Towards the New Age of Gas Networks · 2020-05-18 · towards the new age of gas networks 2...

Towards the New Ageof Gas NetworksProposal on the Regulation of aEuropean Hydrogen Infrastructure

MAY 2020

towards the new age of gas networks 2

OBJECTIVE: EstablIsHmEnt of a EuRoPEan HydRogEnnEtwoRk Economy

as part of the decarbonisation of the energy sector and to meet theclimate targets for 2050, the transformation of the gas industry – as setout by the European green deal – is an essential component. the existingnatural gas industry is characterised by an extensive, mashed network ofpipelines connecting almost all countries of the European union andrepresenting a considerable economic value that should not bejeopardised without need. therefore, current gas networks must beprepared for a new task: The transport of hydrogen and other clean gases.

PROBLEM: REgulatoRy baRRIERs

today’s regulation of the gas sector is not compatible with the above-mentioned objective; in fact, it may even stand in the way of deepdecarbonisation. Hydrogen and other clean gases do not enjoy the samestatus in European law as natural gas, today. yet, an investmentopportunity not relying on public subsidies is given within the regulatoryframework. the current legal framework at European and national levelmust therefore be prepared for the new tasks.

PROPOSED SOLUTION: “combInEd nEtwoRk oPERatoRs“

the central suggestion of gEodE’s proposal is that the future hydrogeninfrastructure should develop itself out of the traditional natural gasnetwork operators, with the latter becoming combined network operators.Existing natural gas assets may be rededicated and the cash flow of theexisting industry may be utilised for the benefit of old and new economy.

this requires equal regulation of natural gas and hydrogen. therefore, thepaper discusses how hydrogen can be established in European law as anadditional base gas and how it can be incorporated – as pure hydrogennetworks or for blending into the natural gas networks – within theunbundled market. based on this, the paper outlines necessaryadjustments with regard to network development and network access.Hence, a technology-neutral market ramp-up can be achieved by alsousing blue hydrogen, while green hydrogen is enjoying feed-in priority.finally, the holistic approach also considers the protection of end-usecustomers in the transformation process and suggests protection ofproperty for end-use applications.

Executive Summary


Content

1. Objective: Establishment of a European hydrogen network economy 4

2. Expansion of the regulatory framework – An overview 6

opening the Eu legal framework 6

Revisions in national law 7

future-oriented development of downstream distribution networks 7

financing a hydrogen infrastructure 8

3. EU regulatory framework and principles 9

Integration of new (hydrogen) networks in regulated gas network operations 9

the term of hydrogen in the Eu regulatory framework 9

unbundling and market entry 10

demand-based network expansion and network development planning 12

demand-based network development and network development planning 12

the independent role of distribution networks 13

development of hydrogen networks 14

network access 15

network access for everybody 15

Entry-/Exit system and equivalent contractual terms and conditions 16

tariff-setting for financing the hydrogen infrastructure 17

Regulatory aspects of decarbonisation 18

Priority feed-in 18

guarantees of origin (certification) 19

Protection of end-use customers 19

summary and proposed solution 20


as part of the decarbonisation of the energyindustry or the implementation of the climatetargets for 2050, domestic, commercial andindustrial consumers across Europe need areliable, efficient and affordable energy system.Hydrogen has a significant role in meeting theneeds of energy consumers and delivering thetransition in an efficient and cost effective way.

an essential component of this is thetransformation of the gas industry due to itscentral role in energy systems across Europe. In atransitional period, natural gas will remain animportant energy carrier. Its use in highly efficientcombined heat and power plants, for example, canreduce co2 emissions compared to coal-firedpower generation. the gas sector has alreadyembarked on a transformation journey to replacethe use of co2-emitting natural gas with hydrogenand biogas.

green gaseous energy supply is a necessary partof our future to provide safe, secure, low-carbonenergy systems together with electrical energysupply. the current natural gas grid is a valuableand indispensable asset for the green energysupply of the future, particularly due to its abilityto store energy until it is needed, and absorbgeneration when it is available. the continuity ofthe gas network operation in the transition fromthe fossil natural gas economy to the hydrogeneconomy as a regulated network operationrequires new thinking from policy makers andregulators to deliver the necessary investment andfinancing structures. In this paper, we explore theopportunities and delivery mechanisms which canunlock the potential for hydrogen grids.

the European Green Deal of 11 december 2019identifies a number of measures that will bring far-reaching changes, including in particular the“supply of clean, affordable and secure energy”.1

this will require the introduction of innovativetechnologies and infrastructures (see point 2.1.2).In particular, the green deal identifies hydrogennetworks which, therefore, need to be developedon a European scale. to ensure this, theEuropean commission expressly calls for existinginfrastructures and assets to be modernised sothat they continue to serve their purpose andbecome climate resilient (see the Europeangreen deal, op. cit.).

the existing natural gas sector today ischaracterised by an interconnected network ofpipelines connecting almost all countries of theEuropean union. natural gas is transported viatransmission and distribution networks from thesources of supply to the domestic market andabroad to the final consumers. a considerableproportion of the natural gas comes from non-European sources. this unique network has grownhistorically since the 1960s and represents aconsiderable economic value that should not bejeopardized without need, and an opportunitythrough which carbon neutrality can be delivered.therefore, these gas networks must be preparedfor a new task: The transport of clean gases.

Hydrogen plays an important role here, butdiscussions are also underway on ammonia ornon-conditioned biogas. Possible migration pathsfor the transformation of the natural gasinfrastructure can be identified:

1 https://ec.europa.eu/info/sites/info/files/european-green-deal-communication_en.pdf

Objective: Establishment of a Europeanhydrogen network economy 1


1. In principle, hydrogen can be added to thetransported natural gas; however, existingnetworks would have to be upgraded above acertain concentration. since the natural gasnetworks must be continuously maintained atthe same time, forward-looking up-grading(“H2-Readiness”) is a good idea.

