The last piece in the EU’s hydrogen policy puzzle: grid ownership rules

11 months ago 33

As EU legislators wrap negotiations on the EU’s new hydrogen rulebook, they have one last question to answer: how to regulate the ownership of pipeline and storage infrastructure.

The European Commission tabled its “hydrogen and decarbonised gas market package” in December 2021, paving the way for green hydrogen and renewable gases like biomethane to replace fossil gas.

Two years later, EU legislators are about to conclude.

On Monday, negotiators from the European Parliament and EU countries – represented by the Spanish EU presidency – will aim to resolve one last issue: how to regulate the ownership of Europe’s future hydrogen infrastructure.

The issue, called “unbundling” in EU jargon, refers to the legal disentanglement of infrastructure ownership from energy production. But, it means the same company cannot produce electricity or gas and own the networks delivering it to European consumers.

The European Commission initially proposed strict “unbundling” rules for hydrogen networks, which would have barred gas companies from switching their existing pipeline infrastructure to hydrogen.

The European Parliament, represented by its chief negotiator, Jens Geier, decided to scrap this rule to encourage gas companies to convert their infrastructure. The Parliament’s approach “enables the transformation of gas networks to hydrogen,” explained the German social democrat MEP.

EU countries, meanwhile, decided to uphold the Commission proposal when it comes to unbundling. The mismatch between Parliament and EU countries has become the law’s last big sticking point.

Why does unbundling matter?

There are two types of unbundling. So-called “vertical” unbundling ensures that hydrogen producers are not directly involved in gas transport. According to the European Commission, this avoids creating incentives for discrimination against competing producers.

“Horizontal” unbundling, meanwhile, makes sure gas grid operators aren’t directly involved in the hydrogen grid. This would prevent both cross-subsidisation at the expense of gas consumers and aimless repurposing of gas grids to hydrogen, paid for by taxpayers.

Infamous for this accumulated dysfunctionality is Germany, “where a whopping 880 entities operate residential gas and electricity grids in a rather non-transparent and inefficient manner,” explains Andreas Jahn, senior expert with the Regulatory Assistance Project (RAP), a think tank.

Strict unbundling rules “would have been a perfect opportunity to avoid creating the same organically-grown issues in gas and electricity regulation in the nascent hydrogen regulation,” says Jahn.

Esther Bollendorf, a gas policy expert with the environmental group CAN Europe, agrees, saying strict unbundling rules will “avoid any conflict of interest” for gas operators seeking to prolong their rent on existing infrastructure. It will also avoid consumers “paying for future unused and over-expanded infrastructures,” she argues.

However, according to multiple sources involved, unbundling could be scrapped in line with the European Parliament’s negotiating stance.

Several EU countries have come out to support this, namely Germany – where the dysfunctional system represents a working status quo at the municipal level – and Austria, alongside countries like Hungary, Bulgaria and Slovakia.

France and the Netherlands, meanwhile, have argued in favour of sticking to the joint EU Council position agreed in March, which would uphold unbundling requirements.

When EU ambassadors met on Friday (24 November), several EU countries did not clarify their stance for Monday’s negotiations with Parliament.

Three possible outcomes

Various sources indicate three possible outcomes.

The first would be to scrap horizontal unbundling requirements entirely, allowing gas and electricity grid operators to directly embrace hydrogen without legal distinction, along with Geier’s position.

The second would limit unbundling requirements for cross-regional transmission infrastructure only and allow EU countries to delay the rule by five years.

The third would keep unbundling requirements as proposed by the Commission but exempt small companies with less than 100,000 customers by introducing a so-called “de minimis” rule.

Given that few expect even the most prolific hydrogen cluster to feature 100,000 off-takers, that would de-facto neuter the obligation entirely – until the EU’s regulatory agency ACER reviews the rules ten years later.

Either way, the outcome is unlikely to benefit consumers. “To ensure competition, the production and transmission of hydrogen or gas must be carried out separately by different companies,” insists the German consumer protection agency vzbv.

At worst, every EU country could develop a situation like Germany’s, with many small operators.

That would mean infrastructure “run in an economically inefficient manner with little ability for critical oversight”, which would be subject to limited scrutiny by various regulators, says Andreas Jahn from RAP.

In Germany, for instance, some 20 regulators currently oversee gas and electricity infrastructure.

A new EU hydrogen network regulator?

This conflict between who gets to take charge of hydrogen infrastructure also plays into the second part of the gas and hydrogen package.

Another avenue to combat potential conflicts of interest would be establishing an independent regulator to govern the infrastructure. To that end, the Commission proposed establishing a new regulator, the European Network of Network Operators for Hydrogen (ENNOH).

This is an option favoured by renewable energy associations, green NGOs, as well as the climate think-tank E3G.

Yet, ENNOH looks unlikely to see the light of day given the strong opposition from Parliament and its lead negotiator, Jerzy Buzek, a former Polish prime minister from the centre-right European People’s Party (EPP). Instead, ENNOH’s tasks could be taken on by ENTSO-G, the European Network of Transmission System Operators for Gas.

“The next decade will show if a separate structure (ENNOH) will be necessary,” the Parliament argues.