The European Union’s regulations on green hydrogen and its derivatives have become legally binding, promising a greener energy future.
However, recent guidance from the European Commission has left project developers with lingering questions and challenges. In this exploration, we delve into the complexities of these regulations and the potential solutions for project developers seeking to export green hydrogen to Europe.
In June 2023, the European Union made its rules on green hydrogen and renewable fuels of non-biological origin (RFNBOs) legally binding. This marked a significant step towards a sustainable energy future, but the devil is in the details. In late July 2023, the European Commission issued guidance in the form of a Q&A document, intending to shed light on these regulations.
However, this guidance left many project developers seeking to export RFNBOs to Europe in a state of confusion. Several critical issues remain unresolved, creating significant hurdles for those looking to structure their projects to meet these new requirements.
Two of the most pressing challenges include:
- The State Aid Conundrum
One of the major roadblocks is the prohibition of State aid for renewable power generation where electricity is transmitted from a renewable generation facility to the RFNBO facility under a Power Purchase Agreement (PPA) through the grid. This broad restriction extends to state support provided outside the EU, posing challenges for global projects.
Various countries worldwide have implemented support schemes for renewable power projects, envisioning the export of hydrogen-based fuels produced with renewable power to Europe. For instance, the U.S. under the Inflation Reduction Act, Canada with investment tax credits, and Egypt, among others, have designed support systems with this export potential in mind.
- The Direct PPA Requirement
Another significant challenge is the requirement for PPAs to be directly between RFNBO producers and renewable power generators. This limitation prevents the use of sleeved PPAs or any structure with a utility supplier as an intermediary power supplier. This poses particular issues in electricity markets that have state-mandated power purchasers and suppliers.
The restriction on State aid is part of the “additionality” test under the Additionality Delegated Act. In essence, this test examines whether, without the demand for renewable power from the RFNBO producer, the renewables project would not have been developed. However, there’s no single definition of “additionality.”
The European Commission’s decision to include this strict restriction on State aid makes the EU’s version of additionality even more rigorous than the most stringent requirements considered in the U.S. This decision raises questions in the industry about whether the EC may have exceeded its delegated authority under the Renewable Energy Directive (RED II).
The requirement for direct PPAs between RFNBO producers and renewable power generators is seen by some as a significant shift in the European Commission’s stance. Article 5 of the Additionality Delegated Act initially allowed for back-to-back PPA arrangements through intermediaries. These arrangements were widely understood to be permissible and provided flexibility for projects in various markets.
Electricity markets with state-mandated power purchasers and suppliers: In these markets, local laws mandate that generators sell to state-mandated offtakers, limiting direct contracts between renewables generators and consumers.
Optimizing economics of renewables components and grid services: This structure allows for more favorable economics by involving a utility as a buyer of renewable power. It also enables the aggregation of electrons from multiple renewables projects, optimizing green hydrogen production and grid services.
However, the EC’s July 2023 guidance strictly limits the role of intermediaries in PPA arrangements, stating that intermediaries can only facilitate contracts but not be party to them. This has left many project developers perplexed and uncertain about the viability of their project structures.
These restrictions on RFNBO eligibility introduce significant uncertainty and legal risk for project developers looking to export to the European market. They could potentially deny European offtakers access to RFNBOs from projects that use subsidized renewable power transmitted through the grid. Additionally, the direct PPA requirement makes it challenging for projects in many crucial regions to export to Europe as RFNBO.
As a result, RFNBO projects may explore other markets for their products, which could have broader implications for Europe’s role as a destination for green hydrogen and derivative fuels. It may also impact Europe’s standing as an exporter of the technologies needed for green hydrogen production.
In conclusion, while the European Union’s green hydrogen regulations aim for a cleaner energy future, they present a complex landscape for project developers. Finding solutions to navigate these challenges will be essential for the growth of the green hydrogen industry and its role in achieving global sustainability goals.
