The EU Hydrogen and Decarbonised Gas Market Package: Revising the governance and creating a hydrogen framework
Building on the EU Hydrogen Strategy from July 2020, the draft Hydrogen and Decarbonised Gas Market package (draft package) was issued by the European Commission in mid-December 2021. Proposals for modifications into the gas regime – the Gas Directive (revised GD) and the Gas Regulation (revised GR) are put forward – and set the ground towards the development of hydrogen markets; these come from the need to adapt the already in-force gas rules, dating back to 2009, and the Third Energy Package, to the energy transition and the Union’s climate ambitions. Put it differently, the European Commission acknowledges the importance of promoting the production and use of renewable and low-carbon gases, including hydrogen, in the energy transition. This draft package envisages hydrogen and other low-carbon gases as complements to electrification in areas where the latter is too difficult or too costly, such as energy-intensive industry or heavy-duty transport. Thus, jointly with an expansion of renewable energy production, low-carbon gases (bio-methane and hydrogen) are to contribute to realising the ambitions outlined in the ‘Fit for 55’ proposal.
In this contribution, we present some broad strokes of the proposed draft package, dwelling on the objectives pursued and the regulatory instruments to enable their achievement. These general issues are accompanied by an analysis of infrastructure measures, particularly related to the unbundling of hydrogen transport.
Two goals are pursued with the draft package: i) to set the legislative base for the decarbonisation of gas markets, and ii) to establish a hydrogen market. Adopting a comprehensive hydrogen governance would be ground-breaking, putting Europe at the forefront in terms of regulatory innovation in an area that is expected to be a vital component of the energy transition in the future. The cornerstone of this is the creation of regulatory incentives towards a fit-for-purpose infrastructure where hydrogen can be cost-effectively transported from production to consumption.
The draft package seeks to develop competitive hydrogen markets based on models such as those applied to natural gas and electricity in the past. The draft package creates a system of exceptions to achieve this aim, so that investment may be attracted to develop cost-effective and cross-border infrastructures for hydrogen and low-emission gases, particularly from the private sector. Additionally, it sets incentives for the repurposing of natural gas infrastructure to be utilized for hydrogen networks.
Regarding gas decarbonization, the draft package follows the EU climate and energy transition trends part of the Green Deal and, more recently, in the proposals of Fit for 55. With the recast of the Gas Directive and Gas Regulation, the ambition is to ensure that EU gas sector regulation is updated and that it enables the sector to contribute to a cost-effective energy transition, a greenhouse gases emissions reduction by at least 55% by 2030 and climate-neutrality by 2050, in alignment with climate objectives. The discussion and revision of gas regulation, particularly for low-carbon emission gases and hydrogen, also fits well with recent investment policy initiatives, such as the taxonomy classification, and the proposal to include certain gas activities within the scope of the Taxonomy framework as a “means to facilitate the transition towards a predominantly renewable-based future”.
Furthermore, the draft package has been envisaged to be flexible and progressive, catering to an immature hydrogen value chain. It comprises a phased approach for the introduction of market and network regulation, whilst establishing some clear main regulatory principles to give certainty to the investors and avoid high costs for ex-post regulatory interventions. It includes substantial changes to the revised GD and revised GR that will be integrated in a two-stage approach: before and after 2030.
2030 will split the application of rules related to hydrogen infrastructures, particularly: third-party access, unbundling, regulated tariffs and financial rules for cross-border hydrogen infrastructure. At first, the rules in these areas will be marked by regulatory flexibility right up to 2030 when the Member States may choose to divert from and not apply the standard rules (i.e., Article 31(4) revised GD states that negotiated TPA for hydrogen transport networks is possible up to 2030). As of 1 January 2031, a clear regulatory perspective marked by a strict regulatory regime will apply (i.e., regulated TPA is mandatory – Article 31 revised GD; no hydrogen tariffs at IPs of hydrogen networks between Member States – Article 6 revised GR).
Key areas of revision of the rules
The draft package contains proposed rules required for supporting the creation of optimal and dedicated infrastructure, as well as efficient markets. Of central importance are:
- Adaptation of the Gas Directive and Gas Regulation to accommodate renewable and low-carbon gases (including hydrogen and biomethane) and to enable the repurposing of the existing gas infrastructure for their transport.
- The design of a hydrogen and market framework (third party access, tariffs, unbundling, ban of long-term gas supply contracts after 2049).
- The creation of the European Network of Network Operators for Hydrogen (ENNOH) to promote a dedicated hydrogen infrastructure, cross-border coordination, interconnector network construction, and elaborate specific technical rules.