2. certain applications also require networks thattransport and distribute pure hydrogen. thesenetworks must be partly newly constructed andpartly obtained by modifying existing naturalgas networks. for this reason, networkcomponents must be rededicated to thetransport of pure hydrogen.

In many countries and regions, the existingnatural gas infrastructure has already beenlargely written off and could be integrated intonew hydrogen networks at book value. thisrequires the transformation of today’s naturalgas network operators into “combined networkoperators”; these can operate both mixed gasand pure hydrogen networks. this model hasdecisive operational and economic advantages.

3. finally, there is a need to continuously developthe transmission network in line with demandand the changing requirements of customers.due to the change in the sources of supply andpossibly the relocation of consumption centres,combination of conversion, remodelling andnew infrastructure can be expected.

natural gas network operators will transportrenewable gases in the future. Regulated“combined network operators” are thereforeessential for the energy transformation.

new and rededicated infrastructure (see points 2and 3 above) will primarily transport pure hydrogen(predominantly transmission networks), since, inlight of the decarbonisation, industrial demand forpure hydrogen in material and energy use isexpected to increase. If these developments (also)reach to existing distribution networks, anadmixture at the network interconnection point isa suitable option (see point 1).

to be clear: natural gas won’t last after 2050.although today’s network operators and theirnetworks will still exist, they will have changedtheir character. they will not serve natural gas butgreen gases.

current regulation of the natural gas sector is notcompatible with the above objective; in fact, it mayeven stand in the way of decarbonisation. thecurrent legal framework at European and nationallevel must therefore be prepared for the newtasks. this paper intends to provide an impulse forreflection on this issue.

Expansion of theregulation framework –An overview 2


In order to achieve the above objective, an equalintegration of climate-neutral gases into theexisting regulatory system for natural gasnetworks is necessary. while the regulation ofenergy infrastructure has so far mainly aimed atliberalising markets, it is now in order to fulfil thehistoric task of achieving a climate-neutralsociety. only a harmonised regulatory frameworkcan transform the existing gas transportinfrastructure so that it can continue to fulfil itspurpose and at the same time become climateresilient.

In essence, hydrogen must be defined as a basegas2 alongside natural gas in all Europeanregulations and directives (insofar as it isnecessary to specify a specific type of gas).Higher-level standards, which form the basis andframework for pending discretionary decisions,can then be accompanied by gas-specificprovisions – as is the case today in many forms,e.g. for natural gas networks – in subordinatedregulations, specification by authorities andnetwork codes which implement the currentregulatory needs.

In order to achieve the objective of a singleEuropean internal market for all gas types, thevalue opportunities of the existing market must beused. this presupposes that the Eu regulationsalso allow the natural gas network operator toparticipate in the development of a hydrogeninfrastructure. the current Eu legal frameworkonly partially fulfils this requirement.

the relevant rules for network operation can befound in directive 2009/73/Ec of the EuropeanParliament and of the council of 13 July 2009 (GasDirective 2009). However, these rules only refer tonatural gas networks. this may not yet be a problemfor mixed gas networks where hydrogen is fed intothe natural gas network, because the provisions ofthe gas directive apply to mixed gas networksaccording to article 1(2) gas directive 2009.

this is not the case with pure hydrogen networks.the operation of hydrogen networks as such (e.g.the operation of an unregulated hydrogen networkalongside a regulated natural gas network withinthe same company) is not expressly prohibited byEu law. nevertheless, the development of purehydrogen networks is practically limited becausethe current regulation framework neither allowssuch a network expansion nor its financing withnetwork fees. In this respect, the legally separatetreatment of natural gas networks is notconducive to the necessary transformation of thenatural gas network operator.

the gas directive 2009, a fundamental legal basisin European law, must therefore be adapted. theexplicit reference to natural gas should be omittedand instead it should only be listed as an example

Opening the EU legal framework

2 It is already possible today to mix hydrogen into natural gas networks as an additional gas, but only within the limits of technical safety andtechnical specifications (“off-spec“).


the necessary changes in European law describedabove only represent the basic conditions for anintegrated internal market across all gas types.

according to article 194(2)(2) of the treaty on thefunctioning of the European union (tfEu), energypolicy measures of the European union “shall notaffect a member state’s right to determine theconditions for exploiting its energy resources, itschoice between different energy sources and thegeneral structure of its energy supply”. thus, the

specific design of the regulatory framework ofalternative networks falls also in the responsibilityof national law which can differ significantlydepending on the specific national markets andenergy policies.

nevertheless, some principles of nationalregulation can be derived, which need to beadapted to meet the goal of a decarbonised internalgas market. these are only presented here asexamples, based on the European legal framework.

Revisions in national law

the future significance of hydrogen and other co2-free gases for distribution networks cannotbe predicted at this point. scenarios can beforecast which range from pure hydrogendistribution networks to biogas networks and thecomplete dismantling of distribution networks fornatural gas. the actual development of thedistribution networks will depend primarily on thetechnological progress of hydrogen applicationsand the individual local situation.

today’s distribution system operators are bestplaced to assess the possible developmentopportunities based on their long experience, buttheir decision-making scope is limited becausede lege lata regulatory restrictions exist both for investments in alternative gas infrastructure

and for the deconstruction of natural gasinfrastructure. for this reason, the planningframework must be opened for distributionsystem operators, starting with Eu law, in orderto enable future-oriented planning in thedistribution networks.

furthermore, gas tsos and dsos should beencouraged through national regulatoryframeworks to undertake innovative activity whichsupports the energy system transition. this shouldinclude activity which would not be financedthrough normal regulatory mechanisms, forexample testing new network assets for thetransportation of hydrogen, and developingmanagement procedures for blended anddedicated hydrogen networks.

Future-oriented development of downstream distributionnetworks

alongside hydrogen. a common Europeandevelopment will ultimately lead to a commoninternal market for hydrogen. as a consequence,subsequent legislation would also have to beexplicitly limited to natural gas (for which there isstill a need as long as a European internal marketfor natural gas exists).

the following chapter elaborates the Europeanrules and principles governing regulation in the gassector. afterwards, it will be examined whetherand to what extent these regulations inhibit theintegration of hydrogen networks and whatchanges or measures might be necessary toovercome these obstacles.


