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LONDON (ICIS)–Europe’s main energy regulators have proposed flexibility in developing decarbonised gas and hydrogen markets, as well as differentiated tariffs for hydrogen and methane.
In the eleventh edition of the Annual Market Monitoring Report (MMR), the Agency for the Cooperation of Energy Regulators (ACER) and the Council of European Energy Regulators (CEER) described production costs, supply and demand for hydrogen. From these wider developments, ACER and CEER provided the market with regulatory recommendations from a wide range of European regulators.
Regulation is now a key area of focus, with numerous market participants citing its importance at European Hydrogen Week in Brussels in October.
REGULATORY RECOMMENDATIONS
ACER and CEER noted that the limited infrastructural, production and extraction base of the emerging hydrogen market will mean that new legislation will need to be taken into account and attempt to balance uncertainties.
These unknowns include record high energy prices, demand reduction targets and the changing cost competitiveness of low-carbon technologies, factors European energy regulators said would require flexibility as the hydrogen market develops.
It is the stated intention of ACER and CEER that the regulation of the hydrogen market should draw on successes in the regulation of the gas market.
The report highlights six recommendations for regulation outlined by ACER and CEER:
A) The principles of the gas market should include non-discriminatory access of third parties, preferably on the absence of cross-subsidies between users and networks, guaranteed unbundling of market-based and regulatory activities, and reinforced monitoring.
B) The regulators support the possibility of maintaining for certain periods during the early stage of market development cases of negotiated third party access to hydrogen networks.
C) In order to avoid discouragingly high tariffs for the purpose of recovering network costs by the first users, the regulators agree that transfers between different regulated services such as gas, power and hydrogen of the same transmission system operator (TSO) or network operator may be made same, despite this being a partial cross-subsidy. Regulators and ACER would have a key role in overseeing such transfers.
D) Regulators support hydrogen and methane separation as a regulated asset base. Gas and hydrogen tariffs should be published under separate methodologies and charged independently. Regulators should audit such assets to avoid information asymmetry.
E) In addition to the above recommendation, financial separations should only occur within clear timelines, and inter-TSO compensation mechanisms should be supervised by the national regulators.
F) Unbundling activities will be a key principle in the future regulatory model. This will involve a clear separation between regulated and market-based network production and supply activities. Electrolyzers will be a competitive activity through facilities. But this rule may be flexible during the early stages of the market.
Outside of the six specific recommendations, ACER and CEER noted that guarantees of origin (GOs) would be necessary for hydrogen trade, and that the trade of decarbonized gases and hydrogen should be promoted.
FINANCIAL SUPPORT MECHANISMS
ACER and CEER said that significant public financial support and private investment is needed to decarbonise the gas sector.
Both regulatory bodies recommend that support should be distributed on the demand side of the market including areas of the economy that are more difficult to electrify, such as industry and large-scale transport. Electromechanical manufacturing and production capabilities are also recommended.
ACER and CEER said that possible support mechanisms could be linked and limited to the price of natural gas without reduction.
Natural gas prices as part of a support mechanism could help bridge the gap between natural gas prices and hydrogen production costs.
This is somewhat contrary to the support mechanism proposed by the European Hydrogen Bank, announced by the European Commission in September. The bank, which is expected to start a pilot period within the third quarter of 2023, aims to bridge the cost gap between the production of unabated hydrogen (referred to as gray hydrogen) and renewable hydrogen (referred to as green hydrogen). to fill.
A support scheme bridging the gap between natural gas and hydrogen production costs could result in a higher subsidy than closing the gap between renewable and non-reduced hydrogen costs. This is because the price of natural gas is likely to be lower than the cost of producing unreduced hydrogen (grey hydrogen), as natural gas is the feedstock.
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