The market rollout of hydrogen as the energy source of the future is not only the prominent objective of the National Hydrogen Strategy but at the same time decisively dependent on the corresponding regulatory framework. Following the initial positioning by the German Federal Network Agency (BNetzA) and the German Federal Ministry for Economic Affairs and Energy (BMWi) on the question of regulating the hydrogen infrastructure, the draft bill of the BMWi gave a first insight on the framework for the coming amendment of the German Energy Industry Act (EnWG-E). Meanwhile, the German Government (Bundesregierung) has published the official government draft on 10 February 2021.
The concept of “transitional regulation” in the new EnWG 2021
The government draft’s objective is the fast and secure implementation of various forms of hydrogen-related infrastructure utilization in the existing regulatory framework. In particular, the necessary legal conditions will be created for
- the approach towards existing hydrogen networks (especially direct pipelines or regionally limited industrial networks),
- the possibility of adding hydrogen to existing natural gas pipelines,
- the transformation of existing natural gas pipelines into hydrogen pipelines and
- the future development of stand-alone (pure) hydrogen networks.
As regulatory concept, the legislator aims at a transitional regulation of the hydrogen infrastructure. Background to this is the ongoing legislative process for a uniform regulatory framework for hydrogen networks on EU level, which has been initiated in parallel by the European Hydrogen Strategy of the European Commission. The current amendment to the EnWG is therefore only intended to create a punctual transitional regulation, which can then be further adapted and developed at a later stage by the implementation of EU law. Accordingly, the draft bill in Section 112b EnWG-E already provides for the publication of a “Concept for the further development of the German hydrogen network” by the BMWi by June 2022 and the evaluation of hydrogen network regulation by the BNetzA in 2025.
The key points of the proposed amendment to the EnWG:
Terminology: Hydrogen network, definitions on energy and energy asset
The catalogue of definitions in Section 3 EnWG is to be expanded to include the terms necessary for hydrogen infrastructure:
- The new No. 10b is intended to define the “hydrogen network operator” as being exclusively responsible for the task of transporting hydrogen. The exclusivity criterion ensures that pure hydrogen networks are distinguished from additions in the gas sector.
- According to the new No. 39a, a “hydrogen network“ (as distinguished from existing local industrial networks or direct pipelines) is to be a network for the exclusive hydrogen supply of customers which, in terms of dimensioning, is not designed from the outset only for the supply of certain customers who are already known or can be determined when the network is set up, but which is in principle open for the supply of any customer. This includes the equipment used to transport hydrogen, such as expansion, regulation and metering systems. The independent definition makes it clear, that hydrogen networks are not subject to the general grid connection obligation pursuant to Section 18 EnWG.
- The inclusion of hydrogen in the definition of ”energy“ in No. 14 ensures that hydrogen is recognized as an independent energy carrier alongside electricity and gas within the network-based energy supply. It should be noted that this extension also indirectly affects the term “energy facility” in No. 15, so that hydrogen facilities will be covered by the term ”energy facility“ in the EnWG. At the same time, the practical consequence is the applicability of the safety requirements of Section 49 (1) EnWG to hydrogen pipelines (more on this later).
- “Hydrogen storage facilities” and operators thereof are defined in new No. 39b and 10c.
„Opt-in“ as prerequisite for the regulation of pure hydrogen networks
The centrepiece for the regulation of ”hydrogen networks“ are Sections 28j to 28q EnWG-E (as new chapter 3b). Starting point for the applicability of regulation shall be the opt-in provision of Section 28j (1) EnWG-E. According to this, the operators of hydrogen networks can declare in writing to the BNetzA that their hydrogen networks are to be subject to regulation pursuant to Sections 28j et seq. EnWG-E. Hydrogen network operators are thus in principle free to decide whether they want to be subject to regulation under the EnWG at all. However, the voluntary decision to opt in is linked to the following legal consequences:
- If hydrogen network operators carry out other activities besides network operation, they must ensure separate accounting and reporting to avoid cross-subsidization and discrimination between business areas (cf. Section 28k (2) EnWG-E). The prohibition of cross-subsidization laid down in European Union law also precludes financing of the hydrogen networks via the network charges in the natural gas sector.
- In order to ensure the separation of regulated network operation from competitive activities such as hydrogen generation, storage and distribution, unbundling requirements are also provided for in line with Sections 6 et seq. EnWG (cf. Section 28m EnWG-E). Thus, hydrogen network operators are not permitted to hold ownership of hydrogen production facilities (e.g. an electrolyser for power-to-gas applications). The disclosure of sensitive information to affiliated companies is also prohibited (informational unbundling).
- Connection to the hydrogen network is to be granted by way of negotiated network access with its typical transparency and publication obligations required by the EnWG. In principle, however, hydrogen network operators must grant third parties the necessary network connection and access on reasonable and non-discriminatory terms; the applicable terms and conditions for network access are to be published on the Internet (cf. Section 28n EnWG-E).
- The conditions and charges for network access are largely based on Section 21 EnWG. By contrast, incentive regulation pursuant to Section 21a EnWG and approval of network charges pursuant to Section 23a EnWG shall not (yet) apply in the market rollout phase (cf. Section 28o EnWG-E). However, the formation of charges and price structure oriented to the costs of network operation are subject to the general non-discrimination obligation.
- Prior to an effective opt-in notification pursuant to Section 28j (1) EnWG-E or a conversion of a natural gas infrastructure, the BNetzA must carry out an assessment of the adequacy of demand (cf. Section 28p EnWG-E). Provided that a public subsidy notice has been issued within the NWS, a statutory presumption applies to the infrastructure’s adequacy to meet demand.