Insofar as future regulation (de lege ferenda) allowsthe construction of a hydrogen network for naturalgas network operators in line with demand, thequestion of financing arises. that includesspecific transformation costs. on the one hand,“combined network operators” could use theirexisting natural gas assets, e.g. by rededicatingexisting network components. on the other hand,however, new hydrogen networks in particularmust be set up.

the development of the hydrogen infrastructureshould be financed from current income from thenatural gas infrastructure. this will enablesubstantial investments to be made, which will beoffset by savings through the integration ofpartially written-off natural gas pipelines into newnetworks, as well as by negative depreciationeffects achieved through the continued use of thenatural gas infrastructure. It can therefore beexpected that there will be no significant increasein current tariffs or network fees in a “combinednetwork”; in fact, there are even advantages overa finite natural gas infrastructure, which can beincorporated into the transformation of the gassector in line with the European green deal – i.e.the development of hydrogen networks.

an economic analysis3 of the financing potential ofthe natural gas networks in Germany showed thatapprox. 11 billion euros could be invested inhydrogen networks in the period from 2021 to2050 (Ø €368 million p.a.) while maintaining thecost level in the status quo, in form of constantnetwork tariffs. If, at the same time, special write-offs by natural gas network operators are avoided,because they can continue to exist as combinednetwork operators after 2050, the possibleinvestment framework would even increase toaround 16 billion euros in the period mentioned.

In simplified terms, this results in an annualinvestment of 534 million euros for the

transformation to climate resilient gas networksover a period of 30 years for Germany alone –without state subsidies.

such a consideration for germany cannot simplybe transferred 1:1 to the situation in the entireEuropean union. country-specific differences inthe gas network infrastructure on the one hand,and in the regulatory regimes on the other, mustbe taken into account. nevertheless, the thesis isproposed that the basic statement applies to allcountries of the European union and that theproposed regulation will thus make the financingof the hydrogen network economy possiblethroughout Europe. However, more case studiesare needed and corresponding regulations need tobe developed.

It can be assumed that alternatives, such as aseparate development of further gas grids, are noteconomically viable. on the one hand, moregaseous energy carriers will be transported in thefuture, making investments in gas networksunavoidable. on the other hand, withoutintegrating hydrogen and other gaseous energycarriers into the natural gas sector, doublestructures would have to be created. Instead of therequired transformation to a climate resilient gaseconomy4, this would devalue the existinginterconnected network in an unplanned way asthe energy transition progresses.

there are no alternatives for a market ramp-up ofhydrogen that could achieve a climate-neutral gaseconomy in 2050. this is because any other pan-European infrastructure required would have to benewly built and would not be able to be operatedfrom a standing start. In case the production,transport and (material) use of hydrogen have tobe combined, the above proposal is the only knownpossibility to effectively solve the “chicken or theegg” problem.

Financing a hydrogen infrastructure

3 bbH: Principles of the regulation of german hydrogen networks in the context of an adaptation of the European legal framework and thefinancing of hydrogen networks by integration into the legal framework of gas network regulation, berlin, april 2020.

4 European green deal, see above.


the following section examines which measures are necessary to implement the previously discussedconsiderations in European law.

the basic legislation for the regulation of theinternal gas market is the gas directive 2009, butthe provisions contained therein are only intendedfor natural gas. according to article 1(1) gasdirective 2009, it governs the transmission,distribution, supply and storage of natural gas, theorganisation and functioning of the natural gassector, market access, the criteria and proceduresfor authorisations and the operation of thenetworks.

according to article 1(2) gas directive 2009, theprovisions of this directive regarding natural gasalso apply in a non-discriminatory way to biogasand gas from biomass or other types of gas in sofar as such gases can technically and safely beinjected into, and transported through, the naturalgas system. thus, other gases such as hydrogenare only included in the regulation (de lege lata) ifthey are fed into a natural gas network. this resultsin problems regarding both the blending ofhydrogen into a natural gas network and theoperation of pure hydrogen networks:

If quantities of hydrogen are fed into a natural gasnetwork in such a way that the proportion ofhydrogen outweighs that of natural gas (50%), it isquestionable whether one can even speak ofinjecting into a natural gas network within themeaning of article 1(2) gas directive 2009 andwhether these cases are covered by the regulatoryframework of the gas directive 2009.

with regard to the fact that, according to article1(2) gas directive 2009, the provisions of thedirective only apply to other gases if they are fedinto a natural gas network, it also follows that thescope of the gas directive 2009 is not open to theoperation of a pure hydrogen network. In otherwords: the operation of a pure hydrogen networkis currently unregulated at Eu level.

whether and to what extent the status quo inhibitsthe operation and expansion of a hydrogennetwork by the natural gas network operator andwhich measures are necessary to overcomeexisting obstacles will be examined below.

Integration of new (hydrogen) networks in regulated gasnetwork operations

THE TERM OF HYDROGEN IN THE EU REGULATORY FRAMEWORK

EU regulatoryframework andprinciples 3


from the perspective of the natural gas networkoperators, the question arises whether and towhat extent Eu regulations stand in the way of theoperation of hydrogen networks as such. In thisrespect, the Eu provisions on unbundling andmarket access must be considered.

