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Germany sets regulatory framework for green hydrogen production and hydrogen grid projects

  • Germany
  • Energy and infrastructure - Clean energy
  • Energy and infrastructure - Hydrogen

06-07-2021

Just before the parliamentary summer break at the end of the current legislative period, the German legislator approved an Ordinance of the Federal Government which implements an exemption for green hydrogen projects from the levy payable under the German Renewable Energies Act (Erneuerbare-Energien-Gesetz, “EEG”) and adopted an amendment to the German Energy Industry Act (Energiewirtschaftsgesetz, “EnWG”) which sets the regulatory framework for hydrogen grids in Germany.

Exemption from the EEG levy for green hydrogen projects

To make green hydrogen competitive with other forms of hydrogen, the German National Hydrogen Strategy of June 2020 (read our summary) envisaged an exemption from the EEG levy, which serves the financing of renewable energies, for power used for the production of green hydrogen. Such exemption has already been included in the reform of the EEG which became effective on 1 January 2021 (read our summary) but was subject to the determination of green hydrogen production requirements through the recent Ordinance.

Exemption for the first 5,000 full usage hours per year

The requirements for an exemption from the EEG levy have been set as follows (section 69b EEG and sections 12h et seq. of the Renewable Energies Ordinance (Erneuerbare-Energien-Verordnung, “EEV”):

  • Consumption of power by an undertaking for the production of green hydrogen
  • from 1 January 2022 onwards
  • in a plant for the production of green hydrogen irrespective of the purpose of use, i.e. including use for electrolysers and other relevant installations
  • commissioned before 1 January 2030
  • having a grid connection with a separate metering point (if the plant might use power from the grid)
  • for the production of “green hydrogen”, which is defined as electro-chemically produced hydrogen, during the first 5,000 full usage hours of any calendar year, through the exclusive use of power (i) generated by renewable energy plants within the meaning of the EEG, (ii) with at least 80% of the power originating from plants located in the German power price zone and up to 20% from plants located in a price zone which is electrically connected with the German price zone, and (iii) which is not subject to financial support under the EEG or any other support scheme.

Evidence for the requirement as per item (i) above shall be provided,

  • in the event of power withdrawn from the grid, through the cancellation of guarantees of origin (GoO) and, if the relevant renewable energies plant is located in Germany, a declaration of the power supplier that the power has been used for the production of green hydrogen in the respective plant
  • in the event of power generated on-site, through contemporaneous generation of power in the renewable energy plant and consumption of the equivalent amount in the green hydrogen production plant (based on 15-minute intervals)

The exemption from the EEG levy does not apply during calendars years where the EEG levy payable by the respective undertaking is reduced pursuant to section 64a EEG. This provision allows undertakings producing hydrogen other than green hydrogen to apply for a limitation of the EEG levy to 15% (with a floor of 0.1 ct/kWh) if their power consumption was below 5GW during the last business year, they are operating a certified energy or environmental management system and have implemented a specific alternative system for improving their energy efficiency.

The exemption requirements for green hydrogen are still subject to State Aid clearance by the European Commission.

Regulation of hydrogen grids

In addition to the creation of green hydrogen production plants and the use of such hydrogen in different industry sectors, e.g. the steel industry (read our summary on the German green steel action plan of July 2020), Germany’s hydrogen ambitions require the construction of hydrogen grids and repurposing of existing natural gas grids. Following an assessment of potential grid structure scenarios and different regulatory approaches by the German Federal Network Agency (Bundesnetzagentur, “BNetzA”) issued in July 2020 (read our summary), the competent ministry and stakeholders intensively discussed the way forward for Germany. Whilst gas grid operators are particularly in favour of an inclusion of hydrogen grids into the existing regulatory regime for natural gas grids, the legislator adopted the approach proposed by the ministry, which provides for the following (sections 28j through 28q EnWG): the regulation of hydrogen grids is in principle at the respective grid operator’s choice (opt-in regulation) and, if the grid operator opts for regulation, the regulation is separate from the regulation of any natural gas grids of the same grid operator (vertical unbundling).

Opt-in regulation

The opt-in regulation for hydrogen grids is available to any hydrogen grid infrastructure for which the BNetzA has confirmed that they are demand-oriented. The basis for such confirmation will in particular be a realisation schedule agreed between the grid operator and a grid user. Irrespective, hydrogen grid infrastructure benefitting from subsidies under the National Hydrogen Strategy, or which is part of offshore wind farms that are used for the production of hydrogen under the Offshore Wind Energy Act (Windenergie-auf-See-Gesetz), usually qualify as demand-oriented.

If a hydrogen grid operator opts for regulation, the relevant EnWG provisions apply to all hydrogen grids of the respective grid operator, i.e. the option is operator-specific, not grid-specific and would therefore not allow grid operators to only have part of their grid regulated and the remainder unregulated.

