Regulation of hydrogen networks: Upcoming draft bill of the Federal Ministry of Economics and Energy on regulating hydrogen networks

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Status and next steps in the legislative procedure

The Federal Ministry of Economics and Energy has made available to associations and the professional public an outline of a draft bill on the implementation of relevant EU requirements and the regulation on pure hydrogen networks. This draft bill, by amending the current Energy Industry Act, will for the first time enact legislation concerning separate hydrogen networks. The intended regulation is intended to set the framework for a fast and legally sound development of a national hydrogen network infrastructure. The planned regulatory framework for the hydrogen network infrastructure is to be merely a transitional framework, which is to be adapted after further alignments at European level.

Current regulatory environment for hydrogen networks

As of today, separate hydrogen networks – meaning networks transporting only hydrogen without an admixture of other gases – are not regulated under German law. The draft bill takes the view that these networks do not fall under the term energy as defined by the German Energy Industry Act and even if existing natural gas pipelines are converted to hydrogen pipelines, the existing regulations for these facilities do not continue to apply. The already existing hydrogen pipelines are predominantly pipelines that are directly connected to certain customers for their supply. These already existing hydrogen pipelines or networks are currently subject to general antitrust law alone.

Essential provisions of the draft bill

The draft bill is meant to facilitate the fast development of a hydrogen network infrastructure, as well as the implementation of various regulations, including the implementing of the Directive (EU) 2018/2001 – Renewable Energy Directive (RED II). It is in line with the EU Hydrogen Strategy from July 2020 (see Dentons’ report here) and also with the ongoing discussions on hydrogen networks at EU-level. In light of the EU’s activities around this subject, some of the proposed regulations are only transitional. Once EU legislation on hydrogen networks is enacted, the current provision will be replaced by their transposition. The draft bill moreover furthers the action plan which is part of the German National Hydrogen Strategy from June 2020 (see further here) and is in line with the re-development and resilience plan as agreed by the German government in December 2020. Action item 20 of the German National Hydrogen Strategy demands the establishment of networks only for transporting hydrogen, aside from starting to use part of the existing gas networks also for hydrogen.

New/adapted legal definitions

According to the new legal definition in section 3 number 10a of the draft bill, an “operator of hydrogen networks” is any natural/legal person solely engaged with the transport of hydrogen. Section 3 number 14 of the draft bill extends the definition of “energy” to also encompass hydrogen (when used as a power supply via pipelines), making it a third independent designated source of energy, aside from electricity and gas. Even though hydrogen is a gas, the explicit naming of hydrogen alongside electricity and gas emphasizes the special significance of hydrogen. Finally, the new section 3 number 39a of the draft defines “hydrogen network” as a supply network that with respect to its size is able to accommodate an indefinite number of customers. According to the definition, a hydrogen pipeline that is designed to supply certain customers who are already determined or specified at the time of network construction is not to be included. Nevertheless, hydrogen networks of this kind do not qualify as energy supply networks under the Energy Industry Act and are not subject to the regulations concerning mandatory provisioning (section 18 Energy Industry Act).

New section on the regulation of hydrogen networks

The draft bill introduces a new section 3b in part 3 of the Energy Industry Act, incorporating for the first time regulations concerning pure hydrogen networks. The new provisions are intended to boost the market and are complemented by transitional regulation on the conversion of existing gas pipelines to hydrogen pipelines. It is intended that the rules under the new section 3b will be re-evaluated and revisited at a later time.

The provisions of the draft bill are not automatically applicable to any existing or future hydrogen pipelines and hydrogen networks. Rather, according to section 28j of the draft bill, the operators of hydrogen networks are able to choose whether they want to be subject to the new regulations or not. This will depend on the potential benefits the applicability of the regulation might hold for their specific business model. If the operator decides to opt in, he has to declare this in writing to the Federal Network Agency, which will also undertake a needs assessment by the Federal Network Agency, according to section 28q of the draft bill.

Section 28k of the draft bill requires, in accordance with the unbundling rules already in the Energy Industry Act, a separate accounting and bookkeeping for hydrogen networks in order to avoid cross-subsidisation and because of network charge regulation. The unbundling regulations go beyond accounting and bookkeeping. For example, section 28l of the draft bill additionally provides that hydrogen network operators are not allowed to hold property in plants for hydrogen production, storage, consumption, as well as plants for feeding gas into the gas supply networks. However, a group of companies consisting of hydrogen network operators and undertakings carrying out other energy supply activities shall be permitted.

The provision of section 28m of the draft bill repeats the well-known provisions of the German Industrial Act for network operators and storage operators: The design and handling of network operation must be presented in a transparent and non-discriminatory manner. Unbundling must be carried out in such a way that there is a clear separation between the operation of hydrogen networks, hydrogen production, hydrogen storage and hydrogen usage. Third parties must also be granted connection and access to the hydrogen network on reasonable and non-discriminatory terms. The access conditions shall be published, according to section 28m.

Overall, the provisions of the new (draft) section 3b in part 3 of the Energy Industry Act are intended to provide a fair and predictable legal framework for the new hydrogen networks business segment, while also promoting sound competition from the beginning. The draft bill does not affect the feeding (admixture) of hydrogen to the gas network, which continues to be governed by the respective current regulations. Feeding in will continue to be possible within this framework and its limitations. This is explicitly stated in the explanatory memorandum.

Take-away

The draft is based on the known rules for networks and storage facilities. It keeps all options open. Hydrogen network operators have the option of subjecting themselves to regulation within the specified criteria. At the same time, the admixture of hydrogen will not be hindered by the introduction of the regulation, and will remain possible within the framework of the existing rules.

We will continue to monitor the BMWi's draft bill and keep you informed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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