Part II - Regulating Hydrogen Markets

8 Economics of Regulating Hydrogen Markets

Machiel Mulder

8.1 Introduction

Because of the need to reduce carbon emissions, the usage of hydrogen is expected to grow strongly in the coming decades. The International Energy Agency expects a growth from the about 90 million metric tonnes in 2020 to 500–700 million metric tons in 2050.¹ Such a strong growth will only be possible when marketplaces are developed where the parties can meet to exchange hydrogen. Such marketplaces have to be developed on top of the presence of physical infrastructure for transport and storage, just as is currently the case for the natural gas market. For the development of the role of hydrogen in future energy systems, it is crucial that the hydrogen market functions well because efficient price formation is essential for producers, traders, and consumers to come up with optimal decisions.

In this chapter, the focus is on how to obtain a well-functioning hydrogen market, departing from the assumption that there will be a demand for hydrogen and that several options to supply hydrogen to the market are available. This implies that we do not dive into the regulatory question of how to realize a transition from fossil energy towards renewable and clean hydrogen and, hence, we do not discuss regulatory measures like support schemes for hydrogen, carbon taxes, or hydrogen obligation (quota) schemes for energy users. Nonetheless, the chapter discusses how to deal with the various types of hydrogen having different environmental consequences (emissions). The key question addressed by this chapter, however, is to what extent governments need to intervene in the development of a hydrogen market to improve its functioning. This question is answered by departing from microeconomic theoretical concepts related to conditions for the functioning of markets (Section 8.2). Based on these concepts, the hydrogen market is systematically analysed by looking at potential shortcomings in the various layers of the hydrogen supply chain (Section 8.3). Section 8.4 then wraps up the chapter by formulating some conclusions.

8.2 Economic Framework for Regulating Markets

8.2.1 Theoretical Benchmark and Market Failures

In economics, a market can be defined as a facility that allows buyers and sellers to exchange any type of goods, services, and information.² These facilities used to exist mainly as physical marketplaces where the parties met each other in person. Increasingly, however, they exist in the form of virtual places where the parties submit their bids on digital platforms and the market operator sets the clearing prices and quantities. Irrespective of the way markets are organized in practice, they are meant to help the parties to realize the best deal for themselves. When these markets function well, one can say that the goods are produced and allocated to users in the most efficient way. This means that the goods are supplied by producers having the lowest costs, which refers to the productive efficiency in a market, and that these goods are consumed by the consumers that have the highest willingness to pay for these goods, which is referred to as the allocative efficiency of a market. The amount of goods produced is determined by the point where the marginal costs³ of the producers equal the marginal willingness to pay of consumers. After all, if a good is consumed by a consumer with a lower willingness to pay than the marginal costs needed to produce that good, then this exchange between producer and consumer would result in a loss of welfare. This loss of welfare is seen as an allocative inefficiency, as the allocation results in lower welfare than what would be possible. One can also say that in well-functioning markets, the exchange of goods results in the maximum possible welfare.⁴

It is important to realize that this theoretical notion of a well-functioning market is not meant to describe real markets, but it can be used as a benchmark for the assessment of actual markets. This also holds for microeconomic theories in general, which are meant to provide analytical frameworks that can be used to analyse actual behaviour of economic agents, such as consumers, producers, and traders. In practice, however, many markets suffer from fundamental shortcomings which prevent the market resulting in an efficient allocation of goods. These fundamental shortcomings are called market failures. The concepts of well-functioning markets and market failures can be used by regulators to determine to what extent and what type of regulatory intervention is needed. Below we will discuss a number of these market failures and how they can be addressed by regulators.

For a perfectly functioning market, a number of conditions have to be fulfilled. One of these conditions is that no market player is able to strategically influence the market outcomes, which means that the market prices are fully exogenous to the suppliers and consumers. If this is not the case, then market prices may get distorted by some suppliers with the result that (other) individual producers and consumers are not correctly informed about the marginal conditions of the other players. For instance, if the market price exceeds the marginal costs of the marginal supplier, then a consumer may decide not to consume a good even though that consumer’s willingness to pay may be higher than these marginal costs. As a result, an allocative inefficiency exists, which is a loss of welfare, referred to as ‘deadweight loss’. This also implies that in a perfectly functional market the only option firms have to make higher profits is to either reduce their costs or to improve the quality of their products and to sell the products to consumers with a higher willingness to pay for such products. In other words, in such markets all suppliers can be seen as price takers, as they can only respond to the market price but not influence it. Generally, one can say that the higher the number of producers in a market, the less firms are able to act strategically. The relation between market structure (degree of concentration) and intensity of competition is, however, not that straightforward as even in industries with only a few firms operating on the particular market, fierce competition may exist, while in industries with a large group of firms, these firms may be able to make joint agreements on, for instance, the magnitude of their supply to the market. Regulators address the risk of abuse of market power by general competition oversight, which consists of two main components: merger control (to prevent the establishment of dominant firms) and antitrust (to monitor and punish the abuse of market power by dominant firms or firms jointly participating in a cartel).

Another condition for a well-functioning market is that no firm has a strategic advantage over others because it is better able to access the market, for instance by using specific infrastructure which cannot be used by others. In other words, all firms should operate on a level playing field. When strategic advantage may result from the usage of essential infrastructure, regulators can implement rules regarding the usage of the infrastructure by other market players. A structural competitive advantage may also result from the presence of economies of scale or scope. This can occur in the case of activities with large fixed costs, such as investments in electricity and gas networks, which have the effect that one firm can conduct these activities more efficiently than a number of (smaller) firms. Such cost advantages result in natural monopolies, which means that the technological characteristics of a given industry results in the fact that it is most efficient to have one firm being responsible for the total supply. As is the case with other (normal) monopolies of firms having market power, unregulated naturally monopolistic firms (such as operators of natural gas and electricity grids) may abuse their position by charging so-called monopoly tariffs, which are tariffs intended to maximize the profits of the firm instead of being related to the marginal costs of production. Hence, such firms with a natural monopoly are not price takers but can be seen as price setters. These firms may also increase their profits by saving on costs for quality improvements or maintenance of their assets, which implies that the resulting higher profits come at the expense of lower quality for customers. To address this type of market failure, regulators may implement rules that restrict the freedom of naturally monopolistic firms regarding the tariffs they charge (so-called tariff regulation) and rules regarding the minimum required quality levels of service provision to customers (so-called quality regulation). In addition, it is crucial for all potential network users to get access to the network, which is called third-party access (TPA).

What is also necessary to obtain well-functioning markets is the presence of full transparency. Producers and consumers need to know what the relevant product characteristics are and under what conditions market transactions can be concluded. In practice, however, markets may fail to realize an efficient allocation in the presence of information asymmetry, which means that the parties (suppliers and buyers) cannot have the same type of information on the characteristics of the commodities. This market failure may result in so-called adverse selection, for instance when high-quality products cannot compete with products of lower quality, where the higher-quality product is more costly but consumers are uncertain about the quality of the product. Consumers are generally not prepared to pay their maximum price for a high-quality product if they are uncertain about the true characteristics (quality) of a product. This may occur if consumers cannot fully assess the quality of a commodity and, as a result, they may not be inclined to pay the full price. If this market failure occurs, coordination or regulation is required, for instance by organizing a trustworthy certification scheme.

Another type of market failure consists of externalities, which occur when economic agents do not take into account all costs or benefits of their activities. Negative externalities result in too high a level of activities from a social point of view. An example of such an externality is carbon emissions resulting from the use of fossil fuel energy. Positive externalities result in too low a level of activities of firms as they cannot capture all the benefits of their activities. This may, for instance, occur if the benefits of innovation cannot be protected by innovative firms. In that case, firms will not innovate enough, or at least they innovate less than they would do if the benefits could be fully captured. Another type of externality is called network externalities, which may result in a limited number of suppliers capturing the full market and, as a result, other firms being unable to enter the market. If network externalities exist in the market, the parties should coordinate how they want to organize the market, or a regulator should impose regulations on market design.

A final type of market failure is the presence of so-called hold-up, which is that the parties are hesitant to take actions which would be beneficial from a social welfare point of view. This may occur in the case of long-term investments without long-term contracts with customers or without the existence of liquid markets. For instance, in the case of a natural gas grid, the owner may be uncertain to what extent the users of that grid will keep using the grid and to what extent they are willing to pay the required tariffs. Because of that uncertainty, the owner of that grid may be hesitant to invest in grid extension unless users have made explicit long-term commitments about their future usage or regulators have indicated that future losses due to a lower utilization will be reimbursed. Consequently, the presence of this market failure may result in too little investment because firms are uncertain about the ex post revenues once they have made an investment. When this market failure exists, coordination or regulation is needed to give investors more certainty about the future revenues.

8.2.2 Regulatory Measures to Develop Energy Markets

If there are no fundamental shortcomings, markets just develop when individual suppliers and consumers see opportunities to start exchanging goods. In several cases, however, some factors lead to situations where markets cannot develop themselves and therefore they need regulatory help. This is true in particular for energy markets, where, because of some peculiarities, these markets cannot fully develop automatically without any help. Energy markets are based on physical networks, conveying natural gas, electricity, heat, and hydrogen and require government intervention to develop. In many countries in the recent past, the previously centrally coordinated systems for the delivery of gas and electricity have been replaced by markets through policy interventions. These interventions included various measures, which can be distinguished as liberalization by fostering competition and creating liquid marketplaces, restructuring of the industry, regulating natural monopolies and externalities, and removing bottlenecks for international trade.

With the liberalization of markets, a main goal is to develop effective competition and create liquid markets. A market is called liquid when the price of a good traded is not noticeably affected by actions taken by an individual. The liquidity depends on the transaction costs parties must put up with and the confidence they have in the market system. The latter depends on transparency of the operation of the market. When these conditions are met, the market will attract more parties, increase its volume, and further improve its liquidity. However, at times not every aspect of a market is well suited for competitive behaviour. One factor making parts of the market unsuitable for competition is the presence of natural monopolies. In electricity and gas markets, and possibly also in hydrogen markets, the networks are characterized by economies of scale, which make it unfeasible to create parallel networks. This situation requires the implementation of tariff regulation, quality regulation, and regulation of TPA.

Energy markets also require regulatory measures to address externalities, in particular environmental emissions. By imposing emissions standards or introducing emissions trading schemes or fossil-fuel energy taxes, the parties are incentivized to take the (negative) external effects into account when they are making decisions on production, investment, or consumption.

