Explanatory Memorandum to COM(2021)804 - Internal markets for renewable and natural gases and for hydrogen (recast)

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dossier COM(2021)804 - Internal markets for renewable and natural gases and for hydrogen (recast).
source COM(2021)804 EN
date 15-12-2021


1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

Contents

1.

1.1 Introduction


The European Union has set an ambitious goal to be the first climate neutral continent by 2050. To achieve this, Member States and the European Parliament have agreed, in the European Climate Law, to reduce greenhouse gas emission by at least 55% by 2030. In order to achieve these targets and, at the same time, contribute to competitiveness, growth and jobs, the energy system needs a systemic change: We have to reduce the use of fossil fuels – including fossil gas – and increase renewable sources. Therefore, we need to design today an ambitious transition of the gas sector towards low-carbon and renewable gases.

Fossil gas constitutes around 95% of today’s gaseous fuels consumed in the EU. Gaseous fuels, account for roughly 22% of total EU energy consumption today (including around 20% of EU electricity production, and 39% of heat production). According to the relevant scenarios used by the Climate Target Plan Impact Assessment, the share of gaseous fuels to total EU energy consumption in 2050 would be about 20%.Gaseous fuels will play an important part in the energy mix by 2050, requiring the decarbonisation of the gas sector via a forward-looking design for competitive decarbonised gas markets. Despite their minor contribution to the current EU energy mix, biogas, biomethane, renewable and low carbon hydrogen as well as synthetic methane (all together renewable and low carbon gases) would represent some 2/3 of the gaseous fuels in the 2050 energy mix, with fossil gas with CCS/U (carbon capture, storage and utilisation) representing the remainder. The present initiative is equally part of the Fit-for-55 package. It covers the market design for gases, including hydrogen. It will remove existing regulatory barriers and create the conditions for this to take place in a cost effective manner. This is an important part of moving to integrated energy system that minimises the costs of transition towards climate neutrality, in particular for consumers and open new opportunities for reducing their energy bills and active participation in the market.

Hydrogen is expected to be used mainly in the areas where electrification is not an option, including today’s energy-intensive industry (e.g. refineries, fertilisers, steel making) and certain heavy-duty transport sectors (maritime transport, aviation, long distance heavy vehicles). Developing a dedicated hydrogen infrastructure is necessary to release the full potential of this energy carrier is specific end-use applications. The objective of promoting renewable and low-carbon gases is to decarbonise these sectors, increase the flexibility of the electricity system thanks to power-to-X technologies, strengthen security of supply by reducing dependence on natural gas imports and allow to store (and produce) electricity. This allows linking various sectors of the economy, in conjunction with other forms of storage and flexibility, such as batteries and demand response. Likewise, it will support self-production and smart use of distributed energy supply, contribute to greater consumer empowerment. Consumers also need clear and easily accessible information to help change energy consumption patterns and switch to renewable and low carbon solutions, similarly to what they are able to do in electricity market.

While aiming for a maximum of renewable hydrogen from 2030 onwards, in the short and medium term other forms of low-carbon gases in particular low-carbon hydrogen can play a role, primarily to rapidly reduce emissions from existing hydrogen production and support the parallel and future uptake of renewable hydrogen. In line with the EU hydrogen strategy, the production of renewable hydrogen in the EU should reach 1 million tonnes by 2024 and up to 10 million by 2030. From then onwards, renewable hydrogen should be deployed at a large scale and replace low-carbon hydrogen.

An efficient and sustainable development of renewable and low-carbon gases as well as the hydrogen market requires to adapt the market framework.This is because the renewable and low-carbon gases today face regulatory barriers for market and grid access that represent a comparative disadvantage versus natural gas. Moreover, for a decarbonised gas market to be set up and contribute to the energy transition, significantly higher shares of renewable energy sources in an integrated energy system with an active participation of consumers in competitive markets are needed. This should allow consumers to benefit from affordable prices, good standards of service, and effective choice of offers mirroring technological developments.

The deployment of various renewable and low carbon types of gases are likely to emerge in parallel and are expected to develop at a different pace across the EU:

·a hydrogen-based infrastructure will progressively complement the network for natural gas;

·a gas infrastructure in which fossil gas will progressively be replaced by other sources of methane.

In addition, events on increasing energy prices have reminded us that the resilience of the European energy system is increasingly important as the EU energy system integrates more decentralised renewable energy and fossil fuels are gradually phased out. The security of supply and risk preparedness arrangements of the gas sector must be fit for the clean energy transition. The Commission’s Communication on tackling rising energy prices (A toolbox for action and support) 1 , highlights the interplay between security of supply, the optimal use of storage capacities and the volatility of energy prices.

2.

1.2 Objectives of the proposal


The present initiative seeks to facilitate the penetration of renewable and low-carbon gases into the energy system, enabling a shift from natural gas and to allow for these new gases to play their needed role towards the goal of EU climate neutrality in 2050.

Within this context, it addresses the following areas:

Low level of customer engagement and protection in the green gas retail market. For new gases to play a full role in the energy transition, the retail market rules should empower customers to make renewable and low carbon choices. This is not currently the case. Moreover, there is no common EU terminology and certification system for low carbon fuels and gases. In addition, the retail gas markets exhibit market concentration and low levels of new entry and innovation. This prevents customers from benefiting from competition by making low carbon choices.