- Finally, hydrogen network operators must comply with certain reporting obligations by April 1, 2022, to enable the start of future network development planning (NEP) for hydrogen (cf. Section 28q EnWG-E).
In view of these legal consequences, it is questionable whether operators of private (pure) hydrogen networks such as Linde or Air Liquide will opt for a regulation according to the EnWG. The advantage of regulation is a secured return on investment and the possibility of including all costs in the network charges. This can be used to finance the extension of hydrogen networks. Without opt-in, these hydrogen networks are not subject to regulation, but only to general antitrust law and access claims based on Section 19 Act against Restraints of Competition (GWB).
Addition of hydrogen to the natural gas network remains unaffected
The feed-in or addition of hydrogen to the natural gas network remains unaffected by the regulatory requirements of Sections 28j et seq. EnWG-E. The amended EnWG will not bring any innovations in this area. The existing legal framework governs such additions (for example, hydrogen produced by water electrolysis is subject to the gas definition in Section 3 No. 19a EnWG). With regard to the addition quotas and percentages, the current safety requirements in the EnWG must be observed (more on this later).
Conversion of natural gas pipelines to hydrogen pipelines
Another focus of the amendment are the newly inserted Sections 113a to 113d EnWG-E, which deal in particular with the conversion of existing natural gas infrastructure into hydrogen pipelines. The legislators’ objective is to enable the ”economically efficient use“ of existing natural gas infrastructure for the purpose of hydrogen transport. Here, the legislator has in mind the L-gas network infrastructure in particular. According to the legislator’s vision, the path to an independent hydrogen infrastructure will initially lead via the conversion of existing natural gas infrastructures rather than the cost-intensive construction of new hydrogen-only pipelines.
In the case of the conversion of a gas network, administrative authorisations for the construction, modification and operation of a gas supply pipeline for natural gas should also be valid as approvals for the transport of hydrogen (c.f. Section 113b EnWG-E). At the same time, it is stated that the mere change of the medium from gas to hydrogen is exempted from the environmental impact assessment. Existing emission control permits for compressor stations are to remain valid. Prior to removal from the natural gas network, it must be ensured that the remaining natural gas network can meet the capacity requirements (cf. Section 113c EnWG-E). To fulfill this requirement, the network development plan for gas may include expansion measures on a minor scale.
Dealing with hydrogen in existing concession agreements
For existing permit agreements and limited personal easements, Section 113a (1) EnWG-E contains the clarifying statutory interpretation rule that they also include the construction and operation of pipelines for the transport of hydrogen. This eliminates any ambiguities regarding the continued validity of existing property rights and saves the unnecessary expense of renegotiating contracts.
In the event of the conversion of gas pipelines for the transport of hydrogen, the existing easement and usage agreements shall continue to apply for the agreed term in accordance with Section 113a (2) EnWG-E. If contracting is mandatory pursuant to Section 46 (1) 1 EnWG, the Concession Levy Ordinance (KAV) shall apply subject to the condition that the maximum amounts for gas shall apply accordingly. If the requirements of Section 46 (1) 1 EnWG are not met, the municipalities shall make the transport routes available on the basis of concession agreements, which may not be worse than existing usage agreements.
Compliance with the safety requirements of the EnWG
A safe operation of the hydrogen network infrastructure in accordance with the technological state of the art is also essential in the market rollout phase. Section 113d EnWG-E takes this consideration into account. First, it declares the Ordinance on High-Pressure Gas Pipelines (GasHDrLtgV) to be applicable accordingly for hydrogen pipelines with an operating pressure of more than 16 bar. Furthermore,Section 49 (1) and (2) EnWG is to be applicable mutatis mutandis until independent rules are issued for hydrogen systems. The state of the art is deemed to be complied with if the standards and regulations of the German Technical and Scientific Association for Gas and Water (DVGW) are met. For addition, this means that a hydrogen content in the single-digit percentage range in natural gas is often possible, provided this does not cause problems for the connected end customers. The expansion to higher hydrogen contents (up to 20 % and even above) depends on the currently ongoing development of corresponding regulations by the DVGW.
First assessment and outlook
The government draft is putting the BMWi’s cornerstones and the BNetzA’s recommendations into law. The chosen concept of “transitional regulation” interprets the market rollout as a dynamic evolution process and refrains from “imposing” a coercive regulatory regime on the market participants. The arrogation of knowledge, a danger inherent in any regulation, is thus circumvented. The opt-in regulation creates a gentle and initially voluntary entry into a hydrogen infrastructure regulation independent of the gas sector. Demands to the contrary for cross-financing via the network tariffs for gas and inclusion in the NEP for natural gas were deliberately not heard.
At the same time, the EnWG remains open to the development of the EU regulations that are currently underway and the common “European hydrogen market“. The upcoming amendment to the EnWG thus creates legal certainty for the introductory phase of the regulation of hydrogen networks in the next few years. The long-term perspective, on the other hand, remains unclear. Particularly with regard to the question of refinancing, it remains to be seen in practice whether the financial incentives – possibly flanked by government funding within the NWS – are sufficient to build a future-proof hydrogen infrastructure. However, the market rollout and the development of the associated infrastructure have only just begun. Even according to the estimates of the keenest market players, supra-regional hydrogen networks or even European hydrogen “backbones” are not to be expected before the years 2030-2035.
(26 January 2021 – Updated on 10 February 2021)