Although energy markets typically include some monopolistic elements that cannot be eliminated by increasing competition, there are other elements that are well suited for competition. To foster the entry of players in those segments of the market, authorities can choose to restructure the market in such a way that the monopolistic and competitive activities are not done by the same firm. This is called vertical unbundling of activities and is a well-known way to prevent conflict of interest. Another restructuring measure is the horizontal splitting of large incumbent firms into competitive segments. Without this, incumbent firms may have excessive market power, which will enable them to behave strategically – raise the market price to the monopoly level. A final form of restructuring is the privatization of ownership of incumbent firms. Privatizing the commercial elements of a sector gives those firms stronger incentives to be efficient as they face more pressure from the providers of equity or the capital market.

Vertical unbundling of monopolistic segments and the introduction of TPA does not automatically result in a competitive market. Effective market competition can only be achieved when the number of firms active in the market is sufficiently high while consumers are able to make a choice of their preferred supplier and the type and number of products they prefer. The benefits of such effective competition are that the market price is more related to the marginal costs. A regulatory measure that may further enhance competition is international market integration. When regional markets become more integrated with each other, domestic firms are able to operate in other markets as well. This (potentially) increases the number of players in all the regional markets which will foster competition and, therefore, the final price will be a better reflection of costs. Next to improving competition, market integration may also result in higher productive efficiency since firms with lower costs will replace those with higher costs. Second, and especially important in energy markets, there will be more flexibility to deal with demand or supply shocks. A larger integrated market has more options to deal with shocks to demand or supply than a market in a smaller region.

8.2.3 Regulatory Failures

When a market suffers from a fundamental shortcoming, like the ones described above, regulatory measures may help to improve the development or functioning of the market. However, finding and implementing the best type of regulation is often challenging. In this respect, it is important to realize that governments may also fail to implement the most appropriate regulatory measures. Such regulatory failures may be the result of various factors.

The first factor to mention is the information asymmetry between government (including the regulator) and market parties. Governments are generally less well informed than the parties about the precise characteristics of technologies (such as their costs and revenues), the actual outcomes of markets (such as profits realized by the various parties) or the (in)ability of the parties to enter into a market. Because of such information asymmetries, regulatory measures may be too generous at the expense of the public budget, or they may be too strict, with the result that the measures are less effective. Information asymmetry may also refer to a lack of information on the actual behaviour of market parties. This regulatory failure results in so-called moral hazard behaviour by regulated parties, which is, for instance, that they make less effort to realize their own objectives because of the impact on regulatory decisions. As an example, subsidies to compensate for all costs of a renewable energy project take away the incentives for firms to reduce these costs. Another example of moral hazard resulting from regulation is the so-called cost-plus tariff regulation of grid operators, which entails that these operators are allowed to raise their tariffs in response to an increase in their own costs. These operators don’t have any incentive to become more efficient, while they would have such incentives if their regulated tariffs were not related to their own costs.

Regulatory failures may also be due to rent-seeking behaviour by some parties. This can be related to information asymmetry, as an information advantage by market parties may be used to plead for regulations which are beneficial to them, but are not in the general interest, while the regulator is unable to check this. The likelihood of such behaviour is the greater, the more regulators depend on information provided by the regulated parties. Rent-seeking behaviour is also more likely to occur when parties are able to jointly act as a coherent group submitting internally consistent messages to politicians.⁵ In such circumstances, it is more difficult for politicians to withstand such pressure from interest groups.

Regulatory measures may also not be in the public interest when politicians pursue their own (political) interests instead of the general welfare. This may occur when politicians implement measures which foster the interests of those they expect to support them. To give an example: politicians with the majority of their voter base amongst homeowners instead of renters may promote financial measures supporting the installation of rooftop solar photovoltaics systems while this measure, from an overall welfare perspective, may not be efficient.

8.3 Regulating the Hydrogen Market

8.3.1 Market Failures in Hydrogen Supply Chains

To determine whether the development of a market for hydrogen needs specific regulation, we first analyse the presence of market failures in the hydrogen supply chain.⁶ This supply chain basically consists of the production, transport, storage, distribution, and consumption layers (see Figure 8.1). While the supply chain refers to how the hydrogen flows from production to consumption, the term hydrogen markets is understood in this chapter as how the commercial relations between agents in this supply chain are organized. Just as with natural gas and electricity markets, the functioning of hydrogen markets is related to the functioning of the physical infrastructure. Below we analyse for the various components of the supply chain and the markets to what extent there is potential for market failures, like economics of scale, externalities, structural lack of competition, information asymmetry, or hold-up. If such failures are found, we explore potential regulatory solutions to address them.

Figure 8.1 Supply chain of hydrogen.

Source: Author

8.3.2 Production of Hydrogen

Hydrogen is an energy carrier, not an energy source, which implies that it has to be produced from other energy carriers.⁷ This production can be done in various ways which can be distinguished into two groups: production based on fossil energy, in particular natural gas, and production based on electricity. In the first method, the methane molecules (NH₄) of natural gas molecules are split into H₂ and CO₂. This is still the common method of hydrogen production. When the CO₂ is captured and stored (so-called carbon capture and storage – CCS), for instance in depleted gas fields, the resulting hydrogen can be almost 90 per cent carbon free (not 100 per cent as full capture is technically not possible). One of the technical methods in this type of hydrogen production is called steam methane reforming. In the second method, water molecules (H₂O) are split into H₂ and O₂ using electricity. This is called electrolysis, which can be differentiated into different types – such as alkaline electrolysis, which is the oldest technique, and proton exchange membrane (PEM) electrolysis.⁸ Depending on how the electricity is generated, the resulting hydrogen can be called fossil-based (when the electricity is generated by fossil-fuel power plants) or fossil free (when the electricity is generated based on renewable sources or nuclear power). As electricity is a secondary energy carrier, this type of hydrogen can be seen as a tertiary energy carrier. This is relevant for the economics of hydrogen production as the costs of the primary energy carriers used and the efficiency of the conversion processes determine the costs of hydrogen supply.

To determine to what extent the production of hydrogen is characterized by economies of scale, one can look at the required investments per megawatt (MW) of capacity in relation to the magnitude of demand in the market. In this respect, it appears that production of hydrogen can be compared to the production of electricity. The installations required to convert an energy carrier into hydrogen or electricity require similar amounts of investments. An advanced combustion turbine gas plant requires about 0.5 million euros/MW, which is a bit less than the investment size of a steam-methane reforming plant, while the investment in an electrolysis plant is equal to about 1 million euro/MW. Coal-fired and, in particular, nuclear power plants are, however, much more capital intensive.

In addition, it appears that neither type of hydrogen production requires specific locational circumstances. Steam-methane reforming plants need access to the gas network, as they need gas as input, and electrolysis plants need access to the electricity grid and water network, as they need electricity and water as inputs, but access to these networks is in principle everywhere available in most countries, due to the existing TPA regulation of gas and electricity grids. In the case of steam methane reforming in combination with CCS, proximity to a transport and storage system for CO₂ is also required, and here we may find some locational constraints.

The above implies that, from a competition point of view, the supply side of hydrogen production needs no particular economic regulation as the relatively small scale of the production facilities and the absence of strong locational advantages prevent the occurrence of a natural monopoly. Hence, the existing regulation of TPA to electricity and gas networks will be sufficient along with the general competition policy oversight to realize competition in the production of hydrogen.

For the negative environmental externalities occurring through the production process, however, regulation is required. As in the case of steam methane reforming, even when combined with CCS, there are always remaining carbon emissions because of technical constraints regarding the conversion process of making hydrogen based on natural gas as well as the transportation of carbon. Hence, these emissions should be subject to environmental regulation, such as a cap-and-trade emissions scheme, in order to give the hydrogen producers incentives to take these emissions into account when they decide upon investment and production levels. In the case of electrolysis, the production of hydrogen does not generate any carbon emissions, but indirectly these emissions do occur when the electricity is generated based on fossil fuels. This negative environmental externality is (partly) addressed through environmental regulation of the electricity industry, such as through emissions trading schemes, support schemes for renewable electricity (which reduces the share of fossil-based electricity in the mix) and taxation on the use of fossil fuel energy in electricity generation. In addition, when hydrogen from various sources is transported through one network, potential users of that hydrogen are not able to determine the environmental burden during the production process of the hydrogen they want to use. Hence, regulation is needed to enable producers of hydrogen to inform their customers about the carbon content of their production process. This regulation will be discussed below in Section 8.3.7 on retail markets.

There is potentially another externality related to the supply of hydrogen in the market, which is the security of supply externality. When significant amounts of hydrogen are coming from a small number of countries, this may result in geopolitical dependence, as we have seen in the natural gas market.⁹ In order to address this risk, governments could foster diversification of the sources of hydrogen imports by enabling parties not only to import from nearby sources at lowest costs, but also to import from sources at a greater distance.¹⁰

8.3.3 Transport of Hydrogen

Just as hydrogen can be produced in various ways, it can also be transported through various modes: via pipelines, trucks, and ships. The different forms of transportation require different amounts of investment, which affects the economies of scale and potential sources of market power. In the first mentioned way, hydrogen is transported in gaseous form, and in the latter two in liquid form. Before hydrogen can be transported in gaseous form through a pipeline system, its volume is reduced (the energy content per unit of volume is raised) through compressing, just as is the case with the transport of natural gas through pipelines, which means that additional investments have to be made. In the case of transport via trucks or ships, the temperature of hydrogen needs to be lowered in order to raise the energy content per unit of volume, which is required to reduce the transportation costs.¹¹

These transportation options have strikingly different economic characteristics. The transport of hydrogen by pipeline is characterized by scale economies as the investment costs per unit of energy transported decrease more the larger the capacity of the transport infrastructure. Although the capital costs of pipelines are high, the large quantities that can be transported (up to 9,000 kg/h) and the relatively low operation costs reduce the costs per kilogram (kg) of hydrogen. Hence, with large quantities of hydrogen, transport via pipelines is the most suitable and cost-efficient option. In addition, the greater the quantity transported, the lower the unit costs. For smaller quantities, however, the construction costs of a pipeline per unit of hydrogen are simply too high, which means that in such a situation transport by truck is more efficient. Therefore, transport through pipelines has to be regarded as a natural monopoly when the amount of hydrogen to be transported exceeds a minimum threshold. This in particular holds for the situation in which existing natural gas pipelines can be repurposed for hydrogen. In that case, the average costs per unit of transport are much lower than in alternative transportation modes, which gives the operator of such a pipeline system a competitive advantage.

A consequence of the cost advantages of pipeline transport compared to transport by truck is that when the hydrogen market evolves, transport will be done through pipelines. Because of the natural monopoly characteristic of pipelines, it is not efficient to have more than a single network for the transport of hydrogen, which means that competition cannot evolve in the transport business. The transport of hydrogen, therefore, needs to be subject to economic regulation, just like the transport of natural gas and electricity. This regulation should entail tariff regulation, protecting network users from tariffs that are too high, giving network operators incentives to operate as efficiently as possible, and enabling other market participants (producers and users of hydrogen) to make use of the transport infrastructure.