To be able to make sustainable energy choices, customers need sufficient information on their energy consumption and origin, as well efficient tools to participate in the market. Moreover, Member States should take the necessary measures to protect vulnerable and energy poor customers. The decarbonised gas market should not be developed without them being able to fully benefit from it and by addressing all generations’ needs, from young to elderly.

Hydrogen infrastructure and hydrogen markets. The current regulatory framework for gaseous energy carriers does not address the deployment of hydrogen as an independent energy carrier via dedicated hydrogen networks. There are no rules at EU level on tariff-based investments in networks, or on the ownership and operation of dedicated hydrogen networks. In addition, no harmonized rules on (pure) hydrogen quality exist. Consequently, barriers exist for the development of a cost-effective, cross-border hydrogen infrastructure and competitive hydrogen market, a prerequisite for the uptake of hydrogen production and consumption. The present proposal seeks to address these deficiencies. It includes a proposal for a system of terminology and certification of low carbon hydrogen and low carbon fuels.

Renewable and low-carbon gases in the existing gas infrastructure and markets, and energy security. Today, renewable and low-carbon gases represent a minor share in the EU energy mix. To untap their potential, access to the gas wholesale market, i.e. the virtual trading points, represents a key prerequisite. Abolishing costs for cross-border trade of those gases and facilitating connection of production facilities will also improve the business case. Differences in gas quality parameters and in the volume of hydrogen blended in the natural gas system can affect the design of gas infrastructure, end-user applications and cross-border system interoperability, thus risk fragmenting the internal market. However, current gas quality rules are not fit to deal with future developments. On LNG, addressing the residual barriers regarding access to LNG terminals could open the way to import renewable and low carbon gases from abroad supporting the decarbonisation of the EU gas market. Finally, preserving and strengthening resilience in the transition require appropriate arrangements of security of supply.

Network planning. As outlined in the Commission’s Energy System Integration Strategy, coordinated planning and operation of the entire EU energy system, across multiple energy carriers, infrastructures, and consumption sectors is a prerequisite to achieve the 2050 climate objectives. Current network planning schemes and practices are deficient asthere are discrepancies between the EU-wide ten-year network development plan (‘TYNDP’) and national network development plans (‘NDP’) A better linkage between TYNDP and NDP would allow transnational exchange of information on transmission systems usage.

Security of supply and storage. In reaction to the significant and EU-wide energy price increases in autumn 2021, the European Council invited the Commission to swiftly consider medium and long-term measures that increase the resilience of the EU’s energy system including measures which enhance security of supply. To contribute to a timely response to this crisis and possible new crisis at Union level, this proposal includes specific measures to improve cooperation and resilience, notably to ensure a more effective and coordinated use storage and operational solidarity arrangements. The measures are targeted to reinforce the resilience of the EU energy system against future shocks in a timely manner. They cover measures in this Regulation and Regulation (EU) 2017/1938 on security of gas supply. In order to ensure a coherent response, the measures on security of supply are part of this legislative proposal and not proposed as a separate legislative proposal. As indicated in the Communication on energy prices of 13 October 2021 entitled ‘Tackling rising energy prices: a toolbox for action and support’, coordination of security of supply across borders is crucial for the resilience against future shocks.

The measures proposed require Member States to explicitly make storages part of their security of supply risks assessments at regional level, including risks linked to the control of storage by entities from third countries. Member States should consider storage measures through regional cooperation in case of unaddressed risks. The proposal defines enabling conditions to deployment of voluntary joint procurement of gas strategic stocks to be used in case of emergency. Measures are also introduced to improve the transparency and access to storages, address cybersecurity risks of gas and facilitates bilateral solidarity arrangements between Member States in case of crisis. The Commission encourages the Member States to proceed with solidarity arrangements without waiting so that even in a severe crisis households receive the gas they need.

• Consistency with existing policy provisions in the policy area

The proposed initiative is strongly linked and complementary to the legislative proposals brought forward in the context of the Fit-for-55 package to implement the European Green Deal, including:

The revised Renewable Energy Directive (‘RED II’), which is the main EU instrument dealing with the promotion of energy from renewable sources. It aims to accelerate the penetration of renewable energy, including renewable gases in the energy system. Its proposed amendment increases the target for renewable sources in the EU’s energy mix to 40% and promotes the uptake of renewable fuels, such as renewable hydrogen in industry and transport, with additional targets. In relation to this initiative, the RED II defines renewable hydrogen as ‘renewable fuels of non-biological origin’ and ‘biomass fuels’ that meet a 70% greenhouse gas emission reduction compared to fossil fuels setting specific sub-targets for the consumption of renewable hydrogen (50% of total hydrogen consumption for energy and feedstock purposes in industry by 2030 and 2.6% of the energy supplied to the transport sector).

The Energy Efficiency Directive ('EED') and the related Energy Performance of Buildings Directive ('EPBD') including the proposals for their amendment interact with the present initiative as they affect the level and structure of gas demand. Energy efficiency measures can alleviate energy poverty and reduce consumer vulnerability. As gaseous fuels are currently dominating theEuropean heating and cooling supply and the cogeneration plants, their efficient use stays at the core of the energy efficiency measures. The Gas Directive and the Gas Regulation are coherent with the energy efficiency first principle: an open and competitive EU market with prices that reflect energy carriers’ production costs, carbon costs, and external costs and benefits would efficiently provide clean and safe hydrogen to end users who value it most.

