EU introduces new Hydrogen and Decarbonized Gas Market Package

On August 4th, 2024, Directive (EU) 2024/1788 (the “Directive”)[1] and Regulation (EU) 2024/1789 (the “Regulation”)[2] (together, the “Fourth Gas Package” or the “Package”) entered into force, representing a new step towards tackling climate change and decarbonization in the Union.[3]

Member States will have until August 5, 2026 to transpose the Directive into national law.

The Fourth Gas Package – proposed in December 2021 by the European Commission – updates and revises the Gas Directive 2009/73/EC[4] and the Gas Regulation (EC) No 715/2009,[5] to encourage the use of low-carbon and renewables gases.  In particular, the Regulation aims to improve the efficiency of the hydrogen and low-carbon gas markets, with incentives for stakeholders to shift away from fossil fuels.[6]

The main changes brought by the Fourth Gas Package consist of:

• Vertical unbundling: ensuring hydrogen network operators will be legally and functionally separate from energy production and supply activities, following an ownership unbundling regime similar to natural gas transmission;
• Infrastructure development: creating an independent body tasked with coordinating the EU hydrogen infrastructure (ENNOH) and the compilation of a Union-wide, ten-year network development plan (TYNDP) for hydrogen;
• Modification of natural gas and hydrogen infrastructure to build integrated networks at Union level: imposing obligations for Member States for integrated gas and hydrogen network planning and development of decommissioning plans;
• Certification and blending: introduction of a Union-wide certification system for low-carbon hydrogen and fuels, and allowance for blending up to 2% hydrogen into natural gas systems;
• Phasing out of long-term contracts for fossil gas: which shall be prohibited by 2049, with a view to promoting the use of renewable and low-carbon gases into the market; and
• Security of supply and consumer protection: extension of security of supply rules to renewable and low-carbon gases, with cyber-security measures for strategic sector and enhanced protection for vulnerable customers, modeled on existing directives.

Unbundling in the Hydrogen Market

First, the Fourth Gas Package regulates the horizontal unbundling of hydrogen transmission network operators (“HTNOs”) from other activities, including transmission or distribution of natural gas or electricity.[7]  HTNOs can be part of a group active in these sectors, provided that (i) they are independent legal entities from those active in transmission or distribution of natural gas or electricity or (ii) a derogation is granted by the Member State in which the HTNO operates, following a positive assessment[8] from its regulatory authority.[9]  This exemption must be reviewed every seven years or upon request by the Commission.

Second, the new rules establish an identical default vertical ownership unbundling (“OU”) regime for hydrogen transmissions as for natural gas transmission.[10]  HTNOs must be legally and functionally separate from energy production and supply activities, as detailed in last year’s blog article on the matter.[11] 

As an alternative to the default OU mode, vertically integrated undertakings[12] may opt for a complete separation between ownership and management of the hydrogen network, by designating an Independent System Operator (“ISO”).[13]  Its designation must follow a proposal from the HTNO and be approved by the EU Commission.  Unbundled HTNOs and natural gas transmission system operators (“NGTSO”) can act as ISO if they follow horizontal unbundling rules.

When the hydrogen transmission network belongs to a NGTSO or a vertically integrated undertaking active in hydrogen, the Directive permits Member States to rely on the Independent Transmission Operator (“ITO”) model.[14]  In this case, a Member State designates an independent entity as an integrated HTNO.  It legally and organizationally belongs to the NGTSO or to the vertically integrated undertaking.  However, the independent operator must not be involved in natural gas or hydrogen supply and production activities: there must be no influence over their controls, shareholdings, or financial benefits.  This is a partially independent model.

In a scenario where an HTNO and an undertaking active in natural gas or electricity have been granted a derogation from horizontal unbundling rules, this HTNO may itself act as the ITO, without the need to designate a different independent entity.

Lastly, an undertaking including both an unbundled TSO and an integrated HTNO can be active in the production or supply of hydrogen, but shall follow the ITO rules previously detailed.  By contrast, the undertaking cannot be involved in production or supply in natural gas or electricity.  