As hydrogen transportation infrastructure has to be developed, investors in this infrastructure need to have some certainty about future utilization and revenues. Without this certainty, they may delay their investment. Governments can play a role in providing regulatory certainty about how the future revenues will be determined and how extensive the future utilization of the infrastructure may become.¹²

8.3.4 Storage of Hydrogen

Hydrogen can be stored in several ways. The simplest option is to store hydrogen in tanks, for which it needs to be compressed, but even with high pressures the required volumes remain large, which makes it an unrealistic option for large-scale storage. To store the same amount of energy by hydrogen compared to natural gas, the required volume is about four times greater.¹³ The volume of the storage can be reduced through liquefaction, but this requires significant amounts of energy, which also makes it less attractive from an economic point of view. An option to store large quantities of hydrogen in an efficient way is to make use of salt caverns or depleted natural gas fields.¹⁴ Salt caverns in particular do have great potential in many countries because of their widespread presence (although this is not possible everywhere), and their ability to provide large-scale storage which can be used with a high level of flexibility in terms of injection and withdrawal.¹⁵

Storing hydrogen can be relevant when the timing of production and consumption are not similar. When hydrogen is mainly used for industrial processes or heavy transport, consumption will be fairly flat, which implies that the producers of hydrogen do not need to (greatly) adapt their production profile. This situation differs, of course, when hydrogen consumption is more volatile. This will occur when hydrogen is used for producing heat in households and offices, as then the demand will depend on the outside temperature. If the temperature drops, the supply side should be able to increase its supply to the market to meet demand. For competition to be effective under such circumstances, it is crucial to know what type of and how many facilities would be required to realize this increase in supply. The more facilities required to provide the flexibility in supply, the less individual suppliers are in a strategic position to influence market outcomes. To obtain a better impression of the competitive situation in case of a cold two-week winter period (as an example), one can estimate the number of facilities required for various types of techniques.

If storage were available in the form of salt caverns, then about fifty of them would be needed to meet the Dutch demand for hydrogen for heating purposes during a cold winter period as defined above. However, if depleted gas fields could be used, then only three fields would be needed. In the latter case, a monopoly may easily occur if these fields were all operated by a single firm. In such case, regulation would be required to assure that the flexibility to supply extra hydrogen during cold winter days is available to the market at reasonable prices. This regulation would be comparable to the current regulation of storage in the natural gas market because of the importance of having flexibility in the form of storage available at reasonable prices if hydrogen is used for heating homes.

The same conclusion holds when instead of depleted gas fields or salt caverns another large-scale storage option were to become available. As many technologies to store hydrogen as liquid, compressed gas, or chemical storage are under development, this may result in a storage solution which outcompetes other technologies in terms of efficiency and costs.¹⁶ In that case, the storage side of the hydrogen market may be characterized by a few players, which would require regulation as mentioned above. However, if hydrogen is not (so much) used for heating homes but more in industry then there is less need to implement strict access regulation storage as industries generally have more options to deal with supply disruptions, while their demand for hydrogen would be less dependent on external weather conditions than the demand from households.

8.3.5 Consumption of Hydrogen

In its pure form, hydrogen is currently mainly used in industry (in particular refining, ammonia, chemicals, metals, electronics), while in a blended form (mixed with other gases), it is mainly used for creating methanol and heat.¹⁷ In oil refining, hydrogen is used to convert crude oil into various end-user products such as transport fuels and feedstock for the chemical industry. This use of hydrogen is currently responsible for a major share in the carbon emissions of the industry, as the hydrogen that is used here is produced as a by-product of fossil energy or created through steam methane reforming. In the future, emissions stemming from the production and consumption of hydrogen have to be reduced sharply, which can be done by either using renewable hydrogen or capturing and storing the carbon emissions in the production process (see Section 8.3.2). This transition requires environmental regulation, in particular by imposing a carbon price on remaining carbon emissions or a constraint through, for instance, a cap-and-trade emissions trading scheme.

In the future, low-emission hydrogen demand will not only come from the abovementioned industries, but also from the transport sector, in particular from heavy freight transport, where hydrogen can be used in fuel cells as well as in internal combustion engines.¹⁸ To realize this potential, more specific regulation is needed regarding the development of appropriate charging infrastructures.¹⁹ In addition, hydrogen may also play a role in providing seasonal flexibility to electricity markets which are characterized by high shares of renewable generation. The potential of this usage depends on the competitive position of hydrogen storage combined with hydrogen power plants in comparison to other options to provide flexibility to electricity markets (such as hydropower and demand response).²⁰ As long as electricity prices reflect the changing scarcity conditions in these markets, no specific regulation is needed to foster particular sources of flexibility, such as hydrogen. Note that this statement refers to the wholesale market, as in the retail market the end-user prices are generally less directly related to changing market circumstances. For hydrogen producers, however, the wholesale market is relevant as that is where they buy their electricity.

8.3.6 Wholesale Markets

Just as for the natural gas market, a hydrogen wholesale market could function based on a transport and storage infrastructure that is accessible by all those who want to trade in hydrogen. After all, the wholesale market will include a physical exchange of the commodities, although financial markets will also emerge, once the physical trade options exist. The latter markets are more related to the desire of parties to hedge their risks through long-term financial forward contracts or options. The physical market can exist as an over-the-counter (OTC) market with bilateral exchange through a broker or an exchange with standardized products and clearance by the exchange operator, who also takes over the financial risks. The last option facilitates the liquidity of the wholesale market as it results in standardization of the products which reduces the transaction costs, while transparency on prices and market conditions is fostered, which results in a higher volume of trades.

The hydrogen market may learn from how the market for natural gas developed over the past decade. Because of the differences in quality of various gases depending on their source, the trade in natural gas is done in uniform thermal (energy) units (in MWh), which strongly facilitates trade. To sell the commodity as a homogenous product, each type of gas is valued in terms of the energy content it carries. This means that it is not the volume (such as cubic metres – m³) of the gas that is sold, but the amount of energy it carries, since heating is the main purpose of natural gas. In addition, to reduce the transaction costs and increase the transparency of trade, market hubs have been created in many countries: for example, the Title Transfer Facility (TTF) in the Netherlands, Net Balancing Point (NBP) in the United Kingdom, NetConnect Germany and GasPool in Germany (which recently have merged into Trading Hub Europe (THE)) and Virtual Gas Trading Point PSV in Italy. These marketplaces are virtual hubs based on an entry–exit system in which parties can transfer gas already injected into the national grid to other parties. As long as the gas is within the system, it can change owner. It is common that gas ownership changes numerous times between entry and exit. This is the so-called churn rate.²¹ In particular, the churn factor of the TTF has increased strongly over recent years, thereby indicating that this market has become highly liquid. One factor behind the liquidity of the TTF are the high quantities supplied relative to the quantities demanded. The total supply to the Dutch natural gas market has been about twice as high as total Dutch gas consumption, while in most other countries this ratio is much lower.

8.3.7 End-User Market

Consumers may have different preferences for the type of hydrogen they want to use, just as they have different preferences for various types of electricity and gas. The economics of the transport of hydrogen, however, shows that it is not efficient to have alternative transport infrastructures. In the situation of a well-developed large-scale hydrogen market, all hydrogen coming from different sources (be it on the basis of steam methane reforming with or without CCS or on the basis of electrolysis based on grey or green electricity) will have a standardized physical quality as it will be transported through the same infrastructure. Users who prefer a specific physical quality (for example, pureness) of hydrogen, may need to convert the hydrogen to a different quality level upon its arrival at their location. This will likely hold for various industries, such as chemicals, glass-making, and steel. If hydrogen is used for heating, for instance in industry, users only have to adapt their appliances to the hydrogen quality transported through the network.

A more important distinction in quality is related to the way in which the hydrogen is produced, as consumers may have a preference for low-carbon hydrogen. This quality is not related to the physical characteristics of hydrogen, but to how ‘sustainably’ it is produced. To facilitate these consumer preferences, a certification system is required, just as currently exists for electricity and gas based on the European system of Guarantees-of-Origin. This certification scheme, which is included in the European Renewable Energy Directive II, provides an internationally consistent approach to monitor carbon emissions throughout the supply chain, taking into account that hydrogen can be used in various types of end-user products, such as ammonia or fuels.²² As countries and regions are currently developing their own certification schemes, it will be crucial for international trade to harmonize these into a global scheme.

8.4 Conclusions

The future outlook for the hydrogen market can be explored by comparing this market with the characteristics of natural gas and electricity markets. Regarding the production side of hydrogen markets, it will be fairly similar to the electricity market. Like electricity, the production of hydrogen is not bound to a particular place, since hydrogen can be produced wherever a gas or electricity network, or even a cluster of windmills, solar panels, and direct connections exists. In addition, it can be stated that the capital intensity of hydrogen production is very close to that of electricity generation. Hence, the supply side of hydrogen does not require special regulation from a competition point of view. Looking at environmental externalities, of course, regulation is required.

Regarding the transport side of the hydrogen market, it seems to be fairly similar to the natural gas market. Similar types of techniques are used, and various options for transport also exist, while that is not the case in electricity systems. The transport of large volumes of hydrogen is most efficiently done through pipelines, which means there exists a natural monopoly that requires appropriate regulation (in terms of tariff setting, quality requirements, and third-party access). For the consumption of energy, it will be necessary to develop global systems for certificates to enable users to make informed choices about the way the hydrogen that they are using is being produced.

9 The Role of Regional and Local Authorities in Developing a Regional Hydrogen Economy

Ceciel Nieuwenhout

9.1 Introduction

Academic and professional discussions on the development of a hydrogen economy often focus on the role of the industry and a national hydrogen pipeline infrastructure. What is frequently overlooked in these discussions, however, are important local and regional developments, which support the creation and development of a regional hydrogen economy. Some regions even declared themselves ‘hydrogen valleys’.¹ This chapter deepens the understanding of the role of regions in the development of hydrogen markets. In practical terms, this is done by bringing parties together and positioning the specific region as a (green) hydrogen hotspot, but also by creating local demand. This chapter investigates the role of regional and local authorities in creating and developing a hydrogen market and the limits thereof. First, the ways in which regional and local authorities can influence the development of a local or regional hydrogen market is analysed (Section 9.2). Then, the policy and legal instruments for doing so are investigated in Section 9.3. This section is based on a functional comparative approach between two ‘hydrogen regions’, Groningen and Puglia. These regions are chosen as they are frontrunners in the development of hydrogen, but with a different approach.² The chapter closes with a conclusion and recommendations on the role of regions and regional authorities in the development of a hydrogen market.