The TEN-E Regulation, as proposed by the Commission in December 2020, aims to better support the modernisation of Europe's cross-border energy infrastructure for the European Green Deal. It introduces hydrogen infrastructure as a new infrastructure category for European Network Development. The present initiative is complementary to the proposed TEN-E Regulation as it focuses on alignment of the national plans with the requirements of the European wide Ten Year Network Development plan.

As announced in the EU strategy to reduce methane emissions, the Commission will propose legislation to reduce methane emissions in the energy sector. The initiative will seek to improve information for all energy-related methane emissions. The present initiative is complementary as it seeks to facilitate the penetration of renewable and low-carbon gases, enabling a shift from natural gas.

• Consistency with other Union policies

The Emission Trading Scheme (´ETS´) increases the price of using fossil fuels relative to renewable and low-carbon gases and, thus, fosters the demand for such gases and investments in related production technology. The Commission has proposed strengthening, including reinforcements in and extensions to the aviation sector, maritime and road transport, and buildings. Under this Scheme all hydrogen production facilities are included, as well as electrolysers with a production capacity exceeding 25 tonnes/day. The Innovation Fund, which was established by the EU Emission Trading System (EU ETS) Directive for the period 2021 to 2030, is one of the funding instruments supporting the transition to a climate neutral Europe by 2050. The Innovation Fund, which was established by the EU ETS Directive for the period 2021 to 2030, is one of the funding instruments supporting the transition to a climate neutral Europe by 2050.

The revision of the Energy Taxation Directive strives to align the taxation of energy products with EU energy and climate policies, promote clean technologies and remove outdated exemptions and reduced rates that currently encourage the use of fossil fuels. Under the revised Directive, products covered by the Directive are grouped and ranked according to their environmental performance. According to this, the revision sets a preferential minimum levels of taxation of EUR 0.15/ GJ (compared to EUR 10.75/GJ for fossil fuels) For renewable and low-carbon hydrogen fuels used as motor fuels. For renewable and low-carbon hydrogen fuels used as heating fuels, it sets a preferential minimum levels of taxation of EUR 0.15/ GJ (compared to EUR 0.6/GJ for natural gas).

The revised Alternative Fuels Infrastructure Regulation (AFIR), which will repeal Directive 2014/94/EU on deployment of alternative fuels infrastructure (AFID), as proposed by the Commission in July 2021, aims to tackle rising emissions in road transport to support the transition to a nearly zero-emission car fleet by 2050. The Regulation requires Member States to expand their network of recharging and refuelling infrastructure in line with zero emissions car sales, and to install charging and fuelling points at regular intervals on major highways. The revision of the Alternative Fuel Infrastructure Regulation will require one refuelling stations (min. 2 t/day, 700 bar) every 150 km along the TEN-T core network and in every urban node by 2030; this would result in around 700 HRS along transport nodes, and 88 HRS in urban nodes.

The Amendment of the Regulation setting CO2 emission standards for cars and vans aims to ensure a clear pathway from 2025 towards zero-emission transport. The regulation notably defines zero-emission vehicles as battery electric vehicles, fuel-cell and other hydrogen powered vehicles, and sets a target of zero average emissions of the new vehicle fleets by 2030.

The FuelEU Maritime proposal aims to increase the share in the fuel mix of international maritime transport of sustainable low and zero-carbon alternative fuels including: liquid biofuels, e-liquids, decarbonised gas (including bio-LNG and e-gas), decarbonised hydrogen and decarbonised hydrogen-derived fuels (including methane, and ammonia). The focus on fuels and power technologies should enable significant and rapid emission reductions, using fully the existing technologies and infrastructure alongside incentives provided by other measures to be proposed. It will also facilitate the definition of decarbonisation pathways for the entire maritime cluster.

The REFuel EU Aviation proposal which targets to advance the potential of sustainable aviation fuels to reduce aviation’s GHG footprint is yet largely untapped. In order to decrease significantly its emissions, the aviation sector will need to reduce its current reliance on fossil jet fuel and rely increasingly on the use of sustainable aviation fuels (SAF) in the years to come. The proposal sets out a minimum share of 0.7% of ‘synthetic aviation fuels’ in the aviation fuels supplied to aircraft operators where ‘synthetic aviation fuels’ are renewable fuels of non-biological origin, as defined in the renewable energy directive.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

The objectives of this initiative cannot be achieved on a national level. The planned measures of the present initiative seek to advance the four objectives set out in Article 194 of the Treaty of the European Union (TFEU), while at the same time contributing to the decarbonisation of the EU’s economy. The planned measures are to be adopted on the basis of Article 194 (2) TFEU together with Article 114 i TFEU. In the field of energy, the EU has a shared competence pursuant to Article 4 (2) (i) TFEU.

The present initiative also builds upon a comprehensive set of legislative acts that have been adopted and updated during the past two decades. With the objective of creating an internal energy market, the EU has adopted four consecutive legislative packages between 1996 and 2019, with the overarching aim of integrating markets and liberalising national electricity and gas markets. These provisions cover a wide range of aspects, from market access to transparency, consumer rights, increase the liquidity of gas markets, and the independence of regulatory authorities.

• Subsidiarity (for non-exclusive competence)

Currently, there are no rules at EU-level regulating dedicated hydrogen networks or markets and low-carbon hydrogen and low-carbon fuels. In view of the current efforts at EU and national levels to promote the use of renewable hydrogen as a replacement for fossil fuels, Member States would be incentivised to adopt rules on the transport of hydrogen dedicated infrastructure at national level. This creates the risk of a fragmented regulatory landscape across the EU, which could hamper the integration of national hydrogen networks and markets, thereby preventing or deterring cross-border trade in hydrogen.

