As the European Union finalises its hydrogen and gas rulebook, key issues remain on how to remunerate network operators for building and maintaining Europe’s future hydrogen grid.
The European Commission tabled its “hydrogen and decarbonised gas market package” in December 2021, paving the way for Europe to transition towards low-carbon fuels.
But there is a long way to go before the EU reaches its goal of producing 10 million tonnes of renewable hydrogen in Europe while importing the same amount by 2030.
And as more projects emerge, market players are calling for clear rules at the EU level to encourage investments in supply as well as transport infrastructure.
“In terms of infrastructure, we need hydrogen backbones,” said Maxime Peeters, who oversees the hydrogen program at the Port of Antwerp-Bruges in Belgium.
Belgian authorities are aiming to connect the port of Antwerp-Bruges to a hydrogen pipeline by 2026, with plans to extend linkages to the hydrogen network in Germany and other neighbouring countries by 2028.
“But on the demand side, we really see a bit of a problem,” Peeters said at a recent Euractiv event, citing economic difficulties in the chemical industry, where most of the demand for clean hydrogen is expected in the short term.
“As we know, there is a cost gap to be filled [between supply and demand for green hydrogen],” Peeters pointed out, saying that potential industrial users of hydrogen need incentives to buy the costly green fuel, “otherwise industry will leave Europe and simply produce elsewhere”.
For the time being though, investors have adopted a wait-and-see attitude as Europe finalises its hydrogen and decarbonised gas market package.
Hydrogen pipeline projects spanning 20,000 kilometres are currently awaiting approval, said Maria Sicilia Salvadores, Chair of the European Hydrogen Backbone, an association of 32 gas transmission system operators from across Europe.
However, a final investment decision has yet to be made because of regulatory uncertainty holding up decision-making, Sicilia told participants at the event.
“If we want to meet our climate neutrality targets, infrastructure needs to happen very rapidly,” she said, urging policymakers to move fast on issues like permitting in the face of the decarbonisation imperative.
Abolishing cross-border tariffs?
Among the key uncertainties is the remuneration model to finance hydrogen infrastructure.
In its original proposal, the European Commission proposed abolishing cross-border tariffs for hydrogen transport, arguing that this hinders trade between EU countries. “The more borders are crossed, the higher the effect of adding tariff layer on tariff layer, which is called the ‘pancaking’ effect,” the Commission said in a cost-benefit analysis published alongside its December 2021 proposal.
The removal of cross-border tariffs is strongly rejected by ENTSOG, the association of European gas network operators, which supported the Euractiv event. In a 2021 position paper, ENTSOG argued against their abolition, saying this would cause “significant complexity” for pipeline operators without lowering costs for consumers.
Their arguments are echoed by Klaus-Dieter Borchardt, a former senior European Commission official who is now adjunct professor at the Copenhagen School of Energy Infrastructure.
Borchardt said he was among the officials who resisted the idea of scrapping cross-border tariffs when he was drafting new rules for the European gas market at the Commission.
“And I haven’t changed my mind. I still think it’s a very bad idea,” he told participants at the Euractiv event, saying the removal of cross-border tariffs “will create even bigger problems” than those the Commission is seeking to resolve.
According to Borchardt, cross-border tariffs merely reflect the cost of investment in the infrastructure as well as the cost of moving hydrogen from one network to another. Removing them will not eliminate the need for operators to recover their costs, he explained, saying operators will therefore have to shift the costs further upstream, at the level of entry and exit tariffs applied to hydrogen when it is injected or taken out of the network.
Recalculating those tariffs will therefore require different network operators and regulators with different allowed revenues to agree on a cost-sharing mechanism between themselves, he continued, saying this will have to be made by establishing a compensation mechanism between network operators.
“That is an absolute no-go” for gas operators, he added, “because when you are doing this you are redistributing money which is not related directly to the investment that has been done” – a move he said will create “maximum complexity for member states and national regulatory authorities”.
Moreover, the amount of compensation will have to be recalculated between 27 EU parties every time new hydrogen infrastructure is added to the network, he warned.
“It’s a nightmare!” Borchardt exclaimed, saying the new mechanism “will take years” to negotiate and deter investment in infrastructure at a time when Europe is looking for speed in building up its hydrogen network.
Of course, individual countries may decide to merge their markets and abolish cross-border tariffs, like Denmark and Sweden have done, Borchardt said. But that must remain a voluntary decision, he added, saying the removal of cross-border tariffs “should not be imposed” by the EU.
Parliament and EU countries undecided
Borchardt’s warning on infrastructure financing was echoed by Jerzy Buzek, a former Polish Prime Minister who is now a lawmaker in the European Parliament for the centre-right European People’s Party (EPP) group.
Reflecting the cost of investment in infrastructure “is absolutely necessary”, argued Buzek, who is the Parliament’s speaker on the draft EU regulation on gas and hydrogen markets.
However, he said this was only his personal view, warning that “it will not be easy in the European Parliament” where lawmakers adopted their position on 9 February during a vote in the assembly’s industry committee.
The Parliament’s position gives hydrogen network operators a regulatory holiday until 31 December 2030. After that date, “all affected hydrogen network operators shall negotiate a system of financial compensation to ensure financing for cross-border hydrogen infrastructure,” it says.
EU member states, for their part, have supported the continuation of cross-border grid tariffs when voting on their position in the Council of the EU.
In their general approach adopted in March, EU countries insisted on the need to “create viable price signals for investments” in hydrogen infrastructure, “including interconnections” between EU member states.
But at the same time, they added: “Any undue barriers, including disproportionate tariffs at interconnection points, should be eliminated by Member States” – a move which seems to partly back the Commission’s proposal to abolish cross-border grid tariffs.
> Watch the full Euractiv event below.
This article follows the EURACTIV-organised policy debate “Navigating the Energy Transition – Implementing clean hydrogen initiatives in the EU” supported by ENTSOG.
[Edited by Nathalie Weatherald. Additional reporting by Annita Elissaiou]