9.2 The Role of Regions in the Development of Hydrogen Markets and Infrastructure

Although the development of hydrogen infrastructure and hydrogen markets is mainly considered to be a national issue, there is a role for regional and local governments, especially in situations where no or only a limited national infrastructure or policy exists. Each country has a different general division of competences between the national, regional and local governments, but even when certain issues are seen as a national competence, there may still be specific regional policies stimulating the development of hydrogen in that region in at least three respects.

Regional authorities may aspire to position themselves specifically as a ‘hydrogen region’ or ‘hydrogen valley’.³ They can bring together knowledge institutions and innovative companies, as well as specific industrial demand or supply of hydrogen. Moreover, as regional authorities are often in charge of the regional economic and industrial policy, they can focus on filling in specific gaps in the development of hydrogen chains. A further role that regional and local authorities may assume is related to the first role concerns help in creating local demand for hydrogen. Regional and local authorities can do so directly via the tender processes for public transportation⁴ and/or maintenance vehicles,⁵ and indirectly by stimulating industry in the region to transition to hydrogen usage rather than fossil fuels for industrial processes. With regard to the latter, local and regional authorities entrusted with environmental control over the local industry may also have to give specific environmental or spatial planning permits for such transitions. Finally, regional authorities in some countries, such as the Netherlands local authorities (gemeentes), are responsible for designing policy regarding the heat transition⁶ and may use this role to stimulate system integration between heat, electricity and various gases in the transition to a fossil-free energy sector, for example by creating district heating networks for residential heating.⁷ For this, they have to draft a heat transition plan in which they determine the source of heating in the future for each neighbourhood. This could be a (collective) heat network, individual heat pumps or a system based on a form of renewable gas.⁸ If local governments decide that part of their neighbourhoods should be heated via district heating, this heat network should also be run on some form of renewable energy.⁹ Next to geothermal, solar thermal and aquathermal energy (energy from surface water or sewage water),¹⁰ waste heat can be an important source of heat for a low-carbon district heating network.¹¹

In this context, a local government may also wish to incentivise hydrogen production facilities in the proximity of the district heat network. In this way, the waste heat from hydrogen production can serve a useful purpose¹² when a (residential) heat network is available nearby. As the process of electrolysis as well as the storage of hydrogen may not be allowed in the vicinity of residential buildings,¹³ local governments do need to take into account the space necessary for such facilities in their spatial planning processes.

9.3 Hydrogen Policy and Law in Groningen and Puglia

Different regions are developing their hydrogen law and policy in different ways. A comparison between regions is useful to gain insights into the different choices to be made and the consequences of those choices. This section compares the way policy and law are used to further the regional ambitions regarding a green hydrogen economy. The comparison focuses on the interplay between hydrogen policy and law, as well as on the interplay between regional and national governments.

Several regions are now developing hydrogen policy and law. For this comparison, the choice of regions was based on two elements: they need to be sufficiently advanced in the development of hydrogen law and/or policy, which ensures there is sufficient comparison material, and they must have a sufficiently distinct approach from each other, so the approaches can be compared. Finally, the actual availability of legal and policy documents also played a role. On the basis of these criteria, Puglia in Italy and Groningen in the Netherlands have been chosen for comparison. The lessons learned in these regions may serve other regions aspiring to develop hydrogen policy and law.

The comparison is made by first analysing the general objectives of the regions (why does this region aspire to be a hydrogen region?); then, the policy adopted to support this ambition, and finally the legal framework (as far as existent) applicable to the development of a regional hydrogen economy. After analysing these topics for both Puglia and Groningen (respectively Sections 9.3.2 and 9.3.3), the differences and similarities between the two regions are analysed in Section 9.3.4.

9.3.1 Puglia

The Italian region of Puglia, with its capital Bari, is very active in promoting hydrogen, via both policy and law. In 2019 Puglia adopted a regional Act on the promotion of the use of hydrogen,¹⁴ and various interesting projects are being developed in the Puglia region. The reason why this region is specifically interested in hydrogen is due to the high potential of energy production from renewable sources,¹⁵ with relatively low demand for electricity in the region. Hence, hydrogen production infrastructure can facilitate the grid integration of fluctuating renewable energy sources.¹⁶

Policy

As a region, Puglia is devoted to developing a hydrogen economy. The regional authorities created a hydrogen policy, which has been codified in the abovementioned regional Hydrogen Act. With this Act, the region confirms that it aims to promote hydrogen and incentivize its usage and production, explicitly recognizing its roles in energy storage, as alternative fuel and especially as a means of integrating renewable energy into the electricity grid.¹⁷ The Act is broader than only hydrogen, as it also includes provisions on the renewal of existing electricity production facilities as well as the general goal to contribute to greenhouse gas emissions reduction and tackling the dependency on fossil fuels.¹⁸ The Act provides a comprehensive overview of the hydrogen policy for Puglia, based on four pillars.

First, the region stimulates projects on the production of hydrogen; hydrogen-based co-generation plants for the production of electricity and heat; a regional distribution network for hydrogen; increased demand for hydrogen as fuel for vehicles; aggregation and storage; and the development of R&D facilities with a view to expand knowledge and skills on hydrogen.¹⁹ The instruments used for this purpose are agreements, conventions and memoranda of understanding with various partners, such as public bodies, research bodies, companies, trade associations and business consortia.²⁰

Second, the Regional Council develops a regional hydrogen plan.²¹ This plan, to be updated every three years, analyses the current state and development prospects of research and technical knowledge related to hydrogen; defines objectives for the upcoming three-year period; identifies regional measures for promotion and support of hydrogen production from renewable sources; lists the financial means for implementing the regional hydrogen plan; and provides tools for monitoring the implementation of the plan.²²

A third aspect is the adoption of supporting measures to implement the hydrogen ambitions. For example, the region makes funding available for both the production and consumption of hydrogen.²³ It is specified that funding is also available for experimental projects and for specific groups, such as the operators of highways (for refuelling stations) and producers of biomethane from green hydrogen.²⁴ In addition, the Regional Act targets public transportation as a source of hydrogen consumption: it promotes the renewal of the vehicle fleet with hydrogen fuel cell systems.²⁵ Moreover, the region uses tax measures to encourage investment in hydrogen fuel cell vehicles by companies and individuals: such vehicles are exempted from the regional car tax for a certain period.²⁶

A fourth pillar in the hydrogen policy is the creation of a ‘Regional Hydrogen Observatory’ that collects and analyses data on the regional hydrogen economy and forecasts hydrogen trends. It also promotes meetings, studies and debates on hydrogen and assists the Regional Council in its decision-making on hydrogen-related topics.²⁷ The Regional Hydrogen Observatory consists of experts from various walks of life, such as representatives from the renewable energy sector, hydrogen production, academia and NGOs focusing on the energy and mobility sector.²⁸

With these four pillars, Puglia covers the first two identified roles that regional authorities can take to stimulate a regional hydrogen economy, namely bringing different actors together and creating or stimulating local demand. The third, a role in the heat transition, is less relevant in a Mediterranean region like Puglia.

Law

As Italy is a republic, the regions have significant autonomy to develop their own policy and law in a wide variety of sectors.²⁹ This is the case for hydrogen. As both ‘scientific and technological research and innovation support for productive sectors’ and ‘transport and distribution of energy’ are listed as fields of concurring legislation, both the national government and the regions have legislative competences; lacking express coverage by state legislation, the hydrogen sector can be covered by regional legislation.³⁰ The regional government has made use of its competences by adopting the Regional Hydrogen Act that was elaborated in the preceding section. However, important aspects of the hydrogen economy, including safety of installations and transportation, are regulated at national level. Therefore, the national legal framework for hydrogen is also briefly described here.

There is no overarching hydrogen Act in Italy. Instead, hydrogen regulation is fragmented – based on the specific use and sector. An important aspect regulated at national level is permits and authorisations for hydrogen installations. At first, hydrogen was, from a legal point of view, considered to be a chemical. It was regulated like other (explosive) chemicals. Interestingly, already from 2006 onwards, a technical rule on hydrogen facilities for automotive vehicles was adopted.³¹ This was renewed in 2018,³² when omissions in the previous rule were addressed.³³ The translated title of the instrument is: Ministerial Decree on Technical Rules of Fire Prevention for Design, Construction and Operation of Hydrogen Distribution Facilities for Automotive Vehicles. As the title suggests, the rule is narrow in scope as it concerns facilities for automotive vehicles, but it does in fact cover the entire chain including the production of hydrogen at locations relevant for automotive vehicles.

Other activities (not related to automotive uses) do not have such a specific regulation. For example, electrolysers are mainly treated as a form of industrial activity and not as a specific element of the energy chain. They do not have a specific status and they are regulated like other industrial activities of the same size and hazard category. The grid connection of electrolysers is based on general rules concerning grid connection of industrial installations.³⁴ This can be considered a missed opportunity, as this way of regulating does not take into account the specific added benefits that hydrogen production could have for the grid integration of renewable energy sources.³⁵ Especially in the context of the Puglian hydrogen economy, which is explicitly aiming at increased grid integration of renewable energy, a regulatory framework that rewards the benefits of hydrogen production would be an important addition.

Transportation of hydrogen by road, rail and inland waterways is regulated like every other form of transportation of dangerous or inflammable products, namely on the basis of the Legislative Decree on the Transport of Dangerous Goods,³⁶ a direct implementation of the European legal framework on the transportation of dangerous goods.³⁷ It includes standards for the transportation of dangerous goods (including hydrogen), classification of dangerous goods for road transport, shipping procedures, as well as provisions on the construction, testing and approval of packaging and tanks, use and requirements for means of transport and cases of exemption. However, this legal framework is not applicable to transportation by pipeline. As transportation by pipeline is expected to bring together hydrogen production and consumption within a region or between regions, it is important that the legal framework for transportation of hydrogen via pipeline is being developed. It is important that this issue is not only approached in the context of safety and permits, but also with regard to the issues of which actors should develop transmission infrastructure; whether or not a transmission system operator should be appointed and whether or not there should be third-party access to hydrogen pipeline infrastructure.