Harmonising rules for hydrogen infrastructure at a later stage (i.e. after national legislation is in place) would lead to increased administrative burdens for Member States and higher regulatory costs and uncertainty for companies, especially where long-term investments in hydrogen production and transport infrastructure are concerned.

The creation of a regulatory framework at EU-level for dedicated hydrogen networks and markets would foster the integration and interconnection of national hydrogen markets and networks. EU-level rules on the planning, financing and operation of such dedicated hydrogen networks would create long-term predictability for potential investors in this type of long-term infrastructure, in particular for cross-border interconnections (which might otherwise be subject to different and potentially divergent national laws).

When it comes to biomethane, without an initiative at EU level, it is likely that by 2030 a regulatory patchwork would still exist regarding access to wholesale markets, connection obligations and transmission system operator (TSO)- distribution system operator (DSO) coordination measures. Likewise, without some harmonisation at the EU level, renewable and low-carbon gases producers will be facing vastly different connection and injection costs across the EU, resulting in an unequal playing field.

Without further legislation at the EU level Member States would continue to apply different gas quality standards and rules on hydrogen blending levels, risking cross-border flow restrictions and market segmentation. Gas quality standards would continue to be mainly defined by the quality parameters of natural gas, limiting the integration of renewable gases in the network

All these aspects are likely to lower cross-border trade with renewable and low-carbon gases that might be compensated by higher natural gas imports. The utilisation of the LNG terminals and imports could remain restricted to natural gas, despite that no adaptation of LNG terminals would be necessary in case competitive biomethane or synthetic methane from non-EU sources were available.

National netwrok planning will be required to be developed only in Member States where certified Independent Transmission Operators (ITO) and Independednt System Operators (ISO) are operating. While most Member States have a single gas national development plan within which gas operators cooperate, there is still limited cross-sector cooperation.

EU coordinated emergency preparedness for the current gas sector has proven to be more efficient than action only at national level.

• Proportionality

The initiative complies with the proportionality principle. It falls within the scope of Article 194 of the Treaty on the Functioning of the European Union. The policy intervention is proportional to the dimension and nature of the problems defined and the achievement of the set objectives.

The proposal does not go beyond what is necessary to achieve the general objective pursued to facilitate the decarbonisation of gaseous fuels in a competitive manner at least economic costs whilst ensuring energy security and placing consumers at the heart of the energy markets. The preferred set of options are considered proportionate and builds to the extent possible on existing approaches. The balance between obligations and consideration of the different capabilities to act among Member States and private entities is considered appropriate given the imperative of achieving climate neutrality by 2050.

• Choice of the instrument

Building on the overall evaluation of the current regulatory framework for the gas market, the instruments chosen are a Directive, to recast the Directive 2009/73/EC, and a Regulation to recast Regulation No 715/2009. The choice of a recast of these existing legal acts will enhance legal clarity. Recourse to an amending act may have been inadequate to address a wide set of new provisions. The choice of the instruments thus calls for a revision of rules already adopted and implemented, as a natural evolution of current legislation,in view of this changes. Further acts will need to be amended through the Gas Regulation such as: the SoS Regulation (EU) 2017/1938, ACER Regulation (EU) 2019/942 and REMIT Regulation (EU) No 1227/2011.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Ex-post evaluations/fitness checks of existing legislation

The entry into force of the Third Energy package has positively contributed to the competition and performance of the internal energy markets. Nevertheless, the current regulatory framework for gas focuses on fossil-based natural gas and does not fully anticipate the emergence of alternatives for methane gases (including natural gas and biomethane), such as hydrogen.

A re-examination of the current gas market regulatory framework is needed and it has already been announced in the European Commission’s communication on a hydrogen strategy for a climate-neutral Europe. Given the different potential in EU Member States for the production of renewable and low carbon hydrogen, a suitable market framework could facilitate hydrogen to play its role as an energy carrier and as an enabler of energy system integration.

On this basis, four main drivers have been identified under Problem area I of the Impact Assessment: (i) decarbonisation will result in the emergence of a European hydrogen value chain reliant on a cross-border hydrogen market; (ii) lack of hydrogen infrastructure investments hinder market development; (iii) hydrogen infrastructure is likely to constitute a natural monopoly, resulting in non-competitive market structures; (iv) diverging hydrogen quality rules may hinder cross-border flows and incur additional costs.

The existing gas rules, focusing on fossil-based natural gas mainly imported from outside the EU, do not address the specific characteristics of decentralized renewable and low-carbon gases production within the EU. In addition, the growing volumes of biomethane, hydrogen but also LNG affect gas quality and thereby the design of gas infrastructure and end-user appliances. In particular, the Impact Assessment recognizes five main drivers related to this Problem Area: (i) constrained market and grid access for local producers of biomethane connected to the distribution grids, divergence of rules regarding obligation to connect and costs of grid connection for renewable and low carbon gases and intra-EU entry/exit tariffs hinder the establishment of a fully integrated, liquid and interoperable EU internal gas market; (ii) differences in gas quality and hydrogen blending levels can negatively impact cross-border flows and end-users, while current gas quality rules are not fit to deal with future developments; (iii) LNG terminals equipped to receive mainly natural gas, limited access for new gases to LNG terminals; (iv) long term supply contracts for unabated natural gas may lock-in natural gas and hinder supply of renewable gases towards 2050; (v) current energy security arrangements only address risks related to the supply of natural gas and not of renewable and low carbon gases.

