New EU Gas Package Proposal - A Legal Analysis

 

Today the European Commission presented its proposals for a new gas package, called the `Hydrogen and Decarbonized Gas Markets´-package. The package consists of a revised Gas Directive (COM(2021) 803 final) (hereafter: rGD), a revised Gas Regulation (COM(2021) 804 final) (hereafter: rGR) and a Regulation on the Reduction of Methane Emissions in the Energy Sector (COM(2021) 805 final) (hereafter: MER). Today`s proposal are only the beginning of a longer legislative process, as the package needs to be discussed with and resolved by the Council and the European Parliament. However, it is crucial in setting the tone and the main pillars. Can the package deliver on hydrogen regulation, decarbonization and gas security of supply? This blog post takes a look and provides a legal analysis of the proposed revisions.

Background

An overhaul of EU Gas legislation is long-overdue in Europe. Previous legislation, particularly the three energy packages of the late 90s and late 2000s, focused on liberalization of the EU`s internal energy market and unbundling of vertically integrated undertakings in the energy sector. Those changes were implemented (more or less) simultaneously for gas and electricity and focused on similar issues of organizing markets and stimulating competition. However, over the last decade new challenges became more prominent. On the one hand the decarbonization of energy and on the other hand the security of energy supplies in a period of energy transitions and energy transformation. Those challenges require different tools for the electricty and gas sector, while at the same time increased sector coupling as well as (legal) system integration seem to point towards a reverse trend. This is exemplified by the issue of storage of energy (electricity can be stored for later usage in the form of gas and then be reconverted to electricity in times of need). The new gas package aims to address both challenges. It proposes rules to further the decarbonization of the gas markets and increase hydrogen amongst other alternatives to gas, encouraging the market participation of active gas customers and at the same time counter gas supply (or price!) crises via the creation of EU-wide procurement of gas and the creation of additional gas storage capacities. This is moulded into three main pillars of the current Hydrogen and Decarbonized Gas Markets-Package 2021, which are discussed below.

First pillar: Hydrogen and Decarbonization

The new Gas Directive aims to create a EU-wide internal hydrogen market. National Regulatory Authorities are requested to support the creation of such an internal hydrogen markets, inter alia by the promotion of cross-border hydrogen flows (recital 119 Revised Gas Directive rGD). From a legal-technical point of view a crucial change occurs in the definitions of the Directive. Article 2 (1) and (3) rGD now differentiate between natural gas and gases (defined as natural gas and hydrogen). Accordingly, the Directive as well as the Regulation differentiate between rules applicable to natural gas and gases more broadly defined. This is a positive development, given that the applicability of the 2009 Gas Directive to hydrogen has been discussed controversially in the past. On the negative side, however, the European Commission has not been receiptive to criticism concerning hydrogen terminology. Instead of sticking to usual `colour-book` of hydrogen (green hydrogen, blue hydrogen etc.) the Commission decided some years ago to consciously use more fuzzy and blurring terms. Art. 2 (10) rGD now uses the terminology `low-carbon hydrogen´, which is supposed to mean the hydrogen content of which is derived from non-renewable sources, which meets a greenhouse gas emission reduction threshold of 70%. `Low- carbon hydrogen`is now one form of `low carbon gases´ (art. 2 (11) rGD). Article 8 (2) and (4) rGD provides a certification scheme and requires opertors to demonstrate to National Regulatory Authorities that the GHG-emission reductions have been met under a mass-balancing system. The same rules shall apply for imported low-carbon gases & hydrogen that have been produced in the EU or outside of it. The threshold as such was discussed controversially until the very last day before publication of the proposals. Further definitions e.g. on `clean hydrogen´, a terminology that has been pushed by the European Commission in the past, are not included in the rGD.

The proposal for a new Gas Directive brings about some key changes to the regulation of hydrogen markets. The new proposal is quite ambitious in terms of regulating hydrogen markets. A number of  Member States, like Germany and France, that already established their own rules for the regulation of hydrogen markets some months or more than a year ago, will need to change their hydrogen market designs and bring them in line with the new EU gas rules by 1 January 2031 (article 72 (1b), (7b) & (9), article 73 (1) rGD).

