On July 14, 2021, the European Commission released a raft of regulatory proposals and revisions to achieve the European Green Deal target of 55 percent net reduction in greenhouse gas emissions by 2030. Shearman & Sterling will be publishing a series of articles on these important developments. This article focuses on the growing importance of green hydrogen in the Commission’s vision for Europe’s energy and industrial future.
The Commission has proposed revisions to the Renewable Energy Directive (Recast) 2018 (RED II) which:
In addition to the reforms to RED II, the Commission’s package—referred to as the “Fit for 55” package—includes revisions to the EU’s Emission Trading System (the EU’s carbon market) and a proposal for a Carbon Border Adjustment Mechanism, both of which will have a significant impact on European industry and foreign industry exporting relevant goods into Europe. These developments will be covered in more detail in subsequent articles by Shearman & Sterling.
Key takeaways from the proposed revisions to RED II for industrial clients are as follows:
The Commission’s proposal has expanded the scope of the RFNBO concept from the currently applicable RED II, which applied it exclusively to transport fuels. The concept is now proposed to apply also to hydrogen when used in industry.
The requirements for an RFNBO are that it must:
Importantly, though, in applying the first criteria above for determining whether renewable energy has been used in producing the hydrogen (and therefore the extent to which the hydrogen qualifies as an RFNBO), RED II looks through to how the electricity supply for the hydrogen production is structured. In particular, RED II contemplates three possible electricity supply scenarios:
The Commission’s proposals will, of course, require that existing hydrogen use in industry, the majority of which is fossil-derived hydrogen (e.g. in ammonia production), be replaced with RFNBOs (green hydrogen). However, these requirements will also have a significant impact on future hydrogen uses in industry—such as in hydrogen-DRI steel manufacturing (i.e. “green” steel).
With the RED II requirements governing how green hydrogen is produced now applying to RFNBOs used in industry, industrial players with existing or potential future hydrogen use will need to carefully consider the implications of RED II and likely implement measures on the structuring of their projects, in particular how renewable energy supply should be structured to ensure compliance with the RFNBO targets.
This increased role for green hydrogen in industry and the strict sustainability requirements imposed may represent a significant opportunity for hydrogen producers in countries with favorable renewable energy resources for exporting into Europe, including available land and a political environment that facilitates swift development of additional renewable energy generation in excess of what the local grid requires. Indeed, increased demand for green hydrogen that will be seen as a result of the targets under RED II for both industry and the transport sector may generate export opportunities for hydrogen projects in the European neighborhood and the Middle East.
No further clarity has been provided on the long-awaited Delegated Acts expected from the Commission to elaborate on important aspects of the regulatory regime for RFNBOs and, specifically, the conditions green hydrogen must meet to qualify as such. In particular, these Delegated Acts (expected by the end of 2021) will clarify:
In addition, the RED II proposals will now need to be debated and adopted by the European Parliament and the Council and then implemented by Member States. The current proposal provides for implementation by 2024.
As part of our work on the world’s largest “green” and “blue” hydrogen / ammonia projects, we are at the forefront of the complex and evolving regulatory issues affecting the production and downstream uses of hydrogen, ammonia and other green energy projects, and we are happy to speak with you if you would like further information as these matters evolve.