Concerning network planning, cooperation between TSOs and regulators needs to evolve further. The increasing penetration of intermittent energy sources requires the whole energy system to be better integrated and the infrastructure to become more interconnected ,based on a more holistic and inclusive approach The Impact Assessment outlines three main drivers regarding this Problem Area: (i) network planning varies between Member States and TSOs, separate planning for electricity and gas; (ii) no transparency on potential of existing infrastructure for repurposing or decommissioning; (iii) DSOs not explicitly included in TSO planning. Furthermore, a more harmonized system development strategy would further increment interlinkages between electricity and gases systems including hydrogen.

The evaluation showed that competition needs to improve to ensure that the full benefits of market integration are passed on to EU consumers. Furthermore, consumers are still deprived from the necessary tools to get actively involved in the market. Consumer protection provisions in the analysed legislation prove to only be partially fit for purpose. In particular protection for vulnerable customers is still uneven between Member States and energy poverty continues to be significant across the EU. Concordantly, Problem Area IV identified three problem drivers: (i) untapped competition potential in retail markets; (ii) insufficient customer empowerment in terms of switching, price comparison tools, billing information, energy communities, and access to data; and (iii) inadequate consumer protection in particular for vulnerable and energy poor.

• Stakeholder consultations

In line with the Better Regulation Guidelines, the Commission carried out a comprehensive and inclusive stakeholder consultation based on a consultation strategy that included a range of methods and tools. This strategy aimed to ensure that all relevant evidence was taken into account, including data about costs, societal impact, and benefits of the initiative. Several consultation tools were employed: a consultation on the inception impact assessment (Roadmap), an online public consultation based on a questionnaire, a presentation by the Commission and feedback from stakeholders, including the Gas Regulatory Forum, discussions with the Member States, with members of the European Parliament and with National Regulatory Authorities, and discussions with stakeholders in a large stakeholder workshop.

The Commission received 263 responses to the open public consultation. In general, respondents confirmed that they see a need to revise the Gas Directive and Gas Regulation to help to achieve decarbonisation objectives. Moreover, over 60% of respondents expect that the technological and regulatory changes necessary to decarbonise the gas market have the potential to create new jobs by 2030.

Regarding the development of hydrogen infrastructure and markets, a majority of the respondents support the introduction of regulation at an early stage to foster a well-functioning and competitive hydrogen market and infrastructure. Respondents advocated for an EU legislative framework that defines key regulatory principles and takes a step-wise approach. A large majority supports e.g. third party access, rules for access to hydrogen pipelines, import terminals and storage, and advocates for network activities to be unbundled. Most respondents considered it important to define early the role of private parties in developing hydrogen infrastructure. A large majority of respondents also consider that existing and future private networks may be (temporarily) exempted from certain regulatory requirements but that convergence on a single regulatory framework needs to be assured. The vast majority of respondents consider that rights and permitting requirements for new hydrogen infrastructure should be similar to those applicable to methane gas pipelines today.

Regarding the promotion of the access of renewable and low carbon gases to the existing gas market and infrastructure, stakeholders agree on a need to revise the current regulatory framework to help achieve decarbonisation objectives. A majority of stakeholders consider it important to ensure full market access and facilitate the injection of RES&LC gases into the gas grid. Many respondents advocate an obligation for network operators to connect RES&LC gases producers and introduce an injection charge reduction. The majority of respondents support as well the improvement of the transparency framework for LNG terminals. There is also a strong support for the harmonised application of gas quality standards across the EU, for reinforced cross-border coordination and increased transparency. Respondents are divided on hydrogen blending, but the majority agrees that it can provide a cost-efficient and fast first step, despite the high technical costs, to energy system decarbonisation. Few stakeholders support the removal of intra-EU cross-border tariffs. The majority of the respondents consider gas-specific security challenges and cyber-security measures as important.

Regarding integrating network planning, the majority of stakeholders support aligning the timing of the Network Development Plan (NDP) with the TYNDP, and a single gas plan irrespective of the unbundling model chosen. A majority of respondents expressed even stronger support for a joint electricity and gas scenario. A substantial number of stakeholders ask for the inclusion of hydrogen projects in the NDP. Most stakeholders agree on the role of DSOs to provide and share information, with several respondents also supporting that DSOs provide their own plan including system optimisation across different sectors. Respondents also preferred a joint gas and electricity plan to joint scenarios with separate plans. Several stakeholders pointed out that a joint methane and hydrogen plan, with a separate electricity plan, would be the preferred option.

Regarding customer engagement and protection in the green gas retail market, the majority of the stakeholders called for higher ambitions in the citizen/consumer-related provisions by mirroring those in the electricity market. As well, energy poverty provisions should help ensure consumers are not paying the cost of switching to clean gas-based options. Representatives of the private sector support the plans to phase out regulated prices, while some consumer organisations would opt for keeping them to protect energy poor and vulnerable consumers. Almost half of all respondents want provisions on the comparability of offers and accessibility of data, transparency, smart metering systems, and switching to be reinforced. No respondent has supported the non-regulatory approach.