In conclusion, the legal framework for hydrogen in Italy is fragmented and there is no overarching national Act on hydrogen. This creates legal uncertainty regarding various hydrogen-related activities, especially when they are organised differently per region. Nevertheless, the Regional Act on Hydrogen, adopted by the Puglian Regional Council, does give legal certainty to project developers, companies and knowledge institutions on the direction of hydrogen policy in Puglia in the coming years. Moreover, the Regional Act also provides sufficient instruments for the regional hydrogen policy. Finally, a danger to the implementation of the regional Hydrogen Act is dependency on the underdeveloped national legal framework for important matters such as permits, integration in the energy sector and transportation by pipeline: development of national overarching laws on this topic may be too slow for the regional ambitions, leaving project developers with legislative uncertainty. Moreover, in the absence of a national framework for the governance of hydrogen pipelines, the regions may all develop their own approaches, creating a patchwork of different systems. As long as all hydrogen developments take place within one region, this is not problematic, but as soon as pipelines cross regional borders, it may become so.

9.3.2 Groningen

The north of the Netherlands, with a key role for Groningen,³⁸ refers to itself as the first ‘hydrogen valley’ of Europe.³⁹ That is, inter alia, because over recent years many hydrogen-related projects have been or are currently being developed in this region.⁴⁰ There are three main reasons why Groningen as a region has an interest in the development of a hydrogen economy: first, Groningen is home to one of the largest natural gas fields in Europe.⁴¹ The region traditionally focused on gas production, but due to earthquakes, and the resulting damage,⁴² it was decided that the gas production should end.⁴³ However, Groningen is still home to significant amounts of knowledge and skilled workers in the gas industry, which could be used for the setting up of a more sustainable gas industry.⁴⁴ Thus, hydrogen can play a role in the transition from a natural gas industry region to a clean energy region. It must be noted in this context that the gas industry has played a large role in lobbying for hydrogen activities in the region.⁴⁵ A second reason for Groningen’s interest in hydrogen is that it is currently one of the regions with the highest penetration of renewable energy in the Netherlands, and it has high ambitions with regard to the development of renewable energy (solar power plants and wind energy) in the years ahead. Hydrogen production could help facilitate grid integration of renewables.⁴⁶ A third reason is that hydrogen can be used as a feedstock for the industrial clusters of the region.⁴⁷

Policy

The Province of Groningen has an active role in developing a hydrogen network. This policy has resulted from considerations related to strengthening the local economy and retaining sufficient employment possibilities while the fossil fuel production region was declining.⁴⁸ The policy was partially designed in close connection to the companies involved in the production of natural gas in the region.⁴⁹

The role of the province in the development of a hydrogen region is twofold: on the one hand, the province creates a network of companies working together in the hydrogen chain, and on the other hand, together with its partners, it develops a pipeline of projects which it coordinates in terms of timing and funding.⁵⁰ This translates into an active lobby for hydrogen on the national and EU scale, and in a stimulus for companies to apply for funding for projects.⁵¹ Moreover, the province developed an Investment Plan with concrete actions for the coming years. The Investment Plan can be compared to the Regional Hydrogen Plan that is to be developed in Puglia; it contains various projects, measures and a roadmap for future hydrogen expansion. With this Investment Plan, the Groningen Regional Council demonstrates the political will to invest in hydrogen, which will help to create investment certainty for project developers.

A recent update of the Investment Plan has shown a vast increase in hydrogen-related projects (from fifty to more than eighty), but at the same time it has become clear that no investment decisions have been made on large(r)-scale green hydrogen projects.⁵² Compared to the 2020 ambitions, there is a serious delay, which also involves the hydrogen infrastructure projects that serve as a backbone for the other activities. This is due to the reluctance of parties to conclude long-term contracts, making the business case (too) uncertain to proceed to a final investment decision.⁵³ Higher energy costs and economic uncertainty, for example in the chemical industry, have also played a role in the delay of these projects.⁵⁴ Without these large projects, it is difficult to keep the ‘hydrogen frontrunner’ position that Groningen aims for.⁵⁵

The efforts are coordinated via HyNorth, the Transformation and Coordination Office founded by the provincial hydrogen roadmap. This organisation is also responsible for monitoring the results and for bringing together partners that depend on each other in the ‘hydrogen chain’.

Next to the provincial efforts, there are also other local entities active in the promotion of hydrogen. One of the ways in which the city of Groningen influences the demand for hydrogen is by experimenting with hydrogen as a fuel for public transportation,⁵⁶ and (heavy duty) vehicles owned by the municipality itself.⁵⁷ By doing so, a city or region can speed up the innovation process for fuelling heavy vehicles with hydrogen. Not only large cities are developing hydrogen projects: In Wagenborgen, a village in the rural area of East Groningen, thirty houses owned by a social housing corporation are connected to a small hydrogen grid.⁵⁸ This allows the project partners to experiment with different components (such as residential hydrogen heating installations), new roles (the distribution system operator of the region, Enexis, which normally operates the electricity and gas network, will also develop the hydrogen network) and citizen engagement.⁵⁹

However, it must be noted that, despite claims that these cases help to increase local demand for hydrogen and thereby boost the development of clean hydrogen production, critics claim that one should not use the (scarce) amounts of clean hydrogen for purposes in which other technologies or fuels are available (and sometimes better suited).⁶⁰ In fact, both views can be applicable at the same time, namely in a situation where hydrogen consumption and production are still at a low level. The weighing of different interests and alternatives for specific purposes may differ by region and vary over time. It helps if regions have a clear vision on what the purpose of a pilot is and how the resulting knowledge and infrastructure will be used in the future.

Of the three roles identified in Section 9.2, the province of Groningen is most active in the first role (bringing together various parties and completing the hydrogen chain), whereas various municipalities (together with the province of Groningen) are investing in the second role (increasing the demand for hydrogen via public transport and municipal vehicles and hydrogen usage in residential areas). Interestingly, even though there is significant heat demand in the Netherlands, and Groningen has a heat network based on waste heat, this has not yet been coupled to the hydrogen economy.

Law

The different hydrogen production and use activities in the northern Netherlands must fit within the existing legal framework. In the Netherlands, the regulation of hydrogen lies with the national authorities. As such, Groningen cannot adopt specific legislation on hydrogen, even though it wishes to be a frontrunner in the development of hydrogen. It should therefore seek support from other regions with similarly high hydrogen ambitions: the port areas of Rotterdam and Amsterdam,⁶¹ as well as the chemical cluster of Zeeland, with the first Dutch hydrogen pipeline between Dow and Yara.⁶² The various Dutch regions with hydrogen ambitions are at the same time competing and cooperating with each other: there is competition, for example, in the application for national or EU-based funding for their projects, and cooperation takes place in joint efforts for the development of national policies and legislation on hydrogen.

Despite all the ambitious hydrogen regions in the Netherlands, the current legal framework for hydrogen is still under construction: the new Energy Act which is currently still in the parliamentary process, is the first Act to include hydrogen regulation. It proposes to include hydrogen in the rules on unbundling, making it in principle impossible for the same legal entity to be involved in both commercial activities (production, trade, sale) and transportation of hydrogen.⁶³ Infrastructure companies are allowed to develop hydrogen transmission infrastructure as well as to organise hydrogen trading platforms.⁶⁴ They are also allowed to develop hydrogen storage facilities, as well as terminals and interconnectors for export of hydrogen.⁶⁵ A major point of consideration is the re-use of the existing natural gas infrastructure for the creation of a hydrogen pipeline infrastructure ‘backbone’. Moreover, an important highlight of this proposed Energy Act is that it puts an end to the long discussion on whether or not the hydrogen pipeline system should be owned by a party that is unbundled from the production, supply and storage of hydrogen.⁶⁶ An additional question is whether the entity responsible for natural gas (owning the gas pipeline structure that will partially be re-used), Gasunie Transport Services (GTS), should become the transmission system operator (TSO) of the hydrogen system.⁶⁷

Next to the debate on the direction of the legal framework concerning the ownership of pipeline infrastructure, other relevant topics are the permitting and licensing regimes and the rules that are applicable to hydrogen transportation via road, rail and inland waterways. Permitting and licensing regimes, for example for hydrogen production and refuelling stations, are based on the legal framework for industrial activities, which is also undergoing a major legislative overhaul.⁶⁸ Regarding transportation of hydrogen via road, rail and waterways, the legal framework is based on the implementation of European legislation.⁶⁹ The regional experiments with hydrogen as a fuel for residential heating (Wagenborgen) are based on exemptions to the existing legislation, rather than on a solid legal framework. The Minister of Economic Affairs requested the Dutch State Supervision of Mines (Staatstoezicht op de Mijnen), which is also the authority for the safety of gas extraction activities, to supervise the safety of experiments with hydrogen in residential areas.⁷⁰

9.3.3 Comparison

In this section, the ‘hydrogen regions’ of Groningen and Puglia are compared on both the policy and law related to hydrogen. Main points that stand out are a focus on the energy chain; the underlying policy goals of the ambition to develop a hydrogen region; the role of municipalities; the regional legal framework; and the relation to the national legal framework. These topics are treated in more detail below.

First, regarding the hydrogen chain, both Puglia and Groningen have applied for projects related to a combination of electrolysis, hydrogen storage and various forms of hydrogen use, in order to reach a ‘hydrogen chain’ rather than separate projects.⁷¹ This could be explained as follows. For entities to benefit from the regional focus (contrary to a national focus), it is important that the region includes various parts of the chain, such as production, storage, transportation and use, within a geographically limited area. With isolated projects, there is less benefit from a regional approach compared to a national approach, as geographical proximity between projects is not exploited. As mentioned in the updated hydrogen investment plan for Groningen, this focus on a chain of projects has the downside that delays in one project influences the projects surrounding it and can affect the activities in the entire region.

A second point relates to the underlying goals of the hydrogen ambitions. There is a clear difference between Puglia and Groningen, at least in the communication about the goals. Puglia focuses mainly on the combination of renewable energy and green hydrogen production, driven by the need for better grid integration of the large potential for renewable energy in Puglia. This is also mentioned in the Groningen case, but in policy documents it becomes clear that Groningen focuses more on industrial policy and economic considerations, and specifically on the link between green hydrogen production, infrastructure and integration in industrial processes. A secondary goal is to use hydrogen as a replacement for the natural gas sector that is seeing its activities decline in Groningen.⁷²

Whereas the goals and background of the ambition differ, the means to reach it are similar: both regions adopted specific policy instruments to this end, which focus not only on the energy installations as such, but also on other aspects such as expanding knowledge and skills in the hydrogen industry and collecting data and trends on the development of the regional hydrogen economy. In both cases, a coordinating and monitoring body is present.

The involvement of municipalities is different in Groningen and Puglia. Whereas they are essential to the policy framework in Groningen, this is less so (or at least less visible from the outside) in Puglia. In Groningen, some municipalities are actively promoting the use of hydrogen in municipal vehicles or in a ‘hydrogen neighbourhood’ in which hydrogen is used as a means of heating. A recommendation in this regard is to couple the development of a hydrogen economy to other municipal tasks, such as heating transition (in the Netherlands) or transportation policy (local public transport for example). This may deliver mutual benefits to the policy goals, such as the use of waste heat from hydrogen production that can be used in a municipal heat network.

