New requirements proposed by the European Commission on renewable hydrogen projects

With regards to gross final consumption of energy in the transport sector, Article 25 of the Directive stipulates that each Member State shall impose an obligation on fuel suppliers to ensure that the share of renewable energy in the transport sector is at least 14% by 2030, and Article 27 lays down the rules for the calculation of this percentage.

In this context, on 13 February 2023, the European Commission adopted two delegated acts defining precisely when electricity used for the production of liquid and gaseous fuels of non-biological origin for transport is considered to be of renewable origin (the "Delegated Acts").

Once adopted, Delegated Acts (non-legislative acts adopted by the European Commission that amend or supplement non-essential elements of a legislative act, in this case the aforementioned Directive) will be sent to the European Parliament and Council so that they can be accepted or rejected within a period of two months, which has been extended for a further two months, without the possibility of their being amended.

When is liquid and gaseous transport fuel of non-biological origin considered to be renewable?

As a general principle, liquid and gaseous fuels of non-biological origin produced from electricity ("Renewable Fuels"), including hydrogen, will be considered renewable when the electricity from which they are produced is of renewable origin. This is of great importance, as it is intended to avoid that the increased production of these fuels will lead to an increased demand for fossil fuels from Russia to produce the electricity needed to produce the fuels.

What requirements must be met for the energy supplied to be considered renewable?

Renewable electricity can be supplied to the Renewable Fuels production units in two ways. Either through an electricity production plant directly connected to the fuel production installation, or it can come directly from the grid, under  numerous, complex and unclear requirements set out in the Delegated Act.

A) Electricity supply through a direct line:

The producer of the Renewable Fuels shall provide evidence of compliance with the following aspects to prove that the electricity used in the production of the fuels is of renewable origin and, consequently, also the fuels produced with it:

1 - Renewable energy production installations are connected to the fuel production installation through a direct line or electricity and fuel production are produced in the same installation.

2 - The electricity production installations have been commissioned within 36 months prior to the commissioning of the fuel production installation.

3 - The electricity production installation is not connected to the grid, or, if connected to the grid, has a system for measuring all electricity flows that shows that no energy has been taken from the grid for the production of the Renewable Fuels.

B) Electricity supply through the grid:

Producers of Renewable Fuels will be able to prove that the electricity taken from the grid and used in the production of such fuels is renewable, if it fulfils any of the following conditions:

The general criterion for electricity taken from the grid to be considered renewable is that the conditions of additionality, temporal correlation and geographical correlation explained below are met. However, there are three exceptions to this criterion:

1 - The Renewable Fuels production installation is located in a bidding zone where the average renewable electricity production exceeded 90% in the previous calendar year and the Renewable Fuels production does not exceed a set maximum number of hours over the renewable electricity share of the zone. Once the share exceeds 90% in a calendar year, it shall be deemed to remain above 90% for the following five years.

2 - The Renewable Fuels production installation is located in a bidding zone where the electricity emission intensity is less than 18 gCO2eq/MJ (grams of carbon equivalent per megajoule) (if less than this amount it will be considered lower for the next five calendar years), provided that the following two aspects are fulfilled:

i) producers of Renewable Fuels have concluded either directly or through intermediaries, one or more purchase agreements for renewable electricity with economic operators for an amount at least equivalent to the amount claimed as renewable and if it has actually been produced at those installations.

ii) the conditions of temporal and geographical correlation that we will detail later are met.

3 -  Electricity used to produce Renewable Fuels is consumed during an imbalance settlement period during which the producer of the Renewable Fuels can prove, based on evidence from the grid operator, the following points:

i) electricity generation installations using renewable energy sources are redispatched downwards in accordance with Art. 13 of Regulation (EU) 2019/943.

ii) electricity consumed to produce Renewable Fuels reduces the need for redispatching by a corresponding amount.

What are additionality, temporal correlation and geographical correlation conditions?

