Effective Additionality Rules Can Optimize Electrolyzer and Renewable Energy Deployments

A long period of uncertainty around the criteria used to certify green hydrogen in the European Union (EU) is approaching a resolution. A draft delegated regulation released on May 20 sets out the European Commission’s approach to classifying Renewable Fuels of Non-Biological Origin, the EU’s catchall term for green hydrogen and power-to-X fuels used in the transportation sector. 

Up until now, the main sticking point has been the need for rules to ensure the additionality of renewable electricity used to produce green hydrogen. Without a guarantee that electrolyzer deployments are matched by proportional increases in renewable energy output, concerns have persisted that increasing green hydrogen production will divert renewable electricity away from power sector decarbonization, prolonging the lifetime of fossil fuel power plants.

A further complication has been the rules on temporal correlation, which relate to the need for matching periods of green hydrogen production with periods of equivalent renewable energy output. While hydrogen stakeholders have generally advocated for temporal correlation to be ascertained over the course of a month, industry sceptics have pushed for periods of an hour or even less.

What Do the Draft Rules Say?

Under the current proposals, there are a variety of ways in which electrolyzer operators can prove that hydrogen is renewably sourced:

• Direct connection between the electrolyzer and a renewable energy generator: Under this model, the operator would need to prove that electricity is sourced from the renewable energy asset and that both resources began operating within a 3-year window.
• Electricity sourced from the grid with a power purchase agreement (PPA): For grid-connected electrolyzers, additionality can be proven if a PPA is obtained from a renewable energy generator that does not receive financial support. Temporal correlation will initially need to be established on a monthly basis, with this set to reduce to an hourly basis by 2027. 
• Electricity sourced from the grid without a PPA: If no PPA is employed, grid-connected electrolyzers will still be considered eligible to produce green hydrogen in power grids with renewable energy shares of more than 90%, providing that the proportion of hours over which they operate does not exceed the proportion of renewable electricity in the relevant bidding area. 

Other proposed rules are designed to enable the participation of colocated battery storage assets, prevent hydrogen production from contributing to grid congestion, and incentivize green hydrogen production from grid-connected electrolyzers during periods of excess regional supply. It is likely that the document will be modified prior to adoption in response to feedback from industry and other stakeholders. 

The Benefits of Electrolyzer Deployments Are Location Specific

The additionality debate is motivated by a credible set of concerns. If hydrogen production occurs without consideration for its possible effects on the electricity system, there is a potential for detrimental impacts on emissions trajectories so long as fossil generation remains a significant component of the electricity mix.

However, under the right circumstances, hydrogen can bring benefits to the renewable energy sector that are sometimes underappreciated. The need for grid integration is one of the leading barriers to renewable energy project development. Strategically sited electrolyzers can provide offtake for renewable energy projects ahead of expansions in grid infrastructure, helping to accelerate deployments. Likewise, green hydrogen production can potentially be used to alleviate price cannibalization, which occurs in electricity grids already saturated with renewable energy resources. These benefits will be harder to realize if short-term impediments stand in the way of early green hydrogen projects.

In reality, the risks and benefits of increasing electrolyzer deployments are highly location specific. Effective additionality rules can incentivize deployments in locations where the highest proportion of benefits can be realized while reducing regulatory complexity as much as possible. The European Commission will have to maintain a balance between these two objectives in its preparation of the final delegated regulation.