UNBUNDLING – IS A SEPARATEDOPERATION OF HYDROGEN NETWORKSNECESSARY?

unbundling aims at ensuring the independence oftransmission and distribution system operationfrom energy production and delivery activities,thereby guaranteeing non-discriminatory andtransparent access to the network at reasonableprices and moving towards the European objectiveof a single internal energy market. the unbundlingrequirement even goes so far as to include otherdivisions. according thereto, operators of naturalgas networks must also unbundle their direct orindirect sales of electricity.

the targets of unbundling are, in particular,vertically integrated companies. according toarticle 2(20) gas directive 2009 these are a naturalgas undertaking or a group of natural gasundertakings where the same person or the samepersons are entitled, directly or indirectly, toexercise control, and where the undertaking orgroup of undertakings perform at least one of thefunctions of transmission, distribution, lng orstorage, and at least one of the functions ofproduction or supply of natural gas. the generalwording covers both transmission systemoperators and distribution system operators. tothe extent that a natural gas undertaking is obligedto unbundle, the gas directive 2009 providesdifferent unbundling models at transmission

system level5 as well as at distribution level.6

among other things, a natural gas undertakingmust implement informational unbundling inaccordance with article 16 gas directive 2009(transmission system operators) or article 27 gasdirective 2009 (distribution system operators).therefore, it is obliged to respect theconfidentiality of commercially sensitiveinformation obtained in the course of its businessand to prevent the disclosure in a discriminatorymanner of information about its own activities,which may be commercially advantageous.7

furthermore, system operators shall not, in thecontext of sales or purchases of natural gas byrelated undertakings, abuse commerciallysensitive information obtained from third partiesin the context of providing or negotiating accessto the system.8

the above-mentioned provisions on unbundling donot prevent the operation of hydrogen networks bynatural gas network operators. However, besideslegal restrictions practical limitations may arise.on the one hand, this applies if the natural gasnetwork operators operate a hydrogen network forthe purpose of admixture. on the other hand, thisalso applies in cases where they operate a purehydrogen network parallel to their natural gasnetwork as “combined network operators” or ifthey completely convert their existing natural gasnetwork into a pure hydrogen network as “solitaryhydrogen network operators”. this is because, inthese cases, the natural gas network operators willbe active within the gas sector on the networkoperation side, so that they will not be able tooperate as vertically integrated undertakings(article 2(20) gas directive 2009) and still beclassified as horizontally integrated companies(article 21(21) gas directive 2009).

UNBUNDLING AND MARKET ENTRY

5 at transmission system level, the gas directive provides for ownership unbundling (article 9 gas directive 2009), the Iso model (article 14 gasdirective 2009) as well as the Ito model (chapter IV gas directive 2009).

6 at distribution level, unbundling is governed by article 26 and 27 gas directive 2009.7 article 16(1), article 27(1) gas directive 2009.8 article 1 (2), art. 27(2) gas directive 2009.


In addition, policy makers and nRas need toconsider whether market participants will needdifferent roles in order to manage the transitionfrom natural gas to hydrogen networks. forexample, regulatory frameworks for developinghydrogen production and storage may utilise aRegulated asset base model and – if only as aninterim measure – require dso activity outside ofcurrent unbundling principles.

Operation of hydrogen networks for thepurpose of admixture

as far as natural gas network operators operate ahydrogen network for the purpose of blendinghydrogen into their existing natural gas network,article 1(2) gas directive 2009 applies accordingly.thus, according to article 1(2) gas directive 2009,they operate a “natural gas network” so that thereis no obligation to unbundle.

Transformation to a “combined networkoperator”

If the natural gas network operator being active asa “combined network operator” intends to operatea pure hydrogen network in parallel to its existingnatural gas network, these are not covered de legelata by the regulatory framework set out in the gasdirective 2009 (see above). thus, a pure hydrogennetwork operated in parallel is not legally qualifiedas a “natural gas network” according to article 1(2)gas directive 2009. nevertheless, the paralleloperation of an unregulated gas network, such asa pure hydrogen network, must ultimately beassigned to the gas sector. In contrast toelectricity, the operation of hydrogen networks istherefore not to be classified as another divisionto be unbundled. this means that the operation ofa parallel pure hydrogen network does not have tobe unbundled from the operation of the natural gasnetwork.

Transformation to a “solitary hydrogennetwork operator”

If the natural gas network operator as a “solitaryhydrogen network operator” intends to use itsexisting natural gas network entirely for theexclusive transport of pure hydrogen, acorresponding rededication of the networks willbe necessary. the rededication of the natural gasnetwork to a pure hydrogen network means thatonly one network in the gas sector will beoperated. In this respect, the statements on thetransformation to a “combined network operator”made above apply accordingly.

such a rededication also includes that the naturalgas network operator will give up its natural gasnetwork as part of its transformation to a “solitaryhydrogen network operator”. the questiontherefore arises if the unbundling regulations allowthe abandonment of the natural gas network infavour of operating pure hydrogen networks. sincethe purpose of unbundling is to separate theoperation of a natural gas network from sales (seeabove), this also means that unbundling is onlynecessary if a natural gas network is still inoperation. If the operation of a natural gas networkis given up, it cannot and need not be unbundled.the complete abandonment of the natural gasnetwork associated with the rededication istherefore not a question of unbundling.9

MARKET ENTRY – AUTHORISATIONOBLIGATION FOR HYDROGEN NETWORKS?

according to article 4(1) gas directive 2009, theoperation of natural gas facilities requiresauthorisation. although the term “natural gasfacility” is not defined in article 2 gas directive2009, it is to be interpreted broadly and alsoincludes transmission and distribution networks.10

according to article 4(2) gas directive 2009, themember states shall establish objective and non-

9 Rather, the complete abandonment of the natural gas network, which goes hand in hand with the rededication, affects the regulations ondemand-based network expansion and its planning, see chap. III sec. 2.

10 However, article 4(4) gas directive 2009 sets out requirements regarding the authorisation procedure for distribution networks.


discriminatory criteria, which an undertakingapplying for the operation of natural gas networksmust meet. In this respect, the question arises fornatural gas network operators whether and towhat extent the operation of a hydrogen networkaccording to the above criteria is required to beauthorised.

If a natural gas network operator operates ahydrogen network for the purpose of admixture,the hydrogen network is legally qualified as a“natural gas network” by article 1(2) gas directive2009. under the premise that the natural gasnetwork operator has already been granted anauthorisation for the operation of its natural gasnetwork, this authorisation must consequentlyalso cover the operation of a hydrogen networkwithin the meaning of article 1 (2) gas directive2009, which is intended to inject hydrogen into thealready authorised natural gas network.

