, be transferred and cancelled when delivered to a final consumer. Where electricity from renewable sources has been used to produce the gas, a renewable gas GoO can be issued, provided that

• either renewable electricity GoOs were cancelled for the electricity used to produce the gas, or

• the electricity stems from a directly connected renewable generator not older than 36 months than the gas producing unit (as detailed in the draft amendment of Sec. 4 37. BImSchV), or

• the electricity has been procured from the grid in a downward redispatch situation (as detailed in the draft amendment of Sec. 9 37. BImSchV).

GoOs for low-carbon hydrogen will be issued for hydrogen based on natural gas, non-biogenic waste and residual materials, or landfill, mine or sewage gas fulfilling either the requirements of GHG emission reduction under the EU RED II DA or the sustainability requirements of the EU Taxonomy Climate Delegated Act .

Network regulation

Pure hydrogen networks have not been subject to network regulation in the past, except for distribution (not transmission) networks for hydrogen that also meets the definition of “biogas”. This is the case if the hydrogen has been produced by electrolysis using predominantly renewable energy sources (in practice, at least 80%). The admixture of hydrogen classifying as biogas and other hydrogen produced by water electrolysis is regulated both on distribution and transmission level.

Beyond this, transmitting or distributing hydrogen was previously only covered by the EnWG if the hydrogen supplemented natural gas in a natural gas network. Such hydrogen feed-in must comply with the requirements of the regulations of the German Technical and Scientific Association for Gas and Water (Deutscher Verein des Gas- und Wasserfaches e.V. – “DVGW”). Due to quality sensitive consumers, particularly natural gas fuel stations, the potential for feeding a hydrogen share into natural gas grids is currently very limited. According to BNetzA, hydrogen may in fact only account for 10%, which may not be exceeded anywhere in the entire network. Various tests, however, are currently being carried out, exploring the possibility of higher hydrogen shares of up to 20% and 30% in real network operation.

On 27 July 2021, legislation for a transitional regulation of hydrogen networks that is part of the EnWG entered into force. The new regulation only applies to those operators that opt to be subject to this regulation the main features of which will be as follows:

• Hydrogen networks will not become subject to the regulation of gas networks. As a consequence, the cost for new hydrogen infrastructure will not be socialised through uniform grid fees for gas and hydrogen customers.

• The German government intends a gradual introduction of regulation for hydrogen networks. As a first step, operators can exercise an option to become subject to regulation for their entire network. This will, however, only be possible after BNetzA has confirmed the need for the respective hydrogen infrastructure. Should a hydrogen pipeline be part of the hydrogen starter network (see below), it shall become subject to hydrogen network regulation by law (to be introduced by a bill named Third Act amending the German Energy Industry Act (3. EnWGÄndG).

• After exercising the option, the operator will be subject to a number of obligations – similar to those for gas networks. These include the obligation to provide grid connection and grid access to customers. Also, regulated operators of hydrogen networks are subject to certain unbundling requirements under which they may not own electrolysers or storage facilities.

• Unlike in the case of gas networks, the tariffs for the use of hydrogen networks will – at least in a ramp-up phase – not be subject to an incentive regulation system (Anreizregulierung). Instead, the network tariffs must be non-discriminatory and cost-based (planned vs. actual cost). Operators can only include costs in the tariff if BNetzA has confirmed the need for the relevant infrastructure and approved the costs.

• The German Hydrogen Network Tariff Ordinance (Wasserstoffnetzentgeltverordnung – “WasserstoffNEV”) came into force on 1 December 2021. It sets out rules for the assessment of costs and the tariffication for regulated hydrogen networks. To incentivise investments, the ordinance sets the rate of the return on equity at 9% before tax until 2027 for new infrastructure and 7.73% before tax for old infrastructure. After 2027, BNetzA will determine the relevant rates.
  
  For assets of the hydrogen starter network (see below) the 3. EnWGÄndG proposes a uniform interest rate of 6.69% before tax.

• To avoid legal insecurity and possibly protracted administrative procedures, existing permits and easements for gas networks that are converted for the transportation of hydrogen are being grandfathered.