The Directive seems to take into account that the hydrogen sector is not monopolised (yet).  Vertical unbundling rules will allow the development of the hydrogen sector while promoting competition by preventing abuse of future dominant positions.  This seems to follow the previous objectives of the EU Commission to offer stable prices to consumers in the long run, rather than low prices for a short period of time followed by inflation.  On the other hand, allowing horizontal cooperation is welcome to allow collaboration between different energy sectors that may lead to further investments and developments in the hydrogen sector to promote sustainability.

Hydrogen and Natural Gas Infrastructure Development

(a) ENNOH

The Package participates in the development of an EU hydrogen infrastructure,[15] for a move towards a liquid market with commodity-based hydrogen trading.  It foresees the creation of a new independent body to coordinate the planning, development, and operation of the EU hydrogen infrastructure: the European Network of Network Operators for Hydrogen (“ENNOH”).[16]  It will develop recommendations for HTNOs on their technical cooperation with hydrogen distribution network operators, as well as existing TSOs and distribution system operators (“DSOs”).[17]  

(b) TYNDPs

Additionally, every two years, ENNOH will adopt and publish a Union-wide, non-binding, ten-year network development plan (“TYNDP”) for hydrogen.[18]  However, during the transitional period ending in 2027, the European Network of Transmission System Operators for Gas (“ENTSOG”) will be responsible for developing the TYNDP for hydrogen, which shall include separate chapters for hydrogen and natural gas.[19]  

TYNDPs will detail the infrastructure to be built, upgraded, or decommissioned, any necessary investments, and relevant timeframes.  This Union-wide plan will be informed by the network development plans of the Member States, which will also be published at least every two years.  Member States shall have one single network development plan for natural gas and one for hydrogen, or, a single combined plan.[20]  There is therefore an onus on all TSOs and HTNOs to submit plans to the relevant regulatory authority on a two year basis.  These measures support the principles of the Commission’s strategy in energy system integration.[21]

(c) Natural Gas infrastructure

The Directive also includes some measures relating to natural gas infrastructure.

First, the Directive allows for the technical modification or upgrade of natural gas infrastructure to enable its use for hydrogen transport.[22] 

Second,  in the event that there is a reduction in demand for natural gas, and thus some natural gas distribution networks need to be decommissioned, the Directive places the responsibility on Member States to ensure that DSOs develop plans for decommissioning these networks.  While the Directive claims that such plans will help effective system integration, it does not provide much concrete guidance on the required contents of the plans, other than providing a list of principles that should be complied with.[23]  For example, the plans should be based off heating and cooling plans in the Energy Efficiency Directive, which must provide strategies for potential energy efficiencies and details of how to finance these projects.[24]  It does require network decommissioning plans to prioritize solutions that do not require new infrastructure investment, and facilitate the participation of various stakeholders by conducting consultation processes.[25]

Echoing similar proposals of both the Renewable Energy Directive III[26] and the EU Energy System Integration Strategy,[27] the Package calls for a system of terminology and certification of low-carbon hydrogen and low-carbon fuels.[28]  This Union-wide certification system will allow Member States to compare low-carbon fuels with other decarbonized alternatives, enabling them to consider them in their energy mix.[29]

Integrated hydrogen and gas networks at a Union level

The Package emphasizes the need for integrated network planning to facilitate energy system integration and harness synergies.[30]  Much of the provisions in the new Regulation mirror those in the trans-European infrastructure Regulation.[31]  For example, common working groups should be set up to publish coordinated infrastructure gap reports and cover the preparation of joint scenarios for electricity, hydrogen, and natural gas.[32]  More specifically, the Directive requires HTNOs to cooperate with electricity TSOs and DSOs to coordinate joint infrastructure requirements, including the location of electrolysers and relevant transmission infrastructure.[33]

HTNOs are responsible for financing cross-border infrastructure. They can include these costs in their tariffs, but they need approval from national regulators. [34] If costs are disproportionately distributed between countries, they can request a cross-border cost-sharing arrangement, justifying the shared benefits. Since there is no tariffs applied at the interconnection points between Member States, starting in 2033, a financial compensation system will be introduced to ensure cross-border infrastructures continue to be funded. The system could require a pool of resources or establish a formula to distribute the costs based on how much each country benefits from the infrastructure. The system will need to be approved by regulatory authorities in the Member States involved, and will not include hydrogen interconnector projects that are already projects of common interest[35] or which do not fall within the objectives of the TYNDPs.

