ESG, Legal Alerts/21 Nov 2023

EU Adopts Rules for Green Hydrogen

In a game-changing move this October, the European Union (EU) Council has updated the Renewables Energy Directive (RED III). Among its new targets for the EU Member States is that by the end of 2030, 42% of industrial hydrogen should source from renewable fuels of non-biological origin (RFNBOs) with an even more ambitious target of 60% by 2035.

RFNBOs, meaning fuels like hydrogen that are produced through renewable electricity, have undergone a significant expansion in their definition. Originally confined to transport fuels, the scope of RFNBOS now encompasses fuels like hydrogen, irrespective of their intended usage.

When can fuel be considered as RFNBO?

There are two ways to produce RFNBOs through renewable electricity:

1. Using renewable electricity produced in an installation that is either independent of the grid or connected to it without drawing power from the grid. The installation generating renewable electricity must have commenced operations within 36 months before the RFNBOs production installation. If the installation is connected to the grid, a smart metering system is needed to ensure that no electricity will be taken from the grid for the purposes of producing RFNBOs.

2. Taking renewable electricity from the grid. Fuel can be classified as RFNBO under four alternative and mutually exclusive conditions:

The share of renewable electricity in the bidding zone is over 90%.
The emission intensity of the bidding zone is low, electricity is purchased from renewable sources, and criteria for temporal correlation and geographical correlation (see later) are met.
Electricity is consumed during a period when power generating installations using renewable energy were dispatched downwards, and production of RFNBOs reduced the need for redispatching by a corresponding amount.
Certain criteria for additionality, temporal correlation, and geographical correlation are met.

Criteria for additionality along with temporal and geographical correlation

The criteria for additionality, temporal and geographical correlation play pivotal roles in classification of RFNBOs. If the criterium of additionality is used, installations generating renewable electricity must have commenced operations within 36 months before the RFNBOs production installation.

Furthermore, if the production capacity of RFNBO is increased, the new capacity will be considered as part of the existing capacity if the increase takes place in the same site and the addition takes place within 36 months after the initial installation commenced operations.

Criteria for temporal and geographical correlation are required when the definition of RFNBO is based on low emission intensity of the bidding zone or additionality. The temporal correlation requires that RFNBO should be produced at the same time as renewable electricity. Until the end of 2029, the production of RFNBO and renewable electricity needs to be produced in the same calendar month. From 2030, the period considered for balancing the production of renewable electricity and RFNBO will be one hour.

The geographical correlation provides that the production of renewable electricity is located:

in the same bidding zone as the electrolyser,
in an interconnected bidding zone with equal or higher electricity prices or
in an offshore bidding zone that is interconnected with the same bidding zone as the electrolyser.

The effect of this update?

The EU's actions outlined in the revised RED III pave the way for a future where renewable energy takes centre stage. With ambitious targets driving the adoption of RFNBOs, particularly in the realm of industrial hydrogen, the directive underscores a commitment to innovation and new investments. Still, criteria for RFNBOs are strict and costs to meet the criteria varies in different member states depending on their energy palette.

If you have any questions about this alert, please contact the undersigned or your regular Borenius contact.