A) Additionality implies that fuel producers produce an amount of renewable electricity at their own installations that is at least equivalent to the amount of electricity declared as fully renewable, or that they have concluded directly or through intermediaries, one or more renewable electricity purchase agreements with economic operators producing renewable electricity for an amount at least equivalent to the amount of electricity declared as fully renewable and the latter is actually produced at that/those installation(s) if the following criteria are met (applicable from 1 January 2038 for fuel production installations coming into operation before 1 January 2028, except for capacity added after 1 January 2028):

1 -  The electricity production installation became operational within 36 months before the fuel production installation became operational.

2 - The electricity production installation has not received financial support in the form of operating or investment aid (exclusion is foreseen in relation to support for installations prior to their repowering, for land or grid connections, that which does not constitute net support and that which is earmarked for R&D&I).

B) The temporal correlation is defined in two different ways based on two time periods. The first one is until 31 December 2029, and implies that the fuel has to be produced during the same calendar month as the renewable electricity from the power purchase agreement, from a new storage asset located behind the grid connection point as the electrolyser that has been charged during the same calendar month in which the energy was produced under the power purchase agreement. The second period occurs from 1 January 2030, and the criterion is deemed to be met when the fuel is produced during the same one-hour period as the renewable electricity, on the same terms as in the first period. It should be noted that Member States will be able to apply the rules set for the second period from 1 July 2027 to Renewable Fuels produced in their territory. In addition to the above, the temporal correlation shall always be deemed to be fulfilled if the fuel is produced in the one-hour period in which the clearing price for electricity resulting from the coupling of the single daily market in the bidding zone is less than or equal to EUR 20 per MWh or less than 0.36 times the price of an allowance for one tonne of carbon dioxide equivalent during the relevant period.

C) Geographical correlation occurs when one of the following requirements regarding the location of the electrolyser is met:

1 - the renewable energy production installation under the power purchase agreement shall at the time it became operational be located in the same bidding zone as the fuel production installation.

2 - the renewable energy production installation is located in an interconnected bidding zone, including in another Member State, and electricity prices in the relevant period on the day-ahead market are equal to or higher than those in the bidding zone where the fuel is produced.

3 - the installation generating renewable electricity under the power purchase agreement is located in an offshore bidding zone interconnected with the bidding zone in which the electrolyser is located.

In this regard, Member States may introduce additional criteria for the siting of electrolysers and renewable energy production installations in order to make additionality compatible with national hydrogen and electricity grid planning.

Generic Renewable Fuel Requirements

Producers of Renewable Fuels shall provide the relevant information that proves compliance with the requirements to consider such fuels as renewable, including for each hour the following information: (a) amount of electricity used, (b) amount of renewable electricity generated by the installation even if it is not used to produce Renewable Fuels and (c) amounts of Renewable and non-renewable Fuels produced by the fuel producer.

In addition to the above, it is foreseen in the Delegated Act that regardless of whether the Renewable Fuels are produced inside or outside the European Union, producers of Renewable Fuels may use national or international voluntary schemes recognised by the European Commission to demonstrate compliance with the relevant criteria. In this respect, a Member State may not require suppliers of Renewable Fuels to provide higher requirements than those set out in the Delegated Act.

Furthermore, the Commission shall submit to the European Parliament and the Council a report assessing the impact of the requirements set out in the Delegated Act, including the impact of temporal correlation on production costs, greenhouse gas emission reductions and the energy system.

Second Delegated Act

The second Delegated Act sets the minimum greenhouse gas emission reduction threshold for recycled carbon fuels at 70%, and specifies in its Annex I the methodology for calculating greenhouse gas emission reductions from renewable liquid and gaseous transport fuels of non-biological origin and recycled carbon fuels.

This methodology takes into account the greenhouse gas emissions produced throughout the entire life cycle of fuels, including emissions at source, those produced when taking electricity from the grid, those produced by transformation and those related to the transport of these fuels to the final consumer.

It remains to be seen whether the two delegated acts are finally approved by the European Council and the European Parliament with a view to their full incorporation as sources of rights and obligations for the Member States of the European Union.

If you would like to know more about the new regulatory and energy sector legislation and its possible implications, please do not hesitate to contact one of our experts listed below or your usual contact at Osborne Clarke.