However, the situation is different for theoperation of a pure hydrogen network, to which theprovisions of the gas directive 2009 do not apply.In this respect, there is no obligation forauthorisation due to the lack of regulation. this isnot only the case where a hydrogen network isoperated alongside a natural gas network (by a so-called combined networks), but also where theundertaking completely rededicates the existingnatural gas network to a pure hydrogen network(acting as a “solitary hydrogen network” from thenon). In the case of such a rededication, theregulations on market entry permissions do notapply, because the operation of a natural gasnetwork, but not its abandonment, is subject toauthorisation.11

Hence, the provisions on market access do notprevent the operation of a hydrogen network forthe reasons mentioned above.

DEMAND-BASED NETWORK EXPANSION

under article 13(1)(a) gas directive 2009 and article25(1) gas directive 2009, operators of natural gastransmission networks and operators of naturalgas distribution networks are obliged to ensurethe long-term ability of the network to meet

reasonable demands for the transport anddistribution of natural gas and to develop a secure,reliable and efficient network under economicconditions and with due regard to environmentalprotection and energy efficiency in their area. Inother words, the network must be developed inaccordance with demand.

Demand-based network expansion and network developmentplanningcertainly, the rules on unbundling and market access allow the operation of a hydrogen network as such(see above). However, its operation requires the construction of a corresponding network infrastructure.this affects the European union regulations on network expansion12 and network development planning.the following chapter therefore examines whether and to what extent these provisions permit thedevelopment of hydrogen networks and network development planning.

DEMAND-BASED NETWORK DEVELOPMENT AND NETWORK DEVELOPMENT PLANNING

11 the complete abandonment of the natural gas grid associated with the rededication rather affects the provisions on the demand-basedexpansion of the networks and its planning, see chap. III sec. 2.

12 network expansion means both the expansion of an existing network and the construction of a new network.


NETWORK DEVELOPMENT PLANNING

European law requires all gas transmission systemoperators to draw up common networkdevelopment plans. a ten-year national networkdevelopment plan (NEP) must be drawn up atnational level and a community-wide ten-yearnetwork development plan (TYNDP) at Europeanunion level.

according to article 22(1) gas directive 2009, allnatural gas undertakings operating natural gastransmission networks within the territory of amember state are obliged to submit a nEP to thenational regulatory authority every year afterconsulting all relevant stakeholders. the nEP shallcontain, inter alia, effective measures to achievethe objectives of system adequacy and security ofsupply.

according to article 8(3)(b) of Regulation2009/715/Ec of the European Parliament and ofthe council of 13 July 2009 (gas transmissionRegulation 2009), all natural gas transmission

system operators in the territory of all memberstates within the European network oftransmission system operators for gas (ENTSO(Gas)) must adopt a non-binding tyndP every twoyears. this shall include, in particular, themodelling of the integrated network, scenariodevelopment and an assessment of the resilienceof the network.

with the tyndP, the Entso (gas) shall, inparticular, promote the completion andfunctioning of the internal gas market and cross-border trade and ensure the optimal management,coordinated operation and appropriate technicaldevelopment of the gas transmission system(article 5 gas transmission Regulation 2009). Inorder to meet these requirements, the Europeanlegislator has therefore ordered forecasts to bemade for both the nEP (article 22(1) gas directive2009) and the tyndP (article 8(10)(1) gastransmission Regulation 2009). these relate, interalia, to future investments in the networkinfrastructure13, the needs of network users14 orthe demand for natural gas.15

THE INDEPENDENT ROLE OF DISTRIBUTION NETWORKS

the effects of the energy transition on gasdistribution networks are still unclear today. oneoption, for example, is to develop transmissionnetworks with only (bio)methane and those withpure hydrogen in parallel. on the other hand, theremay also be gas networks with a much highershare of hydrogen than today. the distributionnetworks, however, will be fed by the upstreamtransmission networks, as is the case today.However, admixtures of the gases could also takeplace at the coupling points to distributionnetworks, which are within reach of different gastransmission networks. depending on regionalproduction and regional demand, pure biogasnetworks would also be conceivable.

In addition, distribution networks themselves willalso be developed, for example, if there is anincreased focus on local heating networks. thefuture developments are difficult to predict todayand the use of hydrogen in the distributionnetworks depends primarily on future end-useapplications. therefore, a regulation frameworkshould be set up which already takes into accountand enables different developments.

It is likely that there will be member states that relymainly on hydrogen, while other member stateswill primarily pursue e.g. a biogas strategy. somemember states may also combine different gasesin their national policies. However, it is important

13 article 22(2) gas directive 2009 (nEP), article 8(10)(2)(a) gas transmission Regulation 2009 (tyndP).14 article 8(10)(2)(b) gas transmission Regulation 2009 (tyndP).15 article 22(1) first sentence gas directive 2009 (nEP).


that the expertise for local energy supply remainswith the distribution network operators. on thebasis of the subsidiarity principle, distributionsystem operators should therefore be empowered,on the basis of national regulations, to decide forthemselves how to develop their networks. In oneregion, it may make sense to rededicate oldnatural gas networks to hydrogen networks, but inanother, it may be preferable to dismantle the gasinfrastructure in favour of heating networks. In anycase, these decisions must be taken locally basedon the local expertise of distribution systemoperators. the current scope for decision-making

of the distribution network operators in themember states is actually too limited, because itis also largely focused on natural gas and aims tomaintain the gas infrastructure – thus, an exit fromgas supply is not possible at all.

Here, the planning framework must be opened for distribution system operators, wherebyconsiderations of economy, efficiency, consumerprotection and, decisively, climate protectionmust be taken into account. However, this alsorequires a relaxing of the regulations in Europeanlaw (see below).

DEVELOPMENT OF HYDROGEN NETWORKS

both the provisions on network expansion andthose on network development planning refer tothe natural gas network. while the networkexpansion of a hydrogen network for the purposeof admixture and its network developmentplanning can be easily integrated in the current Euregulatory regime, this does not apply to purehydrogen networks.