• Collection and use of expertise

The proposed initiative and its underpinning Impact Assessment draw on evidence from the stakeholder input to the extensive consultations carried out in this respect, as well as literature review, and modelling. The literature review included the results of a serie of topical studies on key elements such as the role of hydrogen and decarbonised gas infrastructure, market and production, that were conducted for the Impact Assessment or that contributed to its scope, as well as assessments carried out in for other relevant Commission initiatives. Conclusions adopted in the framework of several stakeholder forums, most importantly the one on gas regulation (Madrid Forum), and the one on electricity regulation (Florence Forum) were also considered in the analysis. Discussions with Member States, with members of the European Parliament, with National Regulatory Authorities, ACER and discussions with other stakeholders were equally considered.

• Impact Assessment

Following the Better Regulation guidelines, the Commission carried out an Impact Assessment of several policy options. This work was supported by a consultation within the Commission via an Inter-Service Steering Group.

The Impact Assessment was presented to and discussed with the Regulatory Scrutiny Board (RSB). TheRegulatory Scrutiny Board issued a ‘positive opinion with reservation’. Reservationswere notably addressed by: (i) integrating the conclusions of the evaluation into the problem description, (ii) spelling out the role of the initiative as part of the enabling framework of the ‘Fit for 55’ package, (iii) clarify the baseline of the impact of the policy options, (iv) distinguish more between different actors, in particular between natural gas and hydrogen producers and consumers, (v) provide an assessment of how the initiative may have different impacts for SMEs compared to other (larger) companies, (vi) better reflect the dissenting and minority views throughout the report, including in the problem definition, the construction of the options, analysis of impacts and the choice of the preferred option, (vii) improve the narrative of the report, and (viii) complete the cost and benefit tables in the appropriate format.

Throughout the Impact Assessment work, a range of measures was considered across four Problem Areas to address the identified problems and problem drivers to reach the objectives of the initiative: Following an assessment of their effectiveness, efficiency, coherence and proportionality, a package of preferred options has been found best suited to contribute to the set objectives.

3.

Problem Area I: Hydrogen infrastructure and hydrogen markets


Problem Area I considers the following policy options: to tender the rights for hydrogen network operation (Option 1); to introduce main regulatory principles inspired by those currently applicable to the natural gas market but adapted to the development stage of hydrogen markets (Option 2); and to establish a fully developed regulatory regime for hydrogen (similar to the one currently applicable to the natural gas sector) without need for a transition to a more mature hydrogen market (Option 3). The preferred option is to introduce key regulatory principles from the start whilst providing clarity on the final (future) regulatory regime. (Option 2b ‘Main regulatory principles with a vision’). The key benefit of this option is that it fosters market integration, provides clarity for investors, avoids the emergence of non-competitive market structures as well as costs of ex-post adjustments of rules once the market is mature, but leaves flexibility to tailor the regulation to the staged ramp-up of the hydrogen sector.

4.

Problem Area II: Renewable and low carbon gases in the existing gas infrastructure and markets, and energy security


Problem Area II contains options that promote access to renewable and low-carbon (RES&LC) gases to the existing gas market and infrastructure. All options include also a progressive level of intervention for addressing energy security concerns, notably extending existing tools, standards and procedures to RES&LC gases, effective solidarity and addressing risks linked to cybersecurity for the gas sector. Option 3 “Allow and promote renewable and low-carbon gases full market access” is the preferred option for Problem Area II. This option contains measures to support access of renewable and low carbon gases to the wholesale market, LNG terminals, and transmission grid (regardless of the place of connection), including tariff discounts for injection to the grid and cross-border transport. Gas quality would be governed by a harmonised EU approach for cross-border interconnection points while leaving flexibility to the Member States. The allowed cap for hydrogen blends is set at 5% for all cross-border points – a level that is cost-efficient in terms of adaptation and abatement costs.

Allowing and promoting renewable and low-carbon full market: The measures foreseen are consistent with the Union’s efforts to fight climate change and necessary to achieve the objectives of the European Green Deal. The key benefit is that the measures will decrease the production costs for producers of renewable and low carbon gases, increase competition, liquidity and trade for renewable gases, while encouraging a reduction of greenhouse gas emissions. In this way, consumers and taxpayers will benefit as support could be lowered. It will also limit risks for energy security and save time and resources, reduce uncertainties, improve the efficiency of emergency measures, and strengthen security-specific requirements for gas companies.

5.

Problem Area III: Network planning


Problem Area III considers options regarding integrated network planning. The preferred option for Problem Area III is Option 2 ‘National Planning based on European Scenarios’. The option allows for national planning but requires that it is based on joint scenarios for gas and electricity, aligned with the TYNDP and linked to the relevant National Energy and Climate Plan. It includes all relevant actors (DSOs) and enables the identification of pipelines that can be used for repurposing from methane to H2 on a level of detail that would not be easily achievable on the European level.

Establish National Planning based on European Scenarios: The key benefit is that this will eliminate risks that electricity and gas TSOs plan the evolution of their systems based on incompatible assumptions. It enables sector integration and a conceptual system plan while keeping the benefits of more detailed sector-specific network development plans. It ensures a common vision of the different stakeholders implying that network planning takes into account the decarbonisation strategies at the national and EU levels, reducing the risk of potential lock-ins or stranded assets.

6.

Problem area IV: Low level of customer engagement and protection in the green gas retail market


Problem Area IV contains options that postulate for a non-regulatory approach in tackling competition and consumers’ engagement or instead require addressing the problem drivers through new legislation, mostly mirroring what was already established in the electricity sector. In light of the analysis, the preferred option is Option 2 ‘Flexible legislation’, which mirrors the electricity market consumer protection and also the empowerment provisions. This option is most likely to be the most effective, efficient, and consistent with other Problem Areas.