The next point of comparison is the development of a regional legal framework. Puglia and Groningen differ significantly in their approaches. This difference stems from the constitutional and political differences between the regions: Italy is a republic, and regions in Italy are more accustomed to adopting their own legislation on a wide variety of topics. Thus, Puglia laid down its policy in a Regional Act, whereas Groningen only has policy documents. Although the difference between the two regions can be explained, the outcome is that Puglia creates more legal certainty. The Regional Act explains the ambitions, instruments and scope of the hydrogen plans unambiguously and for the longer term. Groningen does not have a similar Act but did adopt a regional investment plan on hydrogen that lays down ambitions and projects as well as a development plan for the longer term. However, this document has less legal value than an Act.

Both regions rely on national legislation on hydrogen infrastructure and safety of installations. In the Netherlands, the legal framework is under development, after a long period of discussions on which entity should own and operate hydrogen infrastructure. In Italy, the lack of legislation on hydrogen transportation via pipeline is a legislative gap: pipelines are a logical mode of transportation to match production and consumption of hydrogen within a region. Both countries have legislation regarding transportation of hydrogen via road, rail and waterways, which is based on European law regarding dangerous goods.

Finally, a missed opportunity is that neither of the countries has specific legislation on the integration of hydrogen in the energy sector, whereas in both countries, a main reason for the development of a hydrogen economy is to relieve the stress put on the electricity system regarding the increased load and penetration of intermittent renewable energy sources.

9.4 Conclusion and Recommendations

Hydrogen infrastructure is expected to develop as national infrastructure, but the role of regional and local authorities in the creation and development of the hydrogen market should not be underestimated. Regional and local authorities can have several roles in this respect. First, they can bring parties (companies, industrial associations, knowledge institutions) together and position the specific region as a hydrogen hotspot. Regions are often already in charge of industrial policy and employment policy, and the development of a hydrogen region fits with this competence. Secondly, regions can create local demand through the procurement of public transport services and/or maintenance for vehicles, also in areas where there is no industrial demand for hydrogen (yet). In doing so, they can also complete the ‘hydrogen chain’, when there is potential for hydrogen production. Third, local and regional authorities can play a role in system integration between electricity, hydrogen and heat by using the waste heat from hydrogen production in district heating. When creating a local demand for hydrogen, municipalities may want to steer towards local production of hydrogen, as the waste heat of this process can then be used in local district heating networks. Even though there is an identified potential for use of waste heat from hydrogen production, this chapter shows that possibility is currently not taken up by local or regional authorities in the investigated regions (Groningen and Puglia).

The comparison between these regions showed that there are differences in regional hydrogen policy and law either on the general purpose or on the approach and the translation into legal instruments. First, the purposes for the development of a regional hydrogen economy differ significantly. Whereas Puglia’s main reason for the development of a hydrogen economy is the facilitation of the grid integration of renewables, Groningen developed its hydrogen policy in its search for a replacement for natural gas production and transportation in its regional economy, both the physical infrastructure and the socio-economic infrastructure, including knowledge and skills. The approach to hydrogen policy is also different: whereas Puglia has an overarching instrument, the Groningen approach is based more on projects. Nevertheless, both regions focus on the entire chain, from production to transportation and various types of consumption. In terms of the translation into legal instruments, Puglia adopted a specific legal instrument on hydrogen. This is not the case in Groningen. Codifying the policy into legal instruments has an advantage in that it formalises the regional commitment to hydrogen, thereby providing a stable investment climate for project developers as well as R&D facilities. Both regions, however, struggle with a lack of coherent national legislation for hydrogen.

Based on this chapter, recommendations for regions wishing to create a regional hydrogen policy and legal framework are, first, to consider the purpose for which the hydrogen economy will be developed and to design the policy and legal framework in a way that fits with this purpose; second, to consider whether or not the policy should be based only on soft law instruments or whether a local legal instrument can be used; third, to involve local authorities, such as municipalities, which can also take up their own role in the development of a regional hydrogen economy; and fourth, in regions with district heating, whether or not system integration between hydrogen production and heat networks can be accomplished, as the potential value of waste heat from the hydrogen production process can only materialise if the facilities are located sufficiently close to the district heating network and if the use of waste heat is taken into account in the design of the production facilities. This requires a far-sighted policy that also considers future demand for low-carbon heat. Next to recommendations for local and regional authorities, a recommendation for national authorities is to develop a coherent legal framework on hydrogen that recognises the role(s) of regions in the development of a hydrogen economy.

10 Sustainability Criteria for Renewable Hydrogen

Romain Mauger , Paola Villavicencio-Calzadilla and Ruven Fleming

10.1 Introduction

Hydrogen can come in all shapes and forms. According to the so-called colour-book of hydrogen, several different types of hydrogen exist and are clustered depending on their production method and input (electricity, gas, and so on). However, things are even more complicated given that different terminology exists in different regions of the world. This chapter focuses on Europe. The use of hydrogen terminology by European institutions has been explained before in this book by Leigh Hancher and Simina Suciu¹ and will not be repeated here. The focal point of this chapter is, in line with these EU definitions, renewable hydrogen. Renewable hydrogen means hydrogen produced with the help of renewable energy carriers, such as electricity from solar panels and wind turbines. Whether renewable hydrogen produced from biomass is part of that definition or instead is defined as biogas is still debated between European institutions at the time of writing.²

The Hydrogen and Decarbonized Gas package is finally well on its way to implementation and it contains a revised Gas Directive (hereinafter rGD).³ This rGD indirectly features sustainability criteria for hydrogen. Indeed, article 8 (1) rGD requires renewable gases to be certified in accordance with articles 29, 29a and 30 of the 2023 Renewable Energy Directive (RED III).⁴ Renewable gases encompass biogas and renewable fuels of non-biological origins (RFNBOs).⁵ RFNBOs are themselves defined as liquid and gaseous fuels, the energy content of which is derived from renewable sources other than biomass.⁶ This is where renewable hydrogen lies. All this means that RED III’s bioenergy sustainability criteria should also apply to renewable hydrogen.

To guarantee that RFNBOs are indeed of renewable origin, they have to comply with a 2023 Delegated Act from the Commission.⁷ This Delegated Act was adopted as required by RED III.⁸ For hydrogen to be considered as renewable, the electrolyser must consume electricity either through a direct connection to a generation plant using renewable sources, or through a connection to the grid with the condition that it runs overwhelmingly on renewable sources, or otherwise through power purchase agreements with generation from renewable sources and additionality, temporal correlation and geographical correlation rules. These rules all apply to hydrogen whether produced inside the EU or imported,⁹ and they come on top of the sustainability criteria.

For a genuine transformation and decarbonization of our energy systems, a lot of hydrogen needs to be produced globally. However, when looking into renewable hydrogen specifically, it becomes immediately clear that production conditions differ widely across the globe, as the sun does not shine equally bright and the wind does not blow equally strong everywhere. As a result, some areas and regions will be far more suitable for the production of renewable hydrogen than others. The crux is that, despite great differences in possibilities for production, renewable hydrogen will be required all around the world. Thus, trade in hydrogen becomes crucial. Some countries might be able to export surplus production of hydrogen, while others will have great demand in terms of import.

The International Energy Agency (IEA) did extensive research into these geographical disparities around the globe and compiled the results in its Global Hydrogen Review 2022.¹⁰ According to this, an estimated 12 million metric tons (Mt) of hydrogen could be exported annually by 2030 around the globe, with 2.6 Mt/year planned to come online by 2026.¹¹ Of the 12 Mt H2/year of planned exports by 2030, the region with the largest amount is Latin America (3.0 Mt H2/year). This is followed by Australia (2.7 Mt H2/year), Europe (1.79 Mt H2/year), Africa (1.7 Mt H2/year), North America (1.1 Mt H2/year), Middle East (1.0 Mt H2/year) and Asia (0.7 Mt H2/year).¹² Abundant solar, wind and hydropower resources to supply clean electricity for electrolysis is a key driver of these projects.¹³

As opposed to this export capacity, import capacity around the globe is lagging. Of the 12 Mt H2/year of proposed exports by 2030, only projects accounting for 2 Mt H2/year have made off-take agreements or have a potential off-taker in a project consortium.¹⁴ Projects representing a further 2.6 Mt H2/year cite intend export to a specific region but do not have off-take agreements.¹⁵ The remaining 7.5 Mt H2/year of projects have not announced proposed delivery destinations.¹⁶

However, of interest is the regional breakdown of the expected imports: the biggest importer by 2030, according to IEA projections, is Europe with 1.9 Mt H2/year.¹⁷ The EU itself estimates that it will produce 10 million tonnes of renewable hydrogen by 2030 and sees the need to import a further 10 million tonnes by 2030.¹⁸ Given that Europe is projected to have the biggest demand for hydrogen imports, it is worthwhile asking in particular if there are and/or should be requirements and conditions for all that hydrogen that is expected to come to Europe. In particular, the 2020 European Hydrogen Strategy is putting strong emphasis on the import of renewable hydrogen, as opposed to other types of hydrogen.¹⁹

The question that this raises is: do all stakeholders agree on similar criteria for what exactly is renewable hydrogen and when it can be considered sustainable? Indeed, to meet the EU’s import ambitions in terms of renewable hydrogen, a clear system of criteria must exist to avoid ‘green washing’ of hydrogen that has been produced by ‘non-green’ methods. Given the above-described recent changes in legislation concerning, for example, RFNBOs, now might be a good moment to clarify the sustainability dimension of the future legislation and make some suggestions. It might make sense to take a step back and assess whether or not the sustainability criteria that currently exist in EU law for bioenergy make sense, what the critique is and whether or not these (or other) criteria on sustainability should be applied to the production and import of hydrogen into the EU.

A common starting point to find out if something can be labelled as ‘green’ or not are criteria that relate to the sustainability of the product, here hydrogen. Sustainability criteria for fuels and energy carriers are well-known in EU law, particularly in the context of the import of bioenergy into the EU. After this introduction, the chapter discusses below in Section 10.2 what sustainability criteria are, how they have been used in EU law on bioenergy and what type of critique has arisen. Section 10.3 then provides an analysis on sustainability criteria and how they can be used (or not) for hydrogen purposes, before concluding with some reflections and recommendations on the directions that the transposition of EU legislation into Member State (MS) law should take and, possibly, further amendments.