CASES OF ADMIXTURE COVERED BY THEREGULATORY FRAMEWORK

If a natural gas network operator intends todevelop a hydrogen network for the purpose ofblending hydrogen into the natural gas network, itmust be taken into account that such networks arelegally classified as “natural gas networks”according to article 1(2) gas directive 2009.therefore, the provisions on network expansionand network development planning in the gasdirective 2009 apply accordingly. Pursuant tothese provisions, the expansion of a hydrogennetwork within the meaning of article 1(2) gasdirective 2009 is permissible in any case if it iscarried out in line with demand. In addition, suchhydrogen networks and their development in thenEP and tyndP must be taken into account.16

PRACTICAL UNENFORCEABILITY FOR PUREHYDROGEN NETWORKS

the provisions of the gas directive 2009 do notapply to the expansion of pure hydrogen networksand the related network development planning. Incontrast to the provisions on market access, thelack of legal requirements does not allow therelevant network expansion and its considerationin the (hydrogen) network development planning.

De lege lata, however, the criteria of demandadequacy refer exclusively to natural gas, both withregard to the network expansion and the nEP andtyndP. this also means that, currently, only theexpansion of a natural gas network is in accordancewith demand and thus not the expansion of a purehydrogen network. If a natural gas network operatorintends to expand a pure hydrogen network, e.g.due to the hydrogen demand of its network users,this would not be in accordance with demand undercurrent Eu legislation. correspondingly, networkdevelopment planning cannot take the expansion ofpure hydrogen networks into account.

Particularly with regard to decarbonisation, thenatural gas network operator is endeavouring to

16 the gas transmission Regulation 2009 does not contain any provision corresponding to article 1(2) gas directive 2009. However, as the gastransmission Regulation 2009 only specifies the provisions of the gas directive 2009 and as article 1(2) gas directive 2009 already allowshydrogen to be blended into natural gas networks, the provisions of the gas transmission Regulation 2009 and thus also those relating to thetyndP must apply in parallel.


turn away from the natural gas network and torededicate it – perhaps to a pure hydrogennetwork. such a transformation of the natural gasnetwork operator to a (green) “solitary hydrogennetwork operator” is not permitted by the currentEu regulation framework.

NETWORK EXPANSION AND NETWORKDEVELOPMENT PLANNING ACROSS ALLGAS TYPES

In order to achieve the objective of a uniform,coordinated and internal market across all gastypes, the provisions on network development inarticle 13(1)(a) and 25(1) gas directive 2009 must bemodified in such a way that they apply to theexpansion of gas networks of any kind.

Particularly with a view to coordinated operationnot only of the natural gas transmission networksbut also of transmission networks of any kind,uniform rules should also apply to networkdevelopment planning in order to counteract theobstacles described above. Here, for example, theregulations on the nEP and tyndP could bemodified in such a way that all gas transmissionsystem operators, i.e. also operators of gastransmission networks for hydrogen, are obligedto jointly draw up the nEP and tyndP. In any case,

one thing is certain: network development planacross all gas types is necessary. above all,network development planning across gas typesmust be in line with demand.

the Eu legal framework must therefore beadapted so that the transmission systemoperators are no longer limited to the transport ofnatural gas in their planning, but

• continue to develop a demand-based scenario inorder to adequately take into account futuretransport needs,

• select the appropriate gas types for the scenario,in particular taking into account the material useof hydrogen and its possible admixture todownstream networks,

• while complying with the objectives of EU climatelegislation.

the scenario framework, which in future will alsoinclude hydrogen, should continue to be developedunder the authority of the transmission systemoperators. to this end, the latter must be allowed tomake well-founded assumptions about thedevelopment of the hydrogen economy.

Network accessInsofar de lege ferenda the legal hurdles for the expansion of hydrogen networks and the related financinghave been overcome (see above) and the natural gas network operators actually expand or set up ahydrogen network, the question arises whether and to what extent they must guarantee access to it. yet,since new gas networks have the same attributes as the existing ones, there is little ground to believethat third parties could be treated differently.

NETWORK ACCESS FOR EVERYBODY

BACKGROUND

according to article 32 gas directive 2009 andarticle 14(1)(1)(a) gas transmission Regulation

2009, member states shall ensure theimplementation of a system of third-party accessto the transmission and distribution network. theaccess rules shall apply to all eligible customers,


including supply undertakings, and shall beimplemented objectively and withoutdiscrimination between network users.

according to article 35 gas directive 2009 naturalgas undertakings or system operators may refusenetwork access only in the following cases. aground for refusal exists if

• they do not have the necessary network capacityor

• the access to the network prevents the secure,cost-effective, consumer-friendly, efficient andenvironmentally friendly grid-bound supply ofthe general public with gas increasingly basedon renewable energy in terms of article 3(2) gasdirective 2009 or

• they encounter serious economic and financialdifficulties because of take-or-pay commitmentsaccepted in one or more gas purchase contracts(article 48(1) gas directive 2009).

However, the above-mentioned rules on networkaccess are not an end in themselves. Rather, theyare intended to mitigate the natural monopolyposition of the system operator resulting fromownership of a natural gas network and theassociated risk of discrimination against networkusers by imposing an obligation to contract on thenatural gas network operator (article 32 gasdirective 2009 and article 14(1)(a) gas transmission

Regulation 2009), which can only be deviated fromin exceptional cases (article 35 gas directive 2009).

OBLIGATION TO CONTRACT IS NECESSARYACROSS ALL GAS TYPES

the obligations described above shall in any caseapply to the operation of mixed gas networks usedto blend other gases such as hydrogen into thenatural gas network. this is because article 1(2) gasdirective 2009 stipulates that the provisions onnetwork access also apply to cases of admixture.