The key benefit is that it will offer significant savings potential, help new suppliers and service providers to enter the market, develop innovative products, resulting in increased competition, consumer engagement and economic benefit. It would also enable citizens and communities to increase social acceptance, mobilise private capital and facilitate the deployment of renewable and low-carbon gases. Reducing the risk of over-investments will have a positive environmental impact.

• Regulatory fitness and simplification

The proposals for amending the existing legislation are designed in accordance with the most cost-effective policy options scrutinised in the Impact Assessment. It is expected from some of the preferred options to increase administrative, implementation and enforcement costs for regulatory bodies and market operators. For example, higher administrative exchanges between NRAs and natural gas shippers, increased coordination efforts between DSOs and TSOs, and further regulatory and implementation efforts for Member States and national authorities might stem from the proposed measures. However, lower and more efficient regulatory costs are also expected from the amended framework.

Furthermore, the Impact Assessment shows that the proposed measures offer the most cost-effective regulatory options to achieve the overarching objective of the initiative, namely the establishment of rules for the transmission, distribution, supply and storage of methane and hydrogen gases that can support the decarbonisation of the energy system while ensuring secure and affordable energy.

The short-term regulatory costs entailed in some of the preferred measures must be assessed against the costs and efforts that a late integration and decarbonisation of the energy system would require in the long term. The benefits that the options are expected to produce in terms of support for renewable sources, energy system integration, consumer protection and energy security will largely outweigh the immediate administrative and implementation costs.

The proposal further contributes to simplifying the current regulatory framework by harmonising the provisions on gas infrastructure and market with the new regulatory architecture conceived by the Clean Energy Package for the electricity sector. Higher alignment between sectors is expected to benefit many regulatory areas, notably consumer empowerment and protection, governance and regulatory oversight. Similar contributions are also foreseen in the early introduction of a regulatory framework for hydrogen infrastructures and markets. Whilst these rules will likely increase the immediate administrative costs and regulatory burdens for national authorities and market operators, an early harmonisation of regulatory principles for hydrogen is expected to significantly lower future compliance costs and prevent the risk of major regulatory divergences and implementation costs.

• Fundamental rights

Safeguarding EU values and citizens’ fundamental rights and security in a developing green, digital energy environment, is of paramount importance. The proposed policy measures on data management were developed with this in mind, aiming at ensuring widespread access and use of digital technologies and data-driven services while at the same time guaranteeing a high level of the right to private life and to the protection of personal data, as enshrined in Articles 7 and 8 of the Charter of Fundamental Rights of the EU, and the General Data Protection Regulation.

4. BUDGETARY IMPLICATIONS

The budgetary impact on the EU budget associated to the proposal under this package concerns the human resources of the Agency for the Cooperation of Energy Regulators (ACER) and of the European Commission’s Directorate-General (DG) for Energy which are described in the Legislative Financial Statement accompanying the Commission proposal for a recast of the [Gas Regulation]. Essentially, the new tasks to be carried out by ACER, notably as regards rules facilitating the development of a competitive hydrogen sector, but also the increasing complexity of gas markets due to an increasing share of other gases than natural gas, require a phasing in of 21 additional FTE in ACER from 2023 onwards. For implementing the proposed new rules for a new and growing sector, for integrating new types of gases into the gas market and infrastructure as well as for enforcing the strengthened consumer provisions, also the human resources of DG Energy need to be reinforced by 5 additional FTE.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

Progress monitoring will consist of a two-tier approach of annual reporting by ACER and an evaluation by the Commission.

ACER’s mandate of annual monitoring and reporting of market performance in its annual market monitoring report (obligation in Regulation (EC) No. 715/2009) will be retained, with its scope extended to hydrogen. Within one year of the adoption of the proposals, the Commission will invite ACER to review and update its current monitoring indicators (with the involvement of affected stakeholders) to ensure their continuing relevance for monitoring progress towards the objectives underlying the present proposals. ACER will continue relying on the already established data sources used for the preparation of the market monitoring report, extended with relevant data on hydrogen.

ACER's annual reporting will replace the Commission's reporting obligations that are currently still existing under the Gas Directive. The detailed proposals will ensure that ACER’s monitoring is complementary to other monitoring exercises (esp. monitoring under the Governance of the Energy Union and Climate Action) avoiding any overlaps.

The Commission will carry out a fully-fledged evaluation of the impact of the proposed initiatives, including the effectiveness, efficiency, continuing coherence and relevance of the proposals, within a given timeline after the entry into force of the adopted measures (indicatively, five years). By 31 December 2030, the Commission shall review the Directive and shall submit a report to the European Parliament and to the Council.

• Explanatory documents (for directives)

Following the ruling of the European Court of Justice in Commission vs Belgium (case C-543/17), Member States must accompany their notifications of national transposition measures with sufficiently clear and precise information, indicating which provisions of national law transpose which provisions of a directive. This must be provided for each obligation, not only at ‘article level’. If Member States comply with this obligation, they would not need, in principle, to send explanatory documents on the transposition to the Commission.

The Regulation will be directly and uniformly implemented in the Member States, and hence not requiring an Explanatory Document.

• Detailed explanation of the specific provisions of the proposal

The proposed revised directive consists of ten chapters comprising 91 articles.

Chapter 1 – Subject matter, scope and definitions

This chapter sets out the subject matter and scope of the rules for the transmission, distribution, supply, and storage of gases using the natural gas system as well as the rules for the transport, supply and storage of hydrogen using the hydrogen system. It also defines the main terms used in the proposed directive.

