This is an extract from a recent paper “Hydrogen Europe Position Paper” by Hydrogen Europe.
Introduction
On 20 November 2023, Directive 2023/2413 as regards to the promotion of energy from renewable sources (REDIII) entered into force, thereby amending the previous Directive 2018/2001 (REDII). The new directive aims to reduce the dependence on fossil fuels in the industry sector, as well as to decarbonise industrial emissions (recitals 59-61). Thus, it introduces notable changes by mandating the sector to increase the contribution of renewable fuels of non-biological origin (RNFBO). More specifically, under art. 22a(1), para. 5, an obligation is placed on Member States to ensure that by 2030, RFNBO makeup at least 42% of hydrogen used for final energy and non-energy purposes in industry, rising to 60% by 2035. The Directive also provides several flexibility mechanisms in calculating these targets, both in the articles, as well as in the recitals. Nonetheless, the decision of how to transpose the target into national law is left to Member States and they have until 21 May 2025 to do so. In transposing the target, Member States have a menu of options. The national implementation of the obligation should not only facilitate the deployment of hydrogen technologies in Europe but also enhance European competitiveness.
1. Target and flexibilities in setting national targets
The target covers industrial undertakings in the sectors B, C, F, and J (36) of the statistical classification of economic activities (NACE REV.2). This corresponds to the sectors of Mining & Quarrying, Manufacturing, Construction, and Information Service Activities. Art. 22a, fifth subparagraph, sets out that Member States must ensure that the RFNBO in final energy and non-energy purposes shall make up at least 42% of the hydrogen used for final energy and non-energy purposes in industry by 2030, and 60% by 2035.
Flexibility mechanisms when defining the target: The text of the directive and the way that the target is formulated provides two ways, through which the target can be reduced when set at the national level.
1) Article 22b – Reduction of target by 20%
As outlined in art. 22b, a reduction of the RFNBO target by 20% in 2030 is permissible under two conditions:
a. the Member State is on track to meet its renewable energy sources (RES) target by 2030, and
b. the share of hydrogen, or its derivatives, produced from fossil fuels consumed within that Member State does not exceed 23% by 2030.
2) Exemption of CCS projects & retrofitted facilities: Although, not explicitly stated in the binding text of the legislation, in Recital 62 of the preamble, the legislators provided that “hydrogen produced in retrofitted production facilities based on steam methane reforming technology for which a Commission decision with a view to the award of a grant under the Innovation Fund has been published before the entry into force of this Directive and that achieve an average greenhouse gas reduction of 70% on an annual basis, should not be taken into account.” If such cases are present in any given Member State, this effectively reduces the amount of RFNBO required, through the reduction of the absolute amount of hydrogen to be considered in the denominator for calculating compliance with the target.
2. Menu of options available to Member States in transposition
The Directive leaves to national authorities the choice of the exact form and methods on how to achieve the target, which is binding on them. It is to be noted that national authorities can also develop hybrid options, which combine different elements.
Option 1: Keeping the target on Member-State Level
The first option available is to maintain the obligation at the Member-State level, without explicit obligations on industry, thereby aiming to achieve the target through positive incentives such as tax reductions or subsidies, similarly to the Feed-in-Tariffs used to support the uptake of RES across Europe in the past.
Option 2: Passing the obligation onto industry as a whole
A second option would be to place the obligation to reach the RFNBO target on individual companies, possibly at corporate group-level, in a uniform manner to all sectors in which hydrogen is consumed. This could range from a ‘copy-paste’ approach in transposing the target, where no differentiation would be made regarding the hydrogen-value chain and its complexities (price/competition exposure of different sectors), to a gradual implementation that facilitates achievement. Possible ways to ensure compliance range from simple monitoring, verification, and reporting systems to ‘book and claim’ systems with tradeable credits or tax-based systems with penalties for non-compliance, like the HBE (Netherlands) or THG quota (Germany) or TIRUERT tax (France).
Option 3: Passing the obligation on industry with sectoral differentiation
A third option is to pass the obligation to reach the RFNBO target on individual companies, in industries in which hydrogen is consumed, with a differentiation in the level of ambition for RFNBO consumed depending on the sector in which the company operates. Under this option, national authorities can adapt the target depending on their industrial sector structure and take into consideration the different factors mentioned above, such as exposure to international competitiveness, their decarbonisation alternatives and investment cycles as well as carbon-leakage risks. As in the previous option, the achievement of the target can be facilitated through ‘book and claim’ systems e.g. HBE (Netherlands) and THG quota (Germany), thereby facilitating RFNBO production and integration where it first benefits most from economic efficiency and high willingness-to-pay.