The core idea underlying the new design of hydrogen markets is to introduce main regulatory principles inspired by those currently applicable to the natural gas market but adapted to the development stage of hydrogen markets. This shall be done whilst providing guidance on future regulatory developments. What that means in practice is that for dedicated hydrogen networks a hydrogen network operator needs to be appointed, for hydrogen storage facilities a hydrogen storage operator and for hydrogen terminals a hydrogen terminal operator. The rules are broadly similar to the known rules on natural gas network operators and unbundling rules also apply, which is made clear from the outset by recital 9 rGD. However, 1 January 2031 is also a key date here, as this marks the end of the transition period (see for instance recital 9 in conjunction with article 72 (1b), (7b) & (9), article 73 (1) rGD.

There are provisions on Third Party Acess to hydrogen networks, hydrogen terminals and hydrogen storage (art. 31-33 rGD). Concerning the tie-in of low-carbon hydrogen and renewable gases into the existing natural gas networks allows article 39 rGD Transmission System Operators of natural gas to refuse connection only on grounds of economic unreasonability and technical non-feasibility. There is acomplete new Chapter VII rGD on rules applicable to dedicated hydrogen networks which contains detailed provisions. The underlying rationale allows for a remarkable amount of certain types of exemptions for hydrogen systems by national regulatory authorities (e.g. closed and/or geographically confined hydrogen networks articles 48 rGD, pre-existing hydrogen networks article 47 rGD etc.). 

Unbundling provisions for operators of dedicated hydrogen network operators is contained in articles 62-64 rGD and is mainly modelled on the unbundling options available to vertically integrated natural gas undertakings.

Special attention is paid to cross-border hydrogen interconnectors (article 53 rGD). While these are discussed in the new Gas Directive, cross-border flow of mingled streams (so with hydrogen admixed to natural gas streams) is considered by the new Gas Regulation (rGR). Article 20 rGR prescribes that transmissions system operaters shall accept cross-border mingled gas streams with up to 5% hydrogen content from 1 October 2025. This might have repercussions on sensitive gas storgae facilities down the line, which are not yet able to tolerate that amount of hydrogen. Article 19 rGR requires Transmission System Operators to cooperate to avoid restrictions of cross-border flows due to differences in gas qualities.

From a governance perspective, hydrogen is taken out of ENTSO-G`s competence and a new EU body will be created, the European Network of Network Operators for Hydrogen (ENNOH), according to article 40 rGR. It is supposed to, inter alia, establish network codes, adopt Ten Year NEtwork Development Plans, etc., according to article 42 rGR. 

As a final remark on hydrogen it has to be said that the package contains no targets for the production or consumption of renewable and low-carbon gases. This could have been a significant step forward, as obligatory admixing quotas would have helped to create a hydrogen market.    

The package, however, also consists of a new proposed Regulation on Methane Emissions in the Energy Sector (MER). In a nutshell, the Commission is asking the oil, gas and coal sectors to measure, report and verify methane emissions, and proposes strict rules to detect and repair methane leaks and to limit venting and flaring, according to the Commission. It also proposes new monitoring tools for methane emissions from imports of oil, gas and coal into the EU. Companies would be required to measure and quantify their methane emissions at source and carry out comprehensive surveys to detect and repair methane leaks (article 14 MER). The regulation is interesting in another respect: it proposes a ban on venting and flaring (article 15 and recital 36 MER). These practices have been significantly reduced by the industry in the past and are often used in emergency siutuations. It remains to be seen how these new rules will impact the safety of O & G installations and contribute to a sustainable compliance culture. The methane impacts of fossil fuel imports shall be tackled in a two step-approach: first so called `transparency tools´, that will show the performance and reduction efforts of countries and energy companies across the globe in curbing their methane emissions shall be established (articles 28 & 29 MER). In a second step the results shall be used for a review of the MER in 2025, according to article 27 (3) MER.