- Rules on cross-border cooperation (5% cap for hydrogen blend at cross-border interconnection points from 1st October 2025).
- Infrastructure assessments (Ten Year Network Development Plans, National Development Plans, National Energy and Climate Plans).
- Consumer protection rules modelled on the ones applicable to electricity markets, facilitating supplier switching, price comparisons, and getting accurate data on consumption.
- A certification system for renewable and low-carbon gases in line with the rules of the Renewable Energy Directive applicable to renewable gases.
- Measures connected to a revision of the Gas Regulation (Article 67) on security of supply, suggested now to cover renewable and low-carbon gases, as well as introducing additional provisions on critical areas, namely cybersecurity and supply disruptions.
- Lastly, the rules also seek to develop a strategic approach to gas storage by incorporating storage considerations into energy risk assessments.
Access to infrastructure concerns & unbundling suggestions
Two issues that have seemed to trigger debates amongst the entire gas value chain – policymakers, regulators, industry end-users, as well as associations for low carbon and renewable gases – are related to infrastructure access: unbundling and tariffs. This is due to the complexity of the rules and the long time it took for the electricity and gas markets to be opened to competition. In the case of hydrogen, not only is the technology still developing but competition is desired from the get-go.
According to the draft package, hydrogen pipeline networks will constitute a vital transport vehicle for hydrogen, both onshore and offshore. However, as energy transmission systems, they are capital-intensive networks with characteristics akin to natural monopolies. EU gas and electricity network regulatory experience has shown the importance of ensuring open and non-discriminatory access to pipeline networks to guarantee competition. The regulatory experience also indicates the need to insert unbundling measures even in nascent industries and infrastructural networks, separating the competitive production and supply activities from the monopolistic ones, as in the case of transmission.
The proposal acknowledges the complexity between promoting investment and creating competitive markets. Seeking a middle ground, the draft package adopts a two-tier stage process to the liberalisation of infrastructure, in particular related to the unbundling, third party access, and tariff rules.
Chapter IV of the revised GD deals with the rules related to third-party access to the natural gas and hydrogen infrastructures. Article 31 is the key to third-party access to hydrogen networks. In principle, Member States are to ensure that access is granted based on an objective and non-discriminatory third-party access tariff system, as is the case with electricity and gas at the moment. However, an exception from this tariff-based third-party access is possible. Up to 31 December 2030, Member States may allow for the implementation of a system of negotiated third party access to hydrogen networks. The proposal includes only that hydrogen network users can negotiate access and that it ought to be conducted in good faith.
Unbundling, a critical contentious issue, is regulated for hydrogen networks in Chapter IX of the revised GD, which states that until 31 December 2030, all vertical unbundling (separation of hydrogen production and supply activities from transport activities) models are allowed for hydrogen operators ownership unbundling – OU, independent transmission operator – ITO or independent system operator – ISO).
In the regulation of network industries – traditionally, either electricity or gas, and, in the future, hydrogen – unbundling refers to the separation of the competitive activities, such as production and supply of energy, from transmission and distribution, which are regulated monopolies in the EU. In plain language, the introduction of unbundling implies that an actor performing a competitive activity is constrained and eventually prevented from also performing a monopolistic activity. 
Specifically, Article 62 revised GD – Unbundling of hydrogen network operators – states that Member States shall ensure that from [entry of transposition period + 1 year] hydrogen network operators are unbundled in accordance with the rules for natural gas transmission system operators. This, in turn, means that ownership unbundling is the default rule for hydrogen network operators.
Article 62(4) in the revised GD states that the Independent Transmission Operator (ITO) unbundling model is only allowed until 31 Dec 2030. Up to this date, Member States may designate an integrated hydrogen network operator unbundled according to the rules on independent transmission operators for natural gas.
At the same time, the draft package proposes the horizontal unbundling models: legal and accounting, applicable when a natural gas operator becomes a hydrogen operator.
- Legal separation – Article 63 of the revised GD Horizontal unbundling of hydrogen network operators: Where a hydrogen network operator is part of an undertaking active in transmission or distribution of natural gas or electricity, it shall be independent at least in terms of its legal form.