Lastly, further cooperation between system and network operators will be facilitated through a European entity for DSOs.  This is mandatory for DSOs for natural gas but optional for DSOs for hydrogen.[36]  In addition to tasks set out in the Electricity Directive,[37] the EU DSO entity shall develop network codes relating to distribution grids.[38]

The Role of renewable and low-carbon gases and phasing out of long-term contracts for fossil gas

The current legislation for renewable and low-carbon gases has been enhanced by the Package.  Specifically, it aims to facilitate the integration of said gases into the existing gas network.  The Directive notes that in the short- and medium-term, low-carbon fuels, including low-carbon hydrogen, may have a more significant role in the transition to renewable energy than renewable hydrogen.[39]  Whilst renewable hydrogen is more aligned with the Union’s long-term objectives, low-carbon fuels can quickly reduce existing fuel emissions and support the transition of customers in “hard-to decarbonize” sectors.[40]

The Package provides for the treatment of low-carbon gases, promoting their access to the gas wholesale market.  Discounts for such gases will also be applied to tariffs at entry points from production facilities.[41]  

Additionally, the Package contains detailed provisions to facilitate blending of hydrogen with natural gas and renewable gases.  Specifically, it allows the blending of hydrogen into the natural gas system of up to 2% by volume.[42]  The aim is to use existing natural gas networks to transmit hydrogen, whilst permitting other systems of transmission.  Still, the Package states that due to hydrogen’s scarceness, blending should be reserved as a “last-resort solution”.[43]

According to the Directive, long-term contracts for fossil gas must end by the year 2049.[44]  Ending these long-term contracts will create more opportunities for renewable and low-carbon gases to enter and compete in the energy market.[45]

Security of energy supply

The Regulation extends principles of the Security of Supply regulation[46] to renewable and low-carbon gases, whilst introducing provisions for strategic sectors, such as cybersecurity.  Member States must include cybersecurity measures in their “preventive action plans”.[47]  Such measures should include rules on common minimum requirements, monitoring, and crisis management in the gas sector.[48]  These sector-specific rules are already in place for the electricity sub-sector to further bolster cross-border electricity flow.[49]

Some of the most significant security measures relate to certification of storage system operators and minimum storage quantities.  Measures regarding certification of storage system operators are relevant where a national authority considers that a person who directly or indirectly controls natural gas storage could pose a threat to energy security or supply.  In that case, the authority can refuse or accept certification of the operator.  Acceptance may be conditional on certain measures that mitigate risks of negative filling of underground gas storage facilities.  However, the authority must be able to fully ensure the practicability of such conditions, namely through effective monitoring.[50]  If the threat to security cannot be mitigated through those measures – or even through the transfer of the owner’s or operator’s management of the system – then the authority may put harsher rules in place.[51]  It could require interim measures from the owner or operator, or even force them to dispose of their shareholding or rights over the natural gas resource.[52] 

Additionally, the Package introduces important measures regarding storage quantities.  The Regulation provides for contractual limits to regulate the required minimum capacity of natural gas facilities or hydrogen terminals.  It notes that factors such as technical constraints and small storage users’ access to storage services should be kept in mind when setting contractual limits.[53]  Capacity allocation systems will be developed by TSOs.[54]  It also requires TSOs to make public information on these mechanisms user-friendly and available on a regular and rolling basis.[55]

Consumer Protection

Another pillar of the Package is consumer engagement and empowerment.  Many of the consumer rights in the Package are modelled on the Electricity Directive, Consumer Rights Directive,[56] and the unfair terms in consumer contracts Directive.[57]  The Directive outlines the basic contractual rights to be held by consumers, ensuring that all final customers are entitled to have natural gas and hydrogen provided by a supplier, regardless of the Member State in which the supplier is registered.[58]

Energy suppliers must provide consumers with transparent information on applicable price, tariffs and standard terms and conditions relating to access to and use of services.[59]  Customers will be also able to enjoy a wide choice of payment methods.  Finally, those affected by energy poverty and vulnerable customers may be afforded more favorable treatment.[60]