3. Enabling conditions for meeting the RED III targets
Regardless of the method chosen by a Member State to transpose the target in its national framework, Hydrogen Europe has identified certain conditions applicable to all Member States, without which achieving the national targets will be extremely challenging. Firstly, national authorities should work on providing predictability on how the target will be structured as soon as possible, preferably in the National Energy and Climate Plans, or at least by the end of 2024. In the nascent market of hydrogen, this predictability is paramount, while ensuring timely transposition is essential. Achieving the targets should proactively support the industry early on by offering clear guidance and certainty regarding the target’s framework and requirements.
Infrastructure: Considering the quantities of RFNBO necessary for different industrial processes, ensuring the development of robust hydrogen transport and storage infrastructure is critical, in parallel to transposition and supply scale-up. It is imperative that Member States prioritise infrastructure development to enable the link between hydrogen consumption with hydrogen production. Reaching the ambitious industry target will require moving towards a liquid market for hydrogen, which can only happen with advanced H2 infrastructure deployment. Therefore, Member States should establish a regulatory framework for infrastructure, designate a hydrogen network operator as soon as possible and facilitate funding to ensure the timely development of suitable infrastructure.
Funding: In order to encourage RFNBO consumption in industry and stimulate the production of downstream products with lower GHG emissions, direct funding support at the national level is crucial. At the EU level, the launch of the Hydrogen Bank’s segment for domestic production and its inaugural auction signifies a significant initial stride towards bolstering the overall EU hydrogen market. The Hydrogen Bank or Member states should also provide state guarantees to mitigate the long-term risks associated with off-takers committing to extended purchase contracts, thereby reducing financial requirements. To ensure fair competition, Member States should participate in the Auction-as-a-Service mechanism established under the Hydrogen Bank. Additionally, Carbon Contracts for Difference (CCfDs) and revenue floor-based mechanisms serve as fundamental, cost-effective tools in the arsenal of national authorities to bridge the gap between unabated fossil-based hydrogen and RFNBO production.
Penalties: Whether applied at the national or company level, the consequences for not reaching the target require clarity and transparency from the European Commission. If Member States opt for national obligations, the Commission must explicitly outline the severity of these penalties to deter non-compliance. Ambiguity should be avoided, and clear conditions for penalty application must be established instead of leaving room for potential infringement procedures. Alternatively, if penalties are imposed at the company level, the EC should streamline the process to ensure uniformity across Member States. Divergent policy signals would otherwise expose off-taker companies to varying regulatory environments, further increasing the risk of fragmentation of the EU single market.
Certification: Another obstacle hindering the adoption of RFNBOs is the absence of a well-defined certification framework. A robust RFNBO certification system is vital for projects to progress with Final Investment Decisions (FIDs). Such certification will ensure credibility, transparency, regulatory compliance, and market access for RFNBO. Moreover, it bolsters the trustworthiness of RFNBO products, offering assurance to consumers, investors, and regulatory bodies regarding their sustainability and environmental attributes. This transparency and reliability are pivotal for garnering market acceptance and consumer trust, thereby stimulating demand for RFNBO-based products. The timely implementation of the industry target heavily depends on the prompt endorsement of the certification schemes by the Commission, which should ideally occur no later than June 2024. In turn, Member States should pledge to adopt or acknowledge the certification schemes endorsed by the Commission.
Crediting (Book & Claim): Leveraging RFNBO certification, companies ought to have the opportunity to accrue credits that can be subsequently transferred to other companies seeking to demonstrate their utilisation of RFNBO through ‘book and claim’ systems. This transferability can be motivated either by a company-level obligation or by their willingness to disclose their hydrogen procurement strategy to shareholders or customers. ‘Book and claim’ systems present a cost-efficient, market based mechanism that will facilitate the business case for projects across Europe.
Product Labelling: The European Union ought to establish a standardised and compulsory labelling system for industrial goods, aimed at disclosing the proportion of renewable energy and feedstock used in the manufacturing process. Such a system would facilitate the emergence of leading markets for environmentally friendly products, which could command a premium due to their green credentials. To ensure consistency and reliability, efforts to label products should be consolidated into a unified, transparent system, with Member States playing a pivotal role in ensuring compliance and advocating for its implementation. Priority should be accorded to disclosing key elements such as carbon intensity and the use of renewable energy.
