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The EU's New Decarbonization Package

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On 15 December 2021, the European Commission (the “EC”) released its “Hydrogen and Gas Market Decarbonization package“ (the “Gas Package”), along with legislation on methane emissions and the energy performance of buildings, and a Communication to the European Parliament and Council on sustainable carbon cycles. This gas package is the fourth iteration of comprehensive legislation in the European gas sector. This new framework also represents the first major overhaul of the EU gas market rule book since 2009 and the adoption of the “Third Energy Package.”

Additionally, this latest package represents the concrete legislative implementation of some of the proposals outlined in the EC’s “Fit for 55” package, launched in July 2021, which aims to signpost a path to achieving the 2030 climate and energy ambitions. The goal is to deliver a 55% reduction in greenhouse gas emissions by 2030, relative to 1990 levels – as per the EU Green Deal and EU Climate Law. The new package promotes the demand and production of renewable and low-carbon gases, including hydrogen. 

The two major legislative components of the package are the recasting of the EC’s 2009 regulation on conditions for access to the natural gas transmission networks (the “Gas Regulation”), and the recasting of the EC’s 2009 directive on common rules for the internal market of natural gas (2009/73) (the “Gas Directive”), as well as their corresponding Annexes. The proposed Gas Directive consists of ten chapters comprising 90 articles and the proposed Gas Regulation consists of five chapters comprising 69 articles.

Key Takeaways

The new package covers networks, gas supply and consumers, including detailed rules 

  • on the operation and financing of hydrogen networks; 

  • on transparency of gas quality parameters and hydrogen blends; and

  • on the repurposing of natural gas networks for hydrogen transport, and on the operation of dedicated hydrogen networks.  

Dedicated hydrogen networks enjoy regulatory holidays up to 2031 but after that the current “default” EU gas regulation rules will be replicated for the hydrogen sector.

New long-term gas supply contracts are not to be allowed after 2049.  However, in response to recent gas price shocks, governments are given the option of joint procurement of strategic stocks of natural gas.

Incentives are introduced to promote uptake of and trade in renewable and low hydrocarbon gas, to include connection and blending obligations for network operators and special network tariff reductions.

The package aligns with earlier legislation on electricity market regulation to introduce enhanced consumer engagement rules to promote “self-consumption” and local energy communities.

The Aims of the new Gas Package 

A key objective of the new proposals is to “facilitate the emergence of an open and competitive EU hydrogen market” and “ensure access of renewable gases” based on an EU-wide certification system to ascertain their carbon content. The EC considers that there is significant potential to scale up the production and consumption of renewable and low-carbon gases, which make up less than 5% of the gas market today.

The package also strives to ensure the gradual phase out of natural gas assets, avoiding stranded costs, wherever electrification or a switch to renewable or low-carbon gases are possible. To avoid the lock-in of fossil natural gas, a limit is set for long-term gas contracts, which should not be able to extend beyond 2049. Article 27 confirms that while the Directive shall not prevent the conclusion of long-term contracts for renewable and low carbon gases, no long-term contracts for “supply of unabated fossil gas shall be concluded with a duration beyond the end of year 2049.”

The general aims of the new package can broadly be summarized as follows; (i) to establish the conditions for facilitating the rapid and sustained uptake of renewable and low-carbon gases; (ii) to increase engagement of gas consumers; (iii) to address contemporary security of supply concerns; (iv) to address price and supply concerns; and (v) to recalibrate the structure and composition of regulatory bodies.

Transportation tariffs

Entry tariffs are a significant barrier to uptake of renewable and low-carbon gases into the existing EU pipeline network. The EC proposes to grant discounts of 75% on entry tariffs and to eliminate cross-border tariffs for renewable and low-carbon gases. Similarly, in the future, no cross-border tariffs will apply for the dedicated hydrogen network, promoting competition, affordability, and security of supply. The proposal also envisages that renewable and low-carbon gases would benefit from a 100% discount on the entry and exit tariffs at all interconnection points, including entry points from and exit points to third countries, as well as entry points from LNG terminals.

Major uncertainties ahead?

Despite the detailed nature of both measures there remain major uncertainties include failure to provide robust definitions of “renewable” and “low carbon gases” and absence of  EU-wide or national  targets for the production or consumption of renewable and low-carbon gases.

As it could take at least two years before final versions are hammered out at EU level, there is considerable skepticism as to whether the EU can deliver on its decarbonization targets on time. The need to decarbonize Europe’s gas supply has become pressing.  But while electricity’s share in energy demand is expected to double and reach 53% of total energy use by 2050, the EC considers, controversially, that “gaseous fuels will continue playing an important role in the energy system” for the remainder of energy use”.

In the absence of clear definitions, workable targets and a convincing regulatory framework, the realization of a market for renewable hydrogen and the infrastructure to facilitate its efficient and economical roll out across Europe may prove elusive. Billions of euros of natural gas assets could become stranded in the near future while in the longer term, a surfeit of repurposed infrastructure could also become stranded.

Visit 2021 – Traditional Energy Rebounds and Increased Energy Transition, for the complete list of individual, detailed articles associated with this publication.

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