Conclusion

Overall, the Fourth Gas Package seems ambitious in its objectives.  It builds on other legislation promoting decarbonization of the Union, particularly via the large-scale use of renewable hydrogen, and aims for a carbon-neutral Union by 2050.[61]  Decarbonization is promoted thanks to the new unbundling rules that will call for more competition and innovation within the hydrogen sector.  The development of the hydrogen sector will be facilitated by infrastructure changes and a new certification system, complemented by the phasing-out of long term contracts for fossil gas.  One would further welcome that the Package does not prioritize sustainability over security of supply and consumer protection.  However, there may remain some ambiguities regarding the status of some types of energy.  For example, the definition of low-carbon hydrogen does not explicitly allow for the inclusion of nuclear-generated hydrogen, a topic which has caused uncertainty in recent legislative changes.[62]

*** 

Thank you to Agne Vaitkeviciute and Chloé Papa for their contribution.

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[1]             Directive (EU) 2024/1788 of the European Parliament and of the Council of 13 June 2024 on common rules for the internal markets for renewable gas, natural gas and hydrogen, amending Directive (EU) 2023/1791 and repealing Directive 2009/73/EC (OJ L, 2024/1788, 15.7.2024) (available here). 

[2]             Regulation (EU) 2024/1789 of the European Parliament and of the Council of June 13, 2024 on the internal markets for renewable gas, natural gas and hydrogen, amending Regulations (EU) No 1227/2011, (EU) 2017/1938, (EU) 2019/942 and (EU) 2022/869 and Decision (EU) 2017/684 and repealing Regulation (EC) No 715/2009, (available here).

[3]             European Commission, “Hydrogen and decarbonised gas market”, available here.

[4]             Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC (available here).

[5]             Regulation (EC) No 715/2009 of the European Parliament and of the Council of July 13, 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No 1775/2005 (available here).

[6]             Regulation (EU) 2024/1789, Recital 4.

[7]             Directive (EU) 2024/1788, Article 69.

[8]             The assessment must prove there would be no negative impact on transparency, cross subsidies, network tariffs, and cross-border trade.

[9]             Due to their remote location and limited market size, the horizontal unbundling requirements do not apply to Estonia, Latvia and Lithuania who may grant any derogations to HTNO until December 31, 2030.

[10]            Directive (EU) 2024/1788, Article 68(1).

[11]            Cleary Gottlieb, “The Fourth Gas Package: New Unbundling Rules for Hydrogen”, July 6, 2023, available here.

[12]            A vertically integrated undertaking refers to an undertaking of natural gas or hydrogen or groups where the same person controls different stages of the supply chain. It must perform at least one function of transmission, distribution, transport or storage and at least one function of production or supply of natural gas or hydrogen.

[13]            Directive (EU) 2024/1788, Article 68(3).

[14]            Directive (EU) 2024/1788, Article 68(4).

[15]            Hydrogen Europe, “Hydrogen and Decarbonised Gas package agreement marks milestone in European energy policy”, December 8, 2023, available here.

[16]            Regulation (EU) 2024/1789, Article 57.  Steps have already been taken to establish this network, such as an agreement between Hydrogen Transmission Network Operators on draft rules of operation for ENNOH.  See DG Energy News Announcement, June 18, 2024, here.

[17]            Regulation (EU) 2024/1789, Article 59(1)(e).

[18]            Regulation (EU) 2024/1789, Article 59(1)(c).  European Network for Transmission System Operators for Gas (ENTSOG) has published draft guidance documents for the TYNDP.  These describe the methodologies and assumptions of the TYNDP.  Available here.

[19]            Regulation (EU) 2024/1789, Article 61(1).

[20]            Directive (EU) 2024/1788, Article 55 (1) and Recitals 59 and 136, referencing Regulation (EU) 2022/869 of the European Parliament and of the Council of 30 May 2022 on guidelines for trans-European energy infrastructure (“trans-European energy infrastructure Regulation”), Article 2(18) which defines “repurposing” as “the technical upgrading or modification of existing natural gas infrastructure in order to ensure that it is dedicated for the use of pure hydrogen”.

[21]            Communication from the Commission “Powering a climate-neutral economy: An EU Strategy for Energy System Integration”, COM(2020) 299 final.

[22]            Directive (EU) 2024/1788, Article 57.

[23]            These principles are outlined in the Directive in Article 57(2) and Recital 136.