10.2 Sustainability Criteria for Bioenergy in EU Law

10.2.1 What Are Sustainability Criteria?

To address the notion of sustainability criteria one must first refer to the concept of sustainable development. In the early 1970s, sustainable development emerged as an alternative to the unlimited economic growth model and in response to the previous decades’ concerns about risks and damage of technological advances, development failures and evident growth limits in an already overexploited planet.²⁰ Recognizing the tension between economic growth and environmental protection, the 1987 Brundtland Commission report Our Common Future defined sustainable development as ‘development which meets the needs of current generations without compromising the ability of future generations to meet their own needs’.²¹ The report emphasized the needs and interests of human beings and stressed the necessity to apply an integrated decision-making process taking into account both economic development and environmental protection to further human welfare.²² Since then, and especially since the 1992 Earth Summit in Rio de Janeiro, sustainable development has gained popularity and prominence in varied spaces and discourses, has been placed at the centre of international development policy and has been incorporated into numerous national and supranational legal instruments.²³

While the Brundtland definition of sustainable development is the most widely used, a plethora of other definitions, meanings, approaches and interpretations exists.²⁴ Some argue that because of its complex and disparate historical origins, sustainable development ‘remains both context specific and ontologically open’.²⁵ Yet it is widely admitted that sustainable development rests on three distinct but interdependent, equally important and mutually reinforcing pillars, namely environmental, social and economic. The environmental pillar (environmental sustainability) requires the preservation and maintenance of the natural environment to support development and human quality of life. The social pillar (social sustainability) encompasses many issues such as human rights, equality, cultural identity and public participation, all of which promote peace and social stability. Lastly, the economic pillar (economic sustainability) implies the maintenance of the natural, social and human capital required for incomes and living standards.²⁶ Sustainable development can only be achieved through multilevel efforts to integrate these three pillars in a balanced way, so prioritizing is not an option; they ‘cannot be pursued in insolation for S[ustainable] D[evelopment] to flourish’.²⁷

Although sustainable development has achieved notorious prominence in various spaces, it remains a highly contested concept. For instance, it has been criticized for being a rather vague, ambiguous and inherently anthropocentric and political concept, based on Western thinking and serving neoliberal interests by not questioning the economic growth ideology or the consumerist culture.²⁸ Others consider sustainable development as an oxymoron because economic development or growth is inconsistent with environmental protection or sustainability.²⁹ Despite criticisms, it is argued that sustainable development has become the internationally accepted decision-making framework for achieving, maintaining and improving human well-being for both the present and future generations and that the challenge is to use and improve this framework taking into account and seeking to achieve environmental protection, social justice and economic development.³⁰

Tying sustainable development to sustainability, both concepts are frequently used interchangeably, while they are intrinsically different: sustainable development is the journey to achieve sustainability.³¹ Yet some argue that sustainability ‘has been co-opted into the sustainable development discourse where development is first and foremost about human survival and meeting human needs, but does not necessarily have much to do with genuine sustainability, which is reliant upon the continuation of the earth’.³² For others, the ‘transformation and operationalization at the practical level’ is the main obstacle regarding both concepts.³³

Sustainable development and sustainability form the basis for understanding sustainability criteria and their content. Sustainability criteria have been explored from various scientific perspectives and interpreted in different ways.³⁴ Defining product sustainability criteria, Pavlovskaia states that these ‘are requirements to the sustainable quality of a product and its sustainable production, which have to be fulfilled in order to acquire a sustainability status or certification’.³⁵ In this sense, it is argued that product sustainability criteria can be applied to identify unsustainable trends and effects and to assess opportunities and risks deriving from economic, environmental and social sustainability dimensions, also helping to assure long-term sustainability and secure investment.³⁶

Sustainability criteria can be binding when included in a legal framework – for instance, the EU’s binding sustainability criteria for bioenergy as detailed in Section 10.2.2, but can also be established in voluntary schemes, such as those existing in the coffee sector.³⁷ These criteria can be of a qualitative or quantitative nature; are usually developed for certain purposes and according to specific conditions; are not static, so continuous assessment, reconsideration and improvement can be required; and different actors at different levels can be responsible for setting and supporting their implementation.³⁸

The three pillars of sustainable development, it has been argued, ‘are attractive as organizing categories for sustainability criteria’.³⁹ In fact, it could be said that, to avoid negative sustainability impacts – for instance of a product – sustainability criteria should comprehensively address the most urgent sustainability concerns focusing on environmental, social and economic aspects, as they all are important to assure sustainability compliance, although particular contexts and specific conditions should be considered when identifying and developing the criteria.⁴⁰

Moreover, for sustainability criteria to work as intended, they should be understandable and it should be possible to implement and monitor them, as well as to control compliance through the establishment of an organizational structure.⁴¹ To verify compliance with defined sustainability criteria, certification processes have been created in some cases – for instance, to certify that a product was sustainably produced.⁴² Thus, alongside the creation of different types of sustainability criteria, different certification systems have also been established.⁴³ In any case, it is argued that the establishment and implementation of sustainability criteria should be done in a transparent and consistent manner and that the control systems linked to their fulfilment should be reliable, trustworthy and transparent.⁴⁴

10.2.2 Sustainability Criteria for Bioenergy in EU Law

Sustainability criteria for the production and import of bioenergy into the EU were included in the law for the first time in the 2009 Renewable Energy Directive (hereinafter RED I).⁴⁵ The scope of this Directive was limited to biofuels and bioliquids. According to the Directive, both are produced from biomass, but biofuels are liquid or gaseous fuels for transport, while bioliquids are liquid fuels for energy purposes other than for transport, including electricity, heating and cooling.⁴⁶

The mandatory sustainability criteria of the EU have two components. First, biofuels and bioliquids must achieve a certain threshold of greenhouse gas (GHG) emissions savings in comparison to the use of fossil fuels.⁴⁷ Second, the raw materials cultivated for the production of biofuels or bioliquids must not come from land with high biodiversity value, land with high carbon stock or from peatlands.⁴⁸ If these criteria are not met, the biofuels or bioliquids can still enter and be sold in the EU market, but they cannot receive financial support or count towards the renewable energy targets of EU MSs.⁴⁹

Compliance with the sustainability criteria must be proven by the producers of biofuels or bioliquids through independent audits;⁵⁰ in other words, through private voluntary certification schemes. Alternatively, third countries may conclude bilateral or multilateral agreements providing for sustainability criteria equivalent to those in the Directive,⁵¹ exempting the producers from independent audit.⁵² However, the vast majority of producers of biofuels and bioliquids made use of the private schemes instead of these options.⁵³

In addition to the sustainability criteria, the European Commission must report every two years to the European Parliament and the Council on the impact of the increased demand for biofuels on the availability of food and on social sustainability in and outside of the EU.⁵⁴ It must also report on the respect for land use rights and indicate whether the supplying countries have ratified and implemented a number of Conventions of the International Labour Organization (ILO).⁵⁵ Auditors of private schemes also have reporting obligations on topics not limited to the sustainability criteria. They must inter alia provide information about soil, water and air protection, about the restoration of degraded land and about the avoidance of excessive water consumption in areas where water is scarce.⁵⁶

In the midst of mounting controversy on the effect of the increase in biofuels consumption in the EU on food prices and about their real GHG emissions savings,⁵⁷ RED I was amended in 2015.⁵⁸ This amendment mainly served to include provisions to limit indirect land use change (ILUC). ILUC happens where pasture or agricultural land previously destined for food and feed markets is diverted to biofuel production, displacing the non-fuel demand to new, non-agricultural land.⁵⁹ When this involves the conversion of land with high carbon stock, it can lead to significant GHG emissions.⁶⁰ To tackle this issue, the amended directive caps the total share of energy from biofuels produced from food crops to 7 per cent of the final consumption of energy in transport in the EU by 2020.⁶¹

Only three years later, RED I was overhauled and gave place to RED II.⁶² This new version of the Directive separates sustainability from GHG emissions saving criteria⁶³ while they were mashed in RED I. Yet the criteria follow the same logic: they are mandatory but limited to GHG emissions savings on the one hand and the risk of land use change on the other.⁶⁴ They do not restrict market access but are a condition to access financial support and count towards MSs’ renewable energy targets,⁶⁵ and compliance is controlled by private certification schemes.⁶⁶

Three novelties with relevance to this chapter were introduced. First, the directive’s scope on biofuels and bioliquids was extended to biomass fuels too, defined as gaseous and solid fuels produced from biomass.⁶⁷ Second, the requirements on GHG emissions savings have been made more stringent and are increasing in line with the opening date of a facility. Third, it has to be noted that sustainability criteria only apply to biomass fuels used for producing electricity, heating and cooling or fuels from a certain installation size onwards, namely a total energy generation capacity of a rated thermal input of 20 megawatts (MW) for production from solid biomass and of 2 MW from gaseous biomass fuels.⁶⁸ This last point is of interest, given that current electrolysers for the production of green hydrogen are operating mostly at a similar scale (between a few MW to around 20 MW), which makes an analogy easy.

In October 2023, once again, a revised version of the RED was adopted. RED III amends and reshuffles the provisions detailing the GHG and sustainability criteria applicable to bioenergy and RFNBOs, strengthened some GHG reduction targets⁶⁹ and doubled the previous target for the share of renewable energy within the final consumption of energy in the transport sector to 29 per cent by 2030.⁷⁰ Yet no major change impacted the sustainability criteria, the sectors to which they apply, and so on.

In a nutshell, sustainability criteria in EU law tackle GHG emissions and (direct or indirect) land use change that impacts upon environmentally valuable types of land. These GHG emission reductions are a condition for bioenergy to qualify for financial support and to count towards renewable energy targets. They apply to both domestic production and imports and compliance is (mostly) checked by private certification bodies. However, issues such as soil, air and water quality and their usage or social aspects are not part of the criteria. These are merely subject to a reporting requirement.

10.2.3 The Critique of Sustainability Criteria for Bioenergy in EU Law

The critique of sustainability criteria for bioenergy in EU law mainly focuses on two dimensions: the environmental and the social spheres. Although several points of critique about the environmental impact of bioenergy on GHG emissions and on the local environment have been addressed with the legislative process leading to RED II and III, some persist. Three issues in particular remain, which will now be explained in more depth: first, the issue of green protectionism; second, the problem of non-carbon-related local environmental impacts; and third, problems with the certification process.