Chapter 2 – General rules for the organisation of the markets

This chapter lays down the rules to ensure competitive, consumer-centred, flexible and non-discriminatory markets for gas. It contains provisions on market access such as the free choice of supplier, market-based supply prices, public service obligations, sustainability, certification of renewable and low carbon gases, promotion of regional cooperation, and technical and procedure rules.

Chapter 3 – Consumer empowerment and protection and retail markets

This chapter provides in particular a set of rights for the consumer: It elaborates on basic contractual rights, switching rights and fees, and rules on comparison tools, active customers, and citizen energy communities. It also contains provisions on billing, smart and conventional metering, and data management.

It also contains provisions on single points of contact, right to out-of-court dispute settlement, vulnerable customers, and retail markets.

Chapter 4 – Third party access to infrastructure

7.

This chapter is divided into 3 sections to cover the following: access to natural gas infrastructure, access to hydrogen infrastructure, and refusal of access and connection.


Chapter 5 – Rules applicable to transmission, storage and system operators of natural gas

This chapter elaborates on tasks of transmission, storage and LNG system operators, confidentiality and decision-making powers.

Chapter 6 – Distribution system operators of natural gas

This chapter sets the designation of distribution system operators, their tasks, the decision-making powers regarding the connection of the new production facilities for renewable and low-carbon gases to the distribution system, the unbundling of distribution system operators, the confidentiality obligations of distribution system operators, provisions on closed distribution systems, and combined operator.

Chapter 7 – Rules applicable to the dedicated hydrogen networks

This chapter provides in particular tasks of hydrogen network, storage and terminal operators, provision on existing hydrogen networks, geographically confined hydrogen networks, closed hydrogen systems, interconnectors with third countries, and confidentiality for operators.

Chapter 8 – Integrated Network planning

This chapter elaborates on network development and powers to make investment decisions, on hydrogen network development reporting, as well as on financing new cross-border hydrogen infrastructure.

Chapter 9 – Unbundling of transmission system operators

This chapter is divided into six sections to cover the following: ownership unbundling, independent system operators, independent transmission operators, the unbundling of dedicated hydrogen networks operators and the designation, the certification of natural gas and hydrogen system operators, and unbundling and transparency of accounts.

Chapter 10 – Regulatory authorities

This chapter focuses on the designation and independence of regulatory authorities, on general objectives of the regulatory authority, on their duties and powers, on the regulatory regime for cross-border issues, on compliance with the network codes guidelines, and on record keeping.

Chapter 11 – Final provisions

The last chapter focuses on final provisions and includes articles notably on safeguard measures, level playing field, technical agreements, derogations, empowerment procedure, the exercise of delegation, committee procedure, reporting, repeal, transposition, entry into force, Addressees.

Annex I is about the minimum requirements for billing and billing information.

Annex II deals with smart metering in natural gas.

Annex III lists the date of application and the transposition limits of the repealed Directive and its amendments.

Annex IV contains a correlation table.

The proposed revised regulation consists of eight chapters comprising 69 articles.

Chapter 1 – Subject matter, scope and definitions

This chapter sets out the subject matter and scope of the rules regarding the objectives of the Energy Union, climate and energy framework as well as consumers. It also defines the main terms used in the proposed regulation.

Chapter 2 – General rules for the organisation of the markets and infrastructure access

This chapter lays down the general principles as well as the separation of regulated asset bases, third party access services, market assessment for renewable and low carbon gases, principles of capacity-allocation mechanisms and congestion-management procedure, trading of capacity rights, balancing rules and imbalance charges, certification, and cooperation of transmission system operators.

Chapter 3 – Network access

This chapter elaborates on tariffs for access to networks, and discounts.

Chapter 4 – Transmission, storage, LNG, and hydrogen terminal system operation

This chapter sets out provisions on firm capacity for renewable and low carbon gases, cross border coordination on gas quality, hydrogen blends, the European network of transmission system operators for gas, monitoring by ACER, regulatory authorities, consultations, costs, regional cooperation, TYNDP, transparency requirements, and record-keeping.

Chapter 5 – Distribution system operation

This chapter lays down the rules on firm capacity for renewable and low carbon gases, cooperation between DSOs and TSOs, transparency requirement, the European entity for distribution system operators. It includes procedures and tasks.

Chapter 6 – Access to dedicated hydrogen networks

This chapter focuses on cross-border coordination on hydrogen quality, the European Network of Network Operators for Hydrogen, its tasks, TYNDP for hydrogen, costs, and consultation, the monitoring by ACER, regional cooperation, and transparency requirements.

Chapter 7 – Network codes and guidelines

This chapter sets out provisions for the adoption of network codes and guidelines, the establishment of network codes, amendments of network codes, guidelines, right of Member States to provide for more detailed measures, provision of information and confidentiality, and penalties. All three rules are adapted to hydrogen.

Chapter 8 – Final provisions

This chapter focuses on final provisions and includes articles notably on new natural gas and hydrogen infrastructure, committee procedure, exemptions, derogations, the exercise of delegation, amendments to regulations, amendment to extend the Regulation on security of gas supply to RES&LC gases and to include measures on cybersecurity, solidarity and storage, repeal, and entry into force.

Annex I contains guidelines.

8.

Annex II contains the inserted Annex IX to Regulation 2017/1938


Annex III contains information on the repealed Regulation with list of the successive amendments

Annex IV contains a correlation table.


715/2009 (adapted)