For the ramp-up phase: rules for a hydrogen starter (“core”) network

As Germany aims to develop a starter network for hydrogen with a total length of 1,800 km by 2027/28, an additional set of rules is currently being introduced for the so-called hydrogen core network (Wasserstoffkernnetz). The hydrogen core network is to be composed of projects that have either received IPCEI or PCI (Project of Common Interest) status, are part of the European Hydrogen Backbone Initiative, projects of a supra-regional nature to create a hydrogen network covering the whole of Germany, projects that improve the import possibilities of hydrogen or the integration of hydrogen electrolysers, or projects that interconnect existing hydrogen pipeline structures with those that meet one of the previous requirements.

Regarding the development of the starter network, Sec. 28r EnWG obliges the gas transmission system operators (TSOs) to submit a plan for the hydrogen core network

• stating when the hydrogen network infrastructures included in the requested hydrogen core network are to be commissioned and the expected investment and operating costs of the respective hydrogen network infrastructure.
• In the case of conversion of a natural gas infrastructure to hydrogen in the transmission system: demonstrating that the natural gas infrastructure can be separated from the transmission system and that the remaining transmission system can meet the natural gas demand expected to remain at the time of conversion.
• In order to be an approvable part of the hydrogen core network, a hydrogen network infrastructure must in particular meet the following requirements:
  • it must be located within Germany;
  • it must be scheduled to enter service by the end of December 31, 2032; and
  • it must be part of at least one of the following types of projects: publicly funded projects, projects to establish a European hydrogen network, projects of a superregional nature to create a Germany-wide hydrogen network, projects that improve the import capabilities of hydrogen or the integration of hydrogen electrolysers, or projects that interconnect existing hydrogen pipeline structures with those that meet any of the previous requirements.

In July 2023, the German gas TSOs published a first vision for a hydrogen core network by 2032 which covered 11,200 km. In the meantime, it has been replaced in November 2023 by an optimized version covering around 9,700 km:

(source: Hydrogen Core Network - FNB Gas (fnb-gas.de))

Regarding financing of the starter grid, the German government proposed dedicated rules in November 2023 (3. EnWGÄndG). For the hydrogen starter grid, the German government plans to introduce a concept with the goal of decentralised entrepreneurial ownership, decentralised entrepreneurial opportunity and risk bearing and subsidiary state backing for certain major risks.

Under this concept, the hydrogen network is in principle to be financed by network charges levied on the connected customers using a uniform national network fee (so-called “postage stamp”).

However, in order not to overburden the initially few hydrogen users with the high capital and operating costs of the network construction phase, an amortisation account is to be introduced, on which the initial costs incurred are partly booked and then gradually passed on to an ever larger group of hydrogen network users. In the event that the market ramp-up does not succeed or is less successful than currently expected, the German government plans to introduce a certain level of state backing should the balance on the amortisation account not balance out or networks or pipelines can no longer be operated economically due to the loss of anchor customers (stranded investments).

Planning facilitation

For the immediate construction of the hydrogen production, transport, storage, and import infrastructure, legal provisions for simplification and acceleration are being examined, and regulatory obstacles are being removed.

Therefore, the German government wants to issue a new Hydrogen Acceleration Act (Wasserstoffbeschleunigungsgesetz) to accelerate planning and permitting of the production of hydrogen as well as the associated infrastructure.

The German government has already updated the LNG Acceleration Act (LNG-Beschleunigungsgesetz – “LNGG”) in July 2023. Existing regulations for a future climate-friendly reuse of land-based LNG terminals are being specified. The goal of the German government is to make the LNG infrastructure usable for future hydrogen infrastructure and prevent so-called “stranded investments”.

Furthermore, to shorten the approval process for the expansion of decentralized hydrogen production and its derivatives, an adjustment of the 4th German Federal Immission Control Ordinance (Vierte Verordnung zur Durchführung des Bundes-Immissionsschutzgesetzes – “4. BImSchV”) is being examined after a change in the European legal framework.