Draft Amendment to Energy Act regarding the regulation of hydrogen networks

On 10 February 2021 the German government passed the draft of an amendment to the Energy Act which contains new provisions for the regulation of hydrogen networks. The purpose of the amendment to the Energy Act is to gradually build up a hydrogen infrastructure in Germany. The provisions are intended as a transitional solution until corresponding European guidelines are available. The EU Commission has announced that it will present proposals on this by the end of 2021. Implementation into German law is expected from 2025 onwards.

So far there are only a few hydrogen pipelines in Germany which are not regulated as they are direct pipelines used for industrial purposes. According to the explanatory notes on the legislation, in view of this, there is no intention to subject existing or future hydrogen pipelines to mandatory regulation. Instead, this decision is to be left up to the pipeline operators. However, the German government presumes that as more and more interconnected hydrogen networks are developed, there will be a need to subject them to comprehensive regulation.

The draft provides for the following framework conditions:

• In the definition of the term "energy" in section 3 no. 14 Energy Act, hydrogen is fundamentally categorised as an independent energy carrier alongside gas. However, this is only intended to apply to pure hydrogen pipelines. For the blending of hydrogen into the natural gas network, the existing legal framework continues to apply on the basis of which hydrogen produced by electrolysis falls under the definition of gas.
• According to section 3 no. 39a Energy Act, a hydrogen network is a network for the purpose of supplying customers with hydrogen which, in terms of its size, is not designed from the outset to supply specific customers or customers which are specifiable at the time when the network is constructed but which is, in principle, open for the supply of all customers. Industrial pipelines which connect a generation plant with dedicated individual consumption sites are therefore not covered by the Energy Act by their very definition.
• Section 28j Energy Act gives operators of existing networks and newly constructed networks a unique and irrevocable right to choose whether they want to be subject to the newly introduced regulation of hydrogen networks or not. This also applies to the conversion of natural gas pipelines to hydrogen. The right to choose applies to the operator in general and not to individual pipelines. Those who choose not to be regulated will not be covered by the requirements regarding network access, tariffication and unbundling as explained below.
  • According to section 28n Energy Act, network operators are required to grant access and connection to their hydrogen networks based on the principle of negotiated network access. The standardised contracts for regulated network access to the natural gas network, which have been continuously developed since 2006, therefore do not apply. Whether a correspondingly uniform contractual practice will nevertheless emerge remains to be seen.
  • Section 28o Energy Act provides for cost-based tariffication which is largely in line with the current legal situation. The conditions and tariffs must be reasonable, non-discriminatory and transparent. Application of the Ordinance on the Incentive Regulation of Energy Supply Networks is not planned, but is not completely ruled out. This is logical as benchmarking between network operators would not make sense in the beginning with only few operators to compare. A prerequisite for cost recognition is a positive needs assessment of the hydrogen infrastructure in accordance with section 28p Energy Act.
  • According to section 28k Energy Act, the operators of hydrogen networks must carry out separate accounting and bookkeeping for their networks (unbundling of accounts). This serves to avoid cross-subsidisation and discrimination. Particularly in the case of simultaneous operation of long-distance gas networks, the aim is to prevent costs for the hydrogen infrastructure being included in the transmission tariffs.
  • In accordance with section 28m Energy Act, hydrogen network operators may not construct, operate or own facilities for the production, storage or distribution of hydrogen. The requirements on informational unbundling also apply. Legal unbundling in the sense that the operator of a hydrogen network must be separated from an energy supply company in terms of its legal form is not prescribed.
  • Section 113a Energy Act regulates the transfer and continued application of rights of way and easements for gas pipelines. Under this provision, these also apply to the operation of these pipelines with hydrogen. This also applies, as a matter of principle, to concession agreements. This is intended to facilitate the transition from gas pipelines to hydrogen.
  • Transmission system operators can identify pipelines that could be converted to hydrogen in the framework of the Gas Network Development Plan in accordance with section 113b Energy Act. It must be ensured in this respect that the remaining network can meet the capacity requirements.
  • Last but not least, an independent Network Development Plan is to be drawn up for the hydrogen networks. The target year for this is 2035. This rejects the idea of joint network planning with the natural gas network.

The draft met with sharp opposition from the associations of network operators. The separation between the natural gas and hydrogen networks was criticised as an obstacle to rapidly and efficiently developing a hydrogen infrastructure. Separate tariffication, in which the network tariffs for hydrogen would have to be significantly subsidised in the start-up phase, would lead to higher network tariffs overall. The argument that separation would avoid cross-subsidisation, which is questionable under EU law, is not convincing, they said. Network user associations, on the other hand, welcomed the idea of separate tariffication saying that natural gas customers should not pay for the development of hydrogen networks which are primarily for industrial applications.

Whether a transitional solution with a right to choose for the network operators as envisaged in the draft is actually sensible is questionable. The draft itself presumes that full regulation will be necessary in the medium term. The artificial separation of the natural gas network from the hydrogen network is not convincing either. In the future hydrogen will take over the role of natural gas. The gas network therefore needs to be transformed into a hydrogen network. We can expect that the conversion of existing gas pipelines will be the vital backbone of the future hydrogen network. This will be operated by the existing network operators. In view of this, it is not clear why natural gas and hydrogen networks should remain separate for a transitional period.

Finally, the draft paints a colourful picture of network access to hydrogen networks. In the case of unregulated network operators, there is network access, if any, on the basis of the general legal provisions. The conditions are completely unclear. At regulated network operators negotiated network access applies which had to give way to regulated access to gas networks 15 years ago. Finally, when hydrogen is fed into the natural gas network, regulated network access on the basis of the Energy Act applies with conditions that are standardised down to the very last detail.

If you would like to learn more about the status of hydrogen projects across the globe, please download CMS international guide The Promise of Hydrogen here.