Workshop

A Market Framework for Hydrogen

18 June 2021

A Market Framework for Hydrogen | FSR Regulatory Policy Workshop Series 2020-2021

The EU Hydrogen Strategy published by the Commission in July 2020 envisions the establishment of “a liquid and well-functioning hydrogen market”, in which “commodity-based hydrogen trading would facilitate entry of new producers and would be beneficial for deeper integration with other energy carriers”. Such a market “would create viable price signals for investments and operational decisions”.

At the same time, the Strategy set the priority of developing renewable hydrogen, produced using mainly wind and solar energy, stating that “renewable hydrogen is the most compatible option with the EU’s climate neutrality and zero pollution goal in the long term and the most coherent with an integrated energy system”. However, at least in the short and medium term, renewable (green) hydrogen will not be the only hydrogen produced and consumed in Europe.

Different shades of hydrogen contribute differently to the achievement of EU energy and climate objectives. Green hydrogen contributes to the achievement of the renewable energy penetration target. Green, blue and turquoise hydrogen contribute to the decarbonisation target, albeit to different extents, since blue and turquoise hydrogen are not totally carbon free. The fact that different shades of hydrogen contribute differently to the energy and climate objectives, while being traded, as a commodity, on the same market, requires that other mechanisms be put in place to reflect their different policy values. The performance of the different hydrogen shades vis-à-vis the decarbonisation target can be reflected in their production process requiring different quantities of EU Emission Allowances (EUAs) to cover their greenhouse gas (GHG) emissions. In particular, the production of green hydrogen would not require any EUA, while the production of blue or turquoise hydrogen would only require a fraction of the EUAs needed to cover GHG emissions from the production of grey hydrogen.

Instead, at present, there is not an established EU-wide market for the renewable value of green hydrogen. As mentioned above, green hydrogen would have a marginal advantage with respect to blue and turquoise hydrogen in terms of EUAs, but this advantage might not reflect the greater value of green hydrogen as the only one, among all the hydrogen shades, contributing to the renewable energy penetration target. An additional instrument is therefore needed and this could be provided by a system of guarantees of renewable origin (GROs). GROs would be issued against the production of green hydrogen and GRO demand will be created by the need to achieve the renewable energy penetration target (either by a decentralised quota obligations or a centralised auction).
Therefore, the future market framework for hydrogen could comprise three markets:

The hydrogen (commodity) market;
The EU Emissions Trading System;
A GRO system and market, for recognising and trading the renewable value of green hydrogen.

A GRO system could however be extended to cover other energy vectors and to assist, inter alia, in the implementation of the “additionality” condition for the production of green hydrogen. This would require GROs being issued also vis-à-vis the production of electricity from renewable energy sources. And in fact the GRO system could be extended to all three energy vectors – electricity, gas and hydrogen – thus providing any desired degree of flexibility on the way in which the renewable energy penetration target could be achieved.
Finally, in the context of the coupling of the electricity, gas and hydrogen sectors, and the resulting requirement for a strong coordination of the planning and operation of the respective networks, the question should arise as to the best structure for cooperation of transmission system operators, at national and EU level.
The Workshop will aim at exploring the market framework for hydrogen and all these issues. It will be structured in three sessions:

Session I will focus on the best market framework for hydrogen, in particular how best to recognise the decarbonisation value of green, blue and turquoise hydrogen and the value of green hydrogen in pursuing the renewable energy penetration target. The potential role of a GRO system in this context will also be assessed;
Session II will consider whether GROs could play a role in the implementation of the additionality condition and, more generally, in providing an accounting framework for the achievement of the renewable energy penetration target, allowing for any desired degree of flexibility on the resulting vector mix;
Session III will assess how best to ensure the needed coordination of network planning and operation across the electricity, gas and hydrogen sectors, at national and EU level.

Scientific Directors

Alberto Pototschnig | Florence School of Regulation/Robert Schuman Centre for Advanced Studies/European University Institute
Ilaria Conti | Florence School of Regulation/Robert Schuman Centre for Advanced Studies/European University Institute