[24]            Directive (EU) 2023/1791 of the European Parliament and of the Council of 13 September 2023 on energy efficiency and amending Regulation (EU) 2023/955.

[25]            See, Directive (EU) 2024/1788, Article 57(2) for the full list of principles.

[26]            See, “Third Time is the Charm: RED III – The Latest Revision to the Renewable Energy Directive Sets Ever More Ambitious Climate Goals” (last visited August 12, 2024).

[27]            Communication from the Commission “Powering a climate-neutral economy: An EU Strategy for Energy System Integration”, COM(2020) 299 final.

[28]            See RED III, Article 21(e) ; and Directive (EU) 2024/1788, Recital 14 and Article 11(3).

[29]            Directive (EU) 2024/1788, Recital 14.

[30]            Regulation (EU) 2024/1789, Recital 81.

[31]            Trans-European energy infrastructure Regulation, Article 12.

[32]            Regulation (EU) 2024/1789, Article 61(3).

[33]            Directive (EU) 2024/1788, Article 55(1).

[34]            Directive (EU) 2024/1788, Article 59.

[35]            PCIs falling into the criteria set out in the trans-European energy infrastructure Regulation, Chapter II.

[36]            Regulation (EU) 2024/1789, Article 39.

[37]            Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (recast) (“Electricity Directive”), Article 55(1).

[38]            Regulation (EU) 2024/1789, Article 41.

[39]            Directive (EU) 2024/1788, Recital 13. The European Commission has put forward a definition of “low-carbon” hydrogen as hydrogen derived from “non-renewable” sources producing at least 70% less greenhouse gas emissions than fossil natural gas across its full lifecycle. Instead, Article 4 of Council Delegated Regulation of February 10, 2023 (the “First Delegated Act”) provides that electricity taken from the grid may be considered fully “renewable” if the relevant hydrogen installation is located in a bidding zone where the emission intensity is lower than a certain threshold (i.e. 18 gCO2eq/MJ).

[40]            Directive (EU) 2024/1788, Recital 13.

[41]            Regulation (EU) 2024/1789, Article 18(1).

[42]            Regulation (EU) 2024/1789, Article 21(1).

[43]            Regulation (EU) 2024/1789, Recital 74.

[44]            Directive (EU) 2024/1788, Recital 144 and Article 31(3).

[45]            Directive (EU) 2024/1788, Recital 144.

[46]            Regulation (EU) 2017/1938 of the European Parliament and of the Council of 25 October 2017 concerning measures to safeguard the security of gas supply and repealing Regulation (EU) No 994/2010.

[47]            Preventative action plans are mandated by Directive 2009/73/EC of the European Parliament and the Council of 13 July 2009 concerning common rules for the internal market in natural gas .  Member States must take “appropriate measures” in regards to Public service obligations and consumer protection, through elaborating “preventive action plans” to tackle energy poverty, ensuring  the necessary supply to costumers in situations of vulnerability and supporting energy efficiency improvements.

[48]            Regulation (EU) 2024/1789, Article 84(5) amending Regulation (EU) 2017/1938 Article 8(a).

[49]            Regulation (EU) 2024/1789, Recital 104.

[50]            Regulation (EU) 2024/1789, Article 15(4).

[51]            Regulation (EU) 2024/1789, Article 15(5).

[52]            Regulation (EU) 2024/1789, Article 15(5).

[53]            Regulation (EU) 2024/1789, Article 8(6).

[54]            Regulation (EU) 2024/1789, Article 10.

[55]            Regulation (EU) 2024/1789, Article 33(3).

[56]            Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council (OJ L 304, 22.11.2011, p. 64).

[57]            Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts (OJ L 95, 21.4.1993, p. 29).

[58]            Directive (EU) 2024/1788, Article 11(1).

[59]            Directive (EU) 2024/1788, Article 11(5).

[60]            Directive (EU) 2024/1788, Article 11(6).

[61]            Regulation (EU) 2024/1789, Recital 4, in line with Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing the framework for achieving climate neutrality.

[62]            Directive (EU) 2024/1788, Article 2(2). See also “Is Nuclear Green? European Union Is Splitting on Hydrogen From Nuclear Power”, available here (last visited August 12, 2024).