- Accounting unbundling – Article 64 of the revised GD Unbundling of accounts for hydrogen system operators: Member States shall ensure that the accounts of hydrogen system operators are kept in accordance with Article 69 of the revised GD. According to these accounting unbundling rules, gas system operators that envisage to also become hydrogen system operators shall keep separate accounting between the gas and hydrogen infrastructures and conduct activities to ensure transparency and efficient tariff-setting (Article 63 of the revised GD would prevent gas network operators to operate hydrogen networks already). This separation of accounts must be done as if they would be required to do if the activities in question were carried out by separate undertakings, with a view to avoiding discrimination, cross-subsidisation, and distortion of competition (Article 69(3) revised GD). This unbundling is then reflected in the separation of the regulated assets bases of the hydrogen and natural gas operator, as per Article 4 of the revised GR.
After 2030, the draft package proposes the OU model as a rule with the possibility to apply for the Independent System Operator (ISO) model as an exception, where on the date of entry into force of the draft package, the hydrogen network belonged to a vertically integrated undertaking (Article 62(3) revised GD). In addition, the ITO model will not be an option for hydrogen operators any longer. Preference for the OU model as a default solution mirrors the electricity developments since 2009 for new infrastructure, for example, which sets the OU as a default rule.
The reasoning behind the exclusion of the ITO model from 2030 onwards appears to be based on the desire of the legislators to create a “fresh start”, something completely new to be applicable to a developing hydrogen market. After all, the goal of the Commission is to make Europe the first region in the world that has issued a comprehensive and functioning regulatory framework for a liquid and competitive hydrogen market. In addition, according to the Commission, another important reason for giving up the ITO model would be the diminished need for extensive regulatory oversight if a different unbundling model is applied when compared to that which the NRAs currently apply to the ITO models within the EU. May this ambition go too far, though?
Exceptions for privately owned infrastructures & geographically confined networks
During this transitional period until the end of 2030, the draft package – Article 47 revised GD – also proposes that existing private hydrogen networks are temporarily exempted from unbundling and access rules, which may offer sufficient flexibility for mobilising investments. This means that Member States may decide to grant a derogation from the requirements of regulated third party access for hydrogen networks and regulated tariffs, ownership unbundling, legal and accounting unbundling, as well as participation to the ENNOH, to hydrogen networks that belonged to a vertically integrated undertaking on the date of entry into force of the revised GR and revised GD.
The derogation shall be limited in time and shall expire at the latest on 31 December 2030 or before that if (i) the hydrogen network benefitting from the derogation is connected to another hydrogen network or (ii) where the hydrogen network benefitting from the derogation, or its capacity is expanded or (iii) where the vertically integrated undertaking submits a request to the regulatory authority to end the derogation, and such request is approved by the regulatory authority.
Furthermore, Article 48 of the revised GD proposes derogations from unbundling for geographically confined networks with one entry point and a limited number of exit points towards industrial or commercial consumers. In contrast, the rules on TPA will still apply. The derogations shall apply at least until 31 December 2030. As of 1 January 2031, the derogation shall expire when one of the conditions below is fulfilled: (a) where a competing renewable hydrogen producer wants to gain access to the network or (b) where the exempted hydrogen network becomes connected to another hydrogen network.
Transposing the regulatory models from the gas and electricity markets to hydrogen without necessarily allowing for further flexibility after 2030 is stirring debates amongst the stakeholders. On the one hand, it is claimed that a clear regulatory environment may nurture extended investments and can result in lower regulatory oversight costs by relieving the burden of the NRAs (in the case of ITO, for instance).
However, it is worth recalling that these traditional regulatory models have been applied gradually to the electricity and gas markets through three regulatory packages (issued 1998, 2003, and 2009) and when these markets were already mature enough and sufficient interconnection at the EU level existed. The development of the regulatory framework was thus done in an evolutionary, progressive, and flexible way.
On the other hand, other stakeholders claim that the hydrogen market is at an embryonic stage, and the rules need to be adapted in parallel with its development. This position has been expressed by the regulators – the Agency for the Cooperation of Energy Regulators (ACER) and the Council of European Energy Regulators (CEER). These entities underline the need to safeguard a market-based approach for production and supply activities and are of the opinion that OU shall be upheld as the target model for future dedicated hydrogen transmission infrastructure operators, with accounting separation as a minimum and working gradually towards OU. ACER sees more benefits in a gradual approach rather than a cut-off date in 2030 for flexibility.
Furthermore, ACER notes that the type of transitional unbundling should depend on the level of maturity of the hydrogen sector (with less stringent unbundling rules for small hydrogen network operators under a certain threshold), independently of types of unbundling used in the gas sector. What is more, during the transitional period, temporary exemptions should only be used under stringent conditions to be assessed by the national regulatory authority (NRA), such as temporary exemptions for OU gas TSOs regarding hydrogen production (for both blending and hydrogen-only networks), allowing the holding company of an OU gas TSO to control a hydrogen production company for a limited period only, under specific conditions to be decided by NRAs taking into account the structure of the market and the willingness of the market to invest.