There is no deadline for hydrogen grid operators to decide that their grids shall be regulated. However, once communicated, the decision is irrevocable and the grid operator’s hydrogen grids are subject to regulation for an unlimited period. This approach affords grid users of regulated grids long-term planning for their hydrogen projects.

If grid operators do not choose to have their hydrogen grids regulated, the specific regulatory regime of the EnWG does not apply to them. However, they will still be subject to general principles of law with a similar outcome; for example, grid connection and access claims might be based on the general competition law rule contained in section 19 para. 2 no. 4 of the German Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen).

Separate regulation (vertical unbundling)

The inclusion of hydrogen grids into the regulatory regime for natural gas grids would have allowed an easier repurposing of natural gas pipelines into hydrogen pipelines and secured the financing of hydrogen grid expansion via the grid access fees paid (also) by the natural gas grid users. On the other hand, the competent ministry argued that such financing could constitute a forbidden cross-subsidisation between these sectors that might violate EU law (without explaining this concern in more detail). Therefore, the operation of hydrogen grids and natural gas grids will be vertically unbundled and, hence, include, in particular, separate grid access fee regimes.

Key regulatory provisions

The specific opt-in regulatory regime for hydrogen grids includes the following key provisions:

  • Transparency and non-discrimination: as a general principle, hydrogen grid operators must ensure transparency and non-discriminatory design and operation of their hydrogen grids
  • Informational unbundling: without prejudice to their statutory law disclosure duties, hydrogen grid operators shall ensure that the confidentiality of commercially sensitive information of which they become aware in the course of their business is maintained. In addition, if they disclose information relating to their own activities, such disclosure must be carried out in a non-discriminatory manner; in particular, grid operators shall ensure that commercially sensitive information is kept confidential from related undertakings
  • Accounting unbundling: hydrogen grid operators must, irrespective of their legal form, provide annual financial statements and management reports generally in accordance with the provisions of the German Commercial Code (Handelsgesetzbuch) applicable to corporations. Operators of hydrogen grids carrying out further activities (in particular the operation of natural gas grids) must, in order to avoid discrimination and cross-subsidisation, keep a separate account in their internal accounting for the hydrogen grid operation as if this activity was carried out by a legally independent undertaking
  • Legal unbundling: to achieve the objectives of transparency and non-discrimination, hydrogen grid operators must ensure the independence of grid operations from hydrogen production, storage and supply. Accordingly, they may not own, construct or operate hydrogen production, storage or supply facilities. However, specific ownership unbundling rules do not apply
  • Grid connection and access: hydrogen grid operators must grant third parties connection and access to their grids on reasonable and non-discriminatory terms and conditions where the connection or access is necessary for third parties. Unlike for natural gas and power grids which are subject to regulated grid access but similar to gas storages, such grid access shall be granted by way of negotiated access. Grid operators may only deny grid connection or access if it is not possible or not reasonable for operational, economic or technical reasons. Grid operators must publish the terms and conditions for grid access on their website. This includes, in particular, the grid access fees and the procedural treatment of grid access requests. Upon request, operators are obliged to disclose information on capacities that can be used for the duration of the requested grid access and foreseeable grid congestions to ensure both grid access and the safe and efficient operation of the hydrogen grid. The grid connection and access provisions also apply to hydrogen storage operators who have opted-in for the EnWG regulatory regime. Further details might be regulated in a future ordinance
  • Network development plan: hydrogen grid operators and gas transmission system operators must, by 1 April 2022, present to the BNetzA a report on the current status of the hydrogen grid expansion and for the development of a future hydrogen grid planning until 2035. Hydrogen grid operators who have not opted for regulation under the EnWG must cooperate in the preparation of the report. The report shall include possible criteria for consideration of hydrogen projects as well as requirements for the identification of grid expansion measures, including requirements of a future determination of locations for power-to-gas plants and sources of supply and offtake regions for hydrogen as well as interfaces with the natural gas and power network development plans. The BNetzA will, on the basis of the report, draw up recommendations for a binding hydrogen network development plan.

Outlook: adaption to future EU framework

The recent amendments to the EEG/EEV and EnWG are expected to be an impetus for the further development of green hydrogen production and hydrogen grid projects respectively and, hence, play an important role in attracting investors for the hydrogen market ramp-up and achieving Germany’s ambitious goals in the hydrogen space.

However, both amendments are subject to future regulation at EU level: the EEV explicitly provides that the Federal Government will adapt the green hydrogen requirements to a future EU regulatory framework. Similarly, according to the explanatory memorandum to the EnWG amendments, the new hydrogen grid regulatory regime is considered as only transitional until the creation of a regulatory framework at EU level. In this context, the German Parliament called upon the Federal Government to advocate for changes at EU level that would make joint regulation of hydrogen and natural gas grids possible. It remains to be seen which regulatory approach will prevail in the long run.