However, where the operation of pure hydrogennetworks is concerned, there is no legal frameworkfor network access today. In the absence of aregulatory regime in this respect, operators of purehydrogen networks are free to decide whether toguarantee or deny network users access to theirhydrogen network. like the operation of a naturalgas network, however, the operation of a hydrogennetwork also constitutes a natural monopoly.accordingly, there is a risk that network users willbe discriminated against and denied access to thehydrogen network without an objective justification,such as that provided for in article 35 gas directive2009 regarding the natural gas network.

It is therefore necessary that uniform rules applyto all gas networks. Here, the above-mentionedprovisions on network access should be modifiedin such a way that they are binding for all networkoperators across all gas types.

ENTRY-EXIT SYSTEM AND EQUIVALENT CONTRACTUAL TERMS AND CONDITIONS

while the gas transmission Regulation 200517 didnot contain any provision regarding a specificmodel for setting tariffs, article 13 sec. subsec. 4gas transmission Regulation 2009 now providesfurther harmonisation. accordingly, tariffs may notbe charged on the basis of contract paths (point-to-point system), but must rather correspond tothe entry-exit model. the core of the entry-exitmodel is the separate booking of capacities at anentry point and an exit point of a network, which

can be combined with each other as desiredwithout pricing the contractual path. accordingly,network operators must offer entry and exit pointsseparately.

the network user therefore does not have to bookthe actual transport path through a network, butis granted the right to inject gas at an entry pointbooked by him and to retrieve it at the booked exitpoint. for the network users, the transaction costs

17 Regulation (Ec) no. 1775/2005 of the European Parliament and of the council of 28 september 2005.


and effort are reduced considerably because theyonly have to conclude two contracts, one with thenetwork operator of the entry point and one withthe network operator of the exit point. In addition,the operator of a gas transmission system thatoffers the same service to different customersmust offer equivalent contractual terms andconditions to them by using either harmonisedtransportation contracts or a common networkcode (article 14(1)(2) gas transmission Regulation2009). this is to counteract discrimination againstnetwork users.

In this respect, the question arises to what extentthe requirement of equivalent contractual termsand conditions also applies to hydrogen networks.

as explained above, mixed-gas networks arelegally classified as “natural gas networks”. theconsequence of this is that the provisions ofarticle 13(1)(4) gas transmission Regulation 2009and article 14(1)(2) gas transmission Regulation2009 also apply to hydrogen within the meaning ofarticle 1(2) gas directive 2009.

such an obligation does not exist de lege latafor operators of pure hydrogen transmissionnetworks. nevertheless, given the above-mentioned advantages of the two-contract modeland the need for equivalent contractual terms andconditions, the above-mentioned rules shouldapply to all transmission system operators acrossall gas types.

TARIFF-SETTING FOR FINANCING THE HYDROGEN INFRASTRUCTURE

as already stated above, financing the hydrogeninfrastructure in an economically rational way isonly possible through the tariffs or network feesfor the use of natural gas networks. the questiontherefore arises whether and to what extentEuropean law de lege lata precludes a tariff-setting in this sense.

the gas directive 2009 contains only a few legalrequirements for the determination of tariffs.article 41(10) first sentence gas directive 2009empowers the national regulatory authority toamend tariffs to ensure that they areproportionate and applied in a non-discriminatory manner. the undefined legalconcept of proportionate needs to be concretisedby interpretation. In this respect, the recitals ofthe gas directive 2009 contain importantindications that the network fees must becalculated in a non-discriminatory (Recitals 23, 32gas directive 2009), transparent (Recital 23 gasdirective 2009) and cost-reflective (Recital 32gas directive 2009) manner. the principle of costorientation is concretised in the sense thataccording to article 41(6) (a) second sentence gasdirective 2009, tariffs are to be designed in sucha way that the viability of the networks is

guaranteed by necessary investments in thenetworks.

It is questionable here whether and to what extentthe above principles, in particular article 41(6) (a)gas directive 2009 allow a tariff setting in whichthe construction of the hydrogen infrastructure bythe users of natural gas networks via the tariffs ornetwork fees is co-financed.

LEGALITY OF FINANCING MIXED HYDROGENNETWORKS

the tariff structure in article 41(6)(a) secondsentence gas directive 2009 relates to natural gasnetworks. tariffs in this sense are therefore onlyto be understood as those payable by networkusers of natural gas networks. since the expansionof mixed hydrogen networks via article 1(2) gasdirective 2009 is also legally classified as a “naturalgas network” (see above), article 41(6)(a) secondsentence gas directive 2009 also applies. as aresult, the tariffs to be paid by network users ofnatural gas networks may also serve to financethese networks, provided that this is a necessarynetwork investment within the meaning of article41(6)(a) second sentence gas directive 2009.


INVESTMENTS IN PURE HYDROGENNETWORKS ARE NOT POSSIBLE

the legal situation is completely different for usingthe above-mentioned tariffs to finance theconstruction or expansion of pure hydrogennetworks. Just as the provisions on networkdevelopment and network development planningin the gas directive 2009 and the gastransmission Regulation 2009 refer only to naturalgas networks (see above), this also applies toarticle 41(6)(a) second sentence gas directive2009. under the current legal situation, users ofnatural gas networks can be charged tariffs

solely for the purpose of financing necessaryinvestments in the natural gas network. thismeans that a financing across all gas types bymeans of tariffs charged to users of natural gasnetworks is not permitted.