In addition, given that national market conditions may evolve differently between Member States as the development of a hydrogen sector may occur at different speeds, Member States could further specify regulation according to national circumstances, based on the principle of subsidiarity. At the same time, the various speeds for developing the emerging hydrogen market throughout the EU (the countries in the North West are likely to make progress faster towards competitive hydrogen markets, in comparison with Eastern European Member States, for instance) is also the reason why ACER is questioning whether 2030 should be the “Big Bang” year when this shift will be made equally in all Member States, and whether the hydrogen market will be mature enough for the imposition of strict unbundling requirements after 2030.
Who will bear the costs for the hydrogen infrastructure investments?
One important question that pops up when discussing building or creating infrastructure for supporting the hydrogen market is: who should bear the risks related to its commissioning and demand not meeting expectations at the time of the investment decision?
Article 4 of the revised GR allows for the cross-subsidization of hydrogen networks by natural gas network revenues if done under certain conditions and in a transparent way. Cross-subsidisation is allowed under three conditions: i) the cost can only be levied on domestic users; ii) limited in time; iii) and subject to regulatory approval. This seems natural, as the hydrogen infrastructure is not there yet, and for a market to be liquid and mature enough, the infrastructure is the foundational pillar.
In connection to these risks, it can be added that ACER and CEER consider that cross-subsidies between users of different networks (also referred to as cost mutualisation) should be avoided. Further, cross-subsidisation should be prevented even more when other types of users within the same sector (in this case, gas, and hydrogen), or between different sectors are involved. They believe that the costs for developing hydrogen infrastructure should only be borne by their respective users; however, they agree that to foster the emergence of a decarbonised energy system, some form of support might be necessary for the early phase of its development. From the regulators’ perspective, an option to address the high initial unit costs would be to introduce inter-temporal cross-subsidies, i.e., designing mechanisms whereby a share of cost recovery would be shifted later and borne by later users of the hydrogen network.
If, nevertheless, policy makers opt for cross-subsidies to promote the development and deployment of hydrogen, ACER and CEER consider that an appropriate regulatory framework for temporary derogations to the principle of avoiding cross-subsidies should be developed at the outset and enforced. While ACER agrees with the conditions imposed in the draft package, they suggest that an integrated system perspective is needed to find the optimal design for support schemes, stressing that transparency on the economic and policy rationale, as well as on the amount of cross-subsidisation, is key.
The draft package is an important step ahead to prepare the energy transition, promote the incorporation of low-carbon and renewable gases and to create the first hydrogen market. The set of rules proposed recognises the need for flexibility and adaptability of regulatory principles related to the development of transport networks. Here unbundling, third-party access and tariffs are the central elements and areas for discussion and negotiation. A gradual and flexible regulatory approach could facilitate the development of hydrogen infrastructure initiatives in specific circumstances and enable the mobilisation of financial and technical resources, particularly in the first phase of development of the hydrogen market. Too much flexibility and cross-subsidisation may lead to a lack of sufficient competition, cost-allocation, and efficiency issues. Too strict unbundling rules, before, but especially after 2030, may hinder investments, impacting property rights and economic incentives. The debate on these topics has just begun.
The views and opinions expressed in this article are those of the authors’ and do not and shall not be construed in any way as reflecting the official policy or position of any other agency, organization, employer, or company. The authors would like to thank Leigh Hancher and Carsten Zatschler for comments on a previous draft, as well as Tollef Heggen for research assistance. The errors and omissions are of the authors alone.
 Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (OJ L 328, 21.12.2018, p. 82).
 Unbundling in the European electricity and gas sectors – FSR (link). See also for a discussion of unbundling rules and competition issues: Transmission Networks in Electricity Competition: Third-Party Access and Unbundling – a Transatlantic Perspective (Acceso a las Redes de Transmisión de Electricidad y Separación Efectiva: Una Perspectiva Transatlántica). Herrera Anchustegui, Ignacio; in Ruiz Peris, Juan Ignacio, Cerdá Martínez-Pujalte, Carmen (ed) “Competencia en mercados con recursos esenciales compartidos: telecomunicaciones y energía” (Thomson-Aranzadi, 2019), available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3159458.
 European Commission, Interpretative Note on Directive 2009/72/EC and Directive 2009/73/EC: The Unbundling Regime, p. 5.