Public procurement and green products: Another crucial factor for establishing a hydrogen ecosystem in the EU is the boost of downstream demand for greener products. To accomplish this, governments and public authorities at all levels must take proactive steps to stimulate demand for environmentally friendly products. Public authorities should spearhead initiatives to integrate ambitious product requirements or environmental performance standards into national public procurement schemes. These schemes should prioritise the procurement of products like green steel, cement, aluminium, or glass for public infrastructures. Furthermore, providing carbon intensity information on procured goods should become a standardised practice.
Protection against carbon leakage: It is essential to safeguard European jobs and innovation potential within Europe, therefore it is imperative for Member States to closely collaborate with the EU to formulate and execute coordinated policies that bolster European decarbonised industry and enhance its competitiveness globally. While the Carbon Border Adjustment Mechanism (CBAM) represents a positive stride, as highlighted by Hydrogen Europe, it requires further elaboration and expansion to ensure its efficacy and an equitable level playing field. Further impact assessment is required to understand the transposition of the target across different Member States and the risks of carbon-leakage.
4. Hydrogen Europe’s recommendations
Considering all of the above, Hydrogen Europe urges national authorities responsible for implementing the REDIII RFNBO target in industry to initiate discussions with industrial stakeholders promptly, with the objective of establishing national targets and developing pathways necessary to achieve them before the end of 2024. Taking into account the differences between Member States, a one-size-fits-all approach to setting the national target is unlikely to work across Europe. Different Member States have different industry structures and various types of offtakers, different RFNBO production potential and different connections to import routes.
Regardless of the scenario chosen, leveraging existing, and developing new, suitable infrastructure to transport and store the necessary amounts of hydrogen to decarbonise industry will be key. Moreover, this infrastructure needs to be operational as soon as possible, especially considering the necessity of imports to contribute to the achievement of national targets across Europe. Given that imports may originate from within or outside the EU, it is crucial to prioritise the development of both pipeline and port infrastructure to facilitate their transport. Relating to imports, the current omission of hydrogen imports in the scope of the target risks undermining the entirety of the target. It is therefore very important that the Commission addresses the issue, firstly, by assessing the impact of including derivatives into the obligations, this impact assessment should be done as soon as possible. If the assessment is favourable, The Commission should guide Member states in guaranteeing that any hydrogen and derivatives imported into the EU are subject to the same RFNBO obligations as domestically produced ones. Without such action, the development of the European hydrogen market is placed at risk.
Most importantly, to support the technological deployment across Europe, Member States must assist offtakers of RFNBO and early movers, focusing on support to bridge the gap between the cost of RFNBO and currently unabated fossil-based processes. Additionally, Hydrogen Europe calls for Member States to join the Auction-as-a-Service of the European Hydrogen Bank and to develop national support schemes to incentivise other forms of hydrogen production that aid in attaining the flexibilities under Article 22b.
Hydrogen Europe supports the transposition of the target into national legal frameworks, favouring a coordinated system that imposes obligations on individual companies that consume hydrogen once the enabling conditions are met, such as the gradual development of infrastructure and the derisking schemes guaranteed by the Member States. The transposition should happen in a gradual way, ensuring that the enabling conditions and support are provided in order for the obligation to be achievable by 2030 and 2035, in a manner that retains the competitiveness of European industry. By gradually introducing company obligations and establishing a book and claim system, risks will be effectively distributed to stakeholders best positioned to act and equipped with the necessary means, while also receiving support through subsidy schemes to fulfil obligations. This approach ensures flexibility in achieving targets without risking European de-industrialisation. In developing these systems, national authorities should adopt a holistic approach to the regulatory framework, seeking to maximise synergies with existing regulatory regimes.
Furthermore, in fulfilling their obligations under the directive, Member States must take into account the integrity of the European internal market. While some market fragmentation is inevitable due to the discretion permitted by the directive, national authorities, with guidance from the European Commission, should aim for harmonised legal frameworks across Europe. Additionally, the creation of these frameworks should avoid “gold-plating,” meaning they should not introduce additional requirements or administrative burdens beyond those mandated by REDIII. To prevent delays in investments caused by a vague and prolonged process, the European Commission should signal clear penalties for Member States failing to comply with regulations. Additionally, it should streamline the transposition process by providing comprehensive guidelines on available flexibilities and necessary conditions. Moreover, the Commission must address the oversight concerning imports of final products and hydrogen derivatives concerning target compliance. It’s crucial that any hydrogen derivatives imported into the EU adhere to the same RFNBO quota obligations as domestically produced ones, ensuring fairness and uniformity in the market.
Access the complete paper here