Second Pillar: Active Customers and Customer Protection

The second important aspect of the package is the enabling of participation of active customers in the gas market. Article 2 (71) rGD clarifies that an active customer does not have to be an individual person, but can also be a group of jointly acting final customers, who consume or store renewable natural gas produced on their premises within a confined boundary or (where permitted by Member States) even on other premises or who sell self-produced renewable gas, but not as their main activity. This complicated definition allows Member States to take a lenient stance on the term `active customers´. Article 13 rGD then establishes a light-touch minimum framework for active customers, essentially providing that Member States shall ensure they can actually participate in the markets. Article 14 rGD is the really interesting innovation. It transfers a creature that is known from the recast Electricity Directive to the gas world. the citizen energy communities (CECs). These citizen energy communities for gas shall be enabled to have cross-border membership, but also (art. 14 (4) rGD), if Member States wish to do so, obtain the right to operate gas distribution networks. 

These provisions are further enabled by new rules on smart metering of natural gas (article 16 rGD) and smart metering in hydrogen systems (article 17 rGD). These provisions are far-reaching in the sense that they aim to install smart meters as the new norm in all households. `Normal` meters, according to article 19 & 20 rGD might become the exception and the customer would have to ask for it (and bear associated costs). This will immediately raise concerns about data protection in a number of Member States and with citizens. The Commission tries to alleviate these concerns in article 21 rGD but it remains to be seen if that will succeed.

On the upside, there are also new rights for consumers, which will include the possibility to choose from at least two suppliers, with the possibility of having separate contracts for natural gas or hydrogen at the same time. Article 25 rGD on vulnerable customers establishes that Member States can select to set gas prices for vulnerable customers based on a new, common EU-wide definition of energy poverty. That definition shall feature in article 2 (69) rGD.

Third Pillar: Joint Purchasing of Gas Stocks

 

Gas prices have risen substantial within the last 6 months.  One idea of the EU is to take more responsibility for gas to avoid future gas issues. The fundamental underlying issue is that gas security of supply, so far, is largely a matter of national sovereignty for each EU Member State. Accordingly, the following description of planned EU measures refers to voluntary measures. That means every EU Member State can decide on whether or not to participate in them. While this is the only possible way under the current division of energy competences between the EU and its Member States under article 194 (2) TFEU, it substantially diminishes the `shooting power´and range of the proposed measures.

Instigated by a non-paper by France, Greece, Italy, Romania and Spain of November 2021, the EU Commission proposes in article 67 rGR changes to the Gas Security of Supply Regulation 2017/1938. EU Member States shall be enabled to jointly procur gas, fill their storages with it and then share their gas stocks with one another. In principle gas storage capacity of around 117 billion cubic metres of gas is allegedly in existance in Europe, according to media sources. While these numbers seem overly optimistic, due to technical as well as political and other reasons, it is clear that substantial gas storage capacity in Europe exists. Mostly in salt caverns but also depleted gas fields. What is clear, however, is that, just like with oil stocks, gas storage capacity in the EU is unevenly distributed. There are, for historic as well as geological and technical reasons, large storages in Germany, the Netherlands,  France and Italy, while there is little capacity in other Member States. In theory interconnection pipelines enable member states to use stored gas in neighbouring countries. But this system already existed prior to the current 2021 gas crises and this system of interconnections did not help to avoid that crisis. 

 

If the EU would now install a system of dedicated, EU gas stocks, complicated legal issues would arise. Who would be allowed to draw on the stock, at which point in time and at what ratio? The stocks would need to be owned by private companies. What is their business model and based on what are they remunerated for their services? A further key question is not sufficiently answered. The current gas crisis is, above all, a gas price crisis. There are a number of reasons for the price hikes and insufficient storage capacity might be one of them, but surely not the only one. Prices were also significantly affected by a downfall in Russian supplies, a fierce competition for Liquefied Natural Gas (LNG) between Asia and Europe, lower than expected wind-harvest on the continent with the need to switch to other means (gas) of electricity generation, as well as the introduction of carbon prices in major European countries like Germany. Given that there are, hence, several reasons for high gas prices, it is not certain that the current EU proposals will resolve current issues, let alone be a sufficient safeguard against future gas crises. Member States already suggested other measures, including the delinking of gas and electricity prices and tying the gas price to the average production cost in each EU Member State, but this remains for future revisions.