FINANCING ACROSS ALL GAS TYPES

the obstacles described above can only becountered by creating a uniform framework for thefinancing of gas networks of all kinds, which at thesame time also enables a gas type spanningfinancing. However, it would be advisable tomodify the regulations on tariffs accordingly.

with regard to climate resilience, a fundamentaldebate is taking place as to whether the approvalof blue hydrogen – produced by carbon captureand storage (ccs) or Reuse (ccu) – in a networkaccess model of the future gas infrastructure willhave negative effects. this applies similarly tohydrogen from other sources; the only undisputedpoint is that green hydrogen – produced fromrenewable electricity by electrolysis – is alwayswelcome.

the above concept for a future gas type spanningregulation does not want to anticipate the (political)discussion on this issue but the question which gastype should be used does not arise in a systemwhich is not yet able to transport exclusively greengases. In the meantime, any form of hydrogen canbe used for the market ramp-up; for example,hydrogen from sources identified as inappropriatemay be displaced from the networks later; there isrelevant experience from the electricity sector.

as a result, this dispute can be resolved bygranting priority feed-in to renewable energies,subject to the condition that green hydrogen andother gases are defined as renewable energyaccording to the directive (Eu) of the EuropeanParliament and of the council of 11 december 2018(RED II). to the extent necessary, the memberstates shall therefore examine, in accordance witharticle 20(1) REd II, the need to expand the existinggas infrastructure to facilitate the feed-in of gasfrom renewable sources. the concrete form of thefeed-in priority is therefore a matter for thenational legislator. In particular, in the event of alack of network capacity, the regulatory authorityhas to answer the question how to comply with theprovisions of article 20(1) REd II and how priorityfeed-in is to be implemented if several renewablegas suppliers compete with each other.

Regulatory aspects of decarbonisationfurther aspects of regulation may be postponed. nevertheless, for the transition period certainassumptions have to be made now. for the purpose of this paper, the focus is on the future regulation ofthe gas infrastructure. In any case, in the beginning the availability of quantities of hydrogen (or othergreen gases) in the system is crucial.

PRIORITY FEED-IN


according to article 19(2), subsection 1, firstsentence REd II, the member states shall ensurethat a guarantee of origin is issued upon requestby a producer of energy from renewable sources.such guarantees of origin may be issued inaccordance with article 19(7), sentence 1 (b)(ii) REdII and are also explicitly issued for gas, includinghydrogen.

with regard to their obligation under article 20(1)REd II, the network operators are faced with thequestion, among other things, whether and to whatextent the “green property” of hydrogen can beverified by guarantees of origin and whether theyare obliged to grant priority feed-in in any case ifthe producer feeding hydrogen into the grid

submits guarantees of origin. from the finalcustomer’s perspective, a system of guarantees oforigin could also serve the purpose of guaranteeingthe origin of green hydrogen on the basis oftransparent and non-discriminatory criteria.18

In accordance with article 19(2), subsection 6, REdII such legal effects of the guarantees of origin areexpressly not granted. at present, guarantees oforigin within the meaning of REd II can only certifythe material use of hydrogen, so that guaranteesof origin play a role at the level of production andmanufacture, especially in steel production, ratherthan at the level of network operation. Hence, thisquestion is not primarily relevant for thetransportation, distribution and the infrastructure.

GUARANTEES OF ORIGIN (CERTIFICATION)

Protection of end-use customersthe conversion of end-use applications plays a keyrole in the conversion of a network, for examplefrom natural gas to hydrogen. In addition to thetransport level, which can be expressed in theregulated system as the right to network access,an appropriate solution must be found with regardto dealing with new and existing customers of thenetwork operators, who for their part have certainrequirements for the quality of the gas provided orthe type of gas used.

although the volume of (natural) gas is usuallymeasured to determine consumption, the energycontent of the gas supplied is billed. In the eventthat the applications remain the same, theintegration of different gas qualities in separatenetworks is not impossible. this has beendemonstrated, for example, by experience with

the conversion from l-gas to H-gas. therefore,final customers are in need of protection to theextent that they have made long-term investments(e.g. in heating systems or industrial applications)in reliance on a particular gas supply. or in otherwords: Inventory Protection is highly relevant forend-use customers.

the starting point in European law is here article3(2) gas directive 2009. It allows member states toimpose obligations on undertakings operating inthe gas sector which may relate, inter alia, tosecurity, including security of supply, regularity,quality19 and price of supply. furthermore, suchobligations shall be clearly defined, transparent,non-discriminatory and verifiable and shall ensureequal access of community gas undertakings tonational consumers.

18 moreover, this is not a new issue, as this question already arises for biogas (and is likely to be solved if expansion is planned in the future).19 gas quality also plays a role in technical operational safety as part of general safety within the meaning of article 3(2) gas directive 2009,

according to which, under article 8 gas directive 2009, member states or their regulatory authorities shall publish criteria for technicaloperational safety and for connection to the gas network. with regard to gases from renewable sources article 20(2) REd II refers to article 8gas directive 2009.


according to article 1(2) gas directive 2009, theabove-mentioned general conditions apply also tomixed gas networks. However, the above-mentioned regulations are not applicable to purehydrogen networks so that there is currently noadequate protection for (future) end-usecustomers of such networks in terms of inventory

protection. Particularly with a view to the goal of asingle European internal energy market a gas typespanning protection of property for end-useapplications is necessary. However, article 3 (2)gas directive 2009 should be designed in such away that it applies to all types of gas.

Summary and proposed solution the current Eu regulations do not prevent theoperation of hydrogen networks for the purpose ofadmixture. these mixed networks are covered byarticle 1(2) gas directive 2009 and are thus alreadyintegrated into the current Eu regulationframework.

However, the situation is different for purehydrogen networks. the operation of purehydrogen networks as such does not, de lege late,preclude the rules on unbundling and marketaccess. nevertheless, the expansion of purehydrogen networks and thus the development of ahydrogen infrastructure in general is practicallyimpossible to implement and realize. this isbecause the Eu legal framework currently does

not allow the expansion of pure hydrogennetworks, as this is not in line with demand. afurther obstacle is that the natural gas networkoperator cannot finance the construction orexpansion of a pure hydrogen network withtariffs/network fees paid by the natural gasnetwork users.

therefore, the Gas Directive 2009 needs to beadapted in such a way that it no longer refersexclusively to natural gas but also refers to othergases such as hydrogen. In addition, thesubsequent legislation should be explicitly limitedto natural gas. as there is still a European internalmarket for natural gas, such legislation is stillnecessary.

Avenue Marnix 28 • 1000 Brussels+32 2 204 44 60

@GEODE_EU [email protected]

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