As far as the first point is concerned, it has been argued that the EU created the sustainability criteria to protect ‘its own inefficient domestic biofuels production’.⁷¹ These accusations amount to alleged green imperialism in the sense that EU institutions decide what is to be considered sustainable bioenergy and how the specific local ecological and social needs are to be balanced with economic and social development interests in producing countries.⁷² Using other terms, this is labelled as a transnational legal process, being the ‘impact of unilateral legal developments in one jurisdiction that affect behaviour in others’.⁷³

Second, many critics point out that sustainability criteria prioritize carbon concerns over non-carbon ones,⁷⁴ adopting ‘a limited definition of sustainable development’.⁷⁵ Academics would like to see sustainability criteria extended to soil, water and air protection, to the restoration of degraded land and to the avoidance of excessive water consumption in areas where water is scarce.⁷⁶ As things stand, these are only subject to a reporting obligation to the Commission by private certification schemes.⁷⁷ Yet several studies show that reductions in GHG emissions from biofuels are achieved at the expense of other impacts, such as acidification, eutrophication, water footprint and biodiversity loss.⁷⁸ A 2013 study on the topic of air, soil and water protection acknowledged that introducing mandatory quantitative criteria is not feasible, given the wide variety of crops and the prevailing bio-physical, environmental and climatic conditions for producing bioenergy, and proposed instead to place greater emphasis on targeted management practices.⁷⁹ Such practices would require compliance with relevant legislation on soil, water and air, the creation of management plans at farm level for soil and water management and the creation of river basin management plans to identify regions at risk of water scarcity.⁸⁰ In the 2016 impact assessment for the preparation of RED II, the European Commission clearly indicated that, while the inclusion of these issues in the sustainability criteria was requested by stakeholders during the public consultation, it decided not to reopen the topic due to the industry complaining about the administrative burden that these additional criteria would bring about.⁸¹ In addition, the Commission argued that many private certification schemes that it recognizes already require good agricultural practices, including for soil, water and air.⁸²

Third, the private certification schemes that control compliance with the sustainability criteria have been widely criticized, as they allegedly amount to an externalization of the control of legal compliance to private parties. The literature describes this system as a hybrid approach,⁸³ which allows a formally voluntary certification system to become de facto mandatory through formal enshrinement in law.⁸⁴ The advantage is that some schemes are targeted to a particular feedstock and/or regional conditions and therefore have the specific expertise needed to define management requirements targeted at the local conditions.⁸⁵ It also allows bioenergy producers to choose a more ambitious certification scheme, with higher requirements than those in RED III.⁸⁶ Moreover, when non-governmental organizations (NGOs) are participating in certification schemes, research shows a strengthening of the criteria.⁸⁷ However, the literature also pointed to the risk of a ‘race to the bottom’ or ‘forum shopping’, where producers overwhelmingly choose the less demanding certification scheme, even when the final product is sold with an upper quality certificate.⁸⁸ The consequence is that to really improve the sustainability of bioenergy production, raising the ‘meta-standard’ is the safest option: sustainability criteria could integrate what is already being proposed by various certification schemes and make these elements mandatory.⁸⁹

Besides this criticism on the environmental side of sustainability criteria, there is also long-standing dissatisfaction about the exclusion of social issues, which will be discussed now. The absence of the social dimension means that the negative effects of bioenergy production on social and human rights, such as ‘appropriate wages and working conditions or land rights of smallholders and indigenous peoples’, is often disregarded.⁹⁰

Despite the absence of mandatory social requirements in EU law, many private certification schemes do integrate such prerequisites.⁹¹ The situation is very similar to the one described above on the inclusion of non-carbon environmental aspects in private certification schemes. Indeed, some standards are quite comprehensive on the issue while others are very light,⁹² and schemes with NGOs forming part of the board are more stringent in their criteria than industry-only ones.⁹³ Yet overall social criteria are usually less present than environmental ones in the certification schemes,⁹⁴ and they also suffer from a race to the bottom.⁹⁵ For these reasons, scholars are prone to request the inclusion of mandatory social sustainability criteria in EU law, for instance based on what many private schemes already propose,⁹⁶ to ‘set the “bottom line” higher’.⁹⁷

However, there is a large stumbling block on the way to this integration. When writing RED I, the European Parliament’s Industry Committee proposed to include social aspects in the sustainability criteria.⁹⁸ Due to deep concerns about the compatibility with World Trade Organization (WTO) rules, raised by the Commission especially, this idea was abandoned.⁹⁹ Imposing mandatory social sustainability criteria was seen as overstepping ‘some countries’ “red lines” and thus would almost certainly trigger an action in the WTO’.¹⁰⁰ Most of the academic debate about the legal feasibility of social sustainability criteria with regard to WTO law took place during and shortly after the establishment of RED I and many scholars considered this option to be difficult.¹⁰¹ However, there is some discrepancy and a few authors believe that it would be possible to include such criteria, especially based on the requirements that are already widely used in private certification schemes.¹⁰²

Based on this section, one may consider that the EU sustainability criteria on bioenergy should more accurately be renamed ‘environmental criteria’ (without downplaying all the criticisms of the scope and control of the environmental aspects). Indeed, in contrast with what was mentioned in Section 10.2.1, while the use of the term sustainability criteria suggests an inclusion of the three pillars of sustainable development – economic, social and environmental – only the environmental one is part of the binding EU requirements applying to the production and import of sustainable bioenergy products.

10.3 Transposing Sustainability Criteria from Bioenergy to Hydrogen: One Size Fits All?

As mentioned in the Introduction to this chapter, EU law is in the process of transposing the bioenergy sustainability criteria to local production as well as imports of renewable hydrogen. This move avoids drafting specific sustainability criteria for hydrogen and circumvents time-consuming political negotiations both between EU MSs and with third parties. However, it relies on the assumptions that (i) bioenergy provisions can easily and clearly be applied to hydrogen, otherwise creating an issue in terms of intelligibility of the law, and that (ii) the potential sustainability impacts of renewable hydrogen production are like those created by the production of bioenergy to avoid a mismatch.¹⁰³

Firstly, regarding the application of bioenergy provisions to hydrogen. As mentioned in the Introduction, the rGD proposal provides that articles 29, 29a and 30 of RED III, setting the sustainability criteria for bioenergy, apply to renewable gases.¹⁰⁴ Renewable gases encompass RFNBOs, which encompass renewable hydrogen. Hydrogen produced through the electrolysis of water and fed with electricity from renewable sources falls under this category and therefore the sustainability criteria, as detailed in Section 10.2.2, should apply to its production in the EU as well as its import, if this product is to benefit from subsidies and to count for the renewable energy targets of EU MSs. Therefore, the legal link between renewable gases in the rGD and the sustainability criteria in the RED is clear.

However, there is an interpretation issue with how to specifically apply the bioenergy sustainability criteria to hydrogen. For instance, article 29(3) RED III reads: ‘Biofuels, bioliquids and biomass fuels produced from agricultural biomass … shall not be made from raw material obtained from land with a high biodiversity value.’ If one simply replaces bioenergy with renewable gases in this provision, then it focuses on such gases being produced from agricultural biomass, which does not make much sense as renewable hydrogen will be produced with water and electricity overwhelmingly from hydropower, wind or solar power. In fact, the EU, in its common political agreement of 14 December 2023 on the new revised Gas Directive, only takes these two (wind and solar) into account for the production of renewable hydrogen and defines renewable hydrogen produced from biomass as biogas in recital 9 of the proposal.¹⁰⁵ Whether or not this is the end point and will find its way into the Official Journal of the European Union remains to be seen.

Coming back to article 29(3) RED III. If one considers that the whole provision part to be replaced with renewable gases is ‘Biofuels, bioliquids and biomass fuels produced from agricultural biomass’, then it would mean that hydrogen ‘shall not be made from raw material obtained from land with a high biodiversity value’. It makes a bit more sense than the previous version but it is still not satisfactory.

Indeed, the raw material used for hydrogen is water. Taking a whole supply chain approach, one could also consider as raw materials the resources needed to construct wind turbines, solar panels or dams but these are difficult to trace and do not include the impacts during the operation of the renewable energy installation. A more coherent interpretation would require that the production of renewable gases does not harm land with high biodiversity value. In article 29(3), this means land that has or has had the status of primary forest, highly biodiverse forest, legally recognized protected natural areas, highly biodiverse grassland spanning more than one hectare, or heathland. In the case of renewable hydrogen, it may mean avoiding the electrolyser, the water source and the renewable energy installations being located within such areas. But this would probably be too restrictive, given that the impacts of electrolysers or water pumping or renewable energy installations do not systematically involve a change in (the whole) land use, as tends to be the case for bioenergy. Therefore, it may be necessary for the Commission to adopt more specific rules or at least a guideline to set a threshold above which it is considered that the land is too harmed for the renewable gas to be considered sustainable.

Secondly, unpacking the issue of the potential sustainability impacts of renewable hydrogen compared to bioenergy raises various points. The first is GHG emissions. Although renewable hydrogen is often perceived as emissions-free or with very low emissions, once the life cycle of electrolysers’ and renewable energy installations’ components is taken into account, hydrogen actually is ‘an indirect greenhouse gas whose warming impact is both widely overlooked and underestimated’.¹⁰⁶ It is essential that hydrogen leakage and venting are tracked and limited as much as possible, given that it is a similar GHG to methane: it lasts in the atmosphere a couple of decades but its ‘indirect warming potency per unit mass is around 200 times that of carbon dioxide’.¹⁰⁷ In this regard, RED III sets a GHG savings criteria specifically for RFNBOs at 70 per cent.¹⁰⁸ The new regime between rGD and RED III is therefore consistent in this respect.

The other series of impacts where hydrogen has to be compared to bioenergy is the (direct or indirect) land use change that affects environmentally valuable types of land. As detailed in Section 10.2.2, bioenergy feedstock should not come from land with high biodiversity value, land with high carbon stock or peatlands. Such restrictions may be useful to avoid or limit some impacts of renewable hydrogen production. For instance, article 29 (3) (c) RED III might address the risks of biodiversity loss, especially from renewable energy installations, when located in areas designated by law or by the relevant competent authority for nature protection purposes, or for the protection of rare, threatened or endangered ecosystems or species.¹⁰⁹ However, this will (i) depend on the interpretation of the sustainability criteria in the case of hydrogen, as highlighted previously in this section, and (ii) only cover some impacts of the renewable hydrogen life cycle and not even the most important ones according to the literature, as detailed below.

Arguably, the first environmental concern when it comes to renewable hydrogen is the consumption of water. While water consumption to produce renewable hydrogen is minimal when compared to water consumption for other uses, such as farming,¹¹⁰ it is still a prevalent local concern given the global hotspots for future renewable hydrogen production are usually water-scarce, with countries such as Chile, Morocco, Namibia or even for Global North countries Australia or Spain.¹¹¹ A solution to avoid conflicts around water supply could be to use desalinated water,¹¹² which only slightly increases the total electricity consumption and the final price,¹¹³ or to directly use sea water, although the technology is not yet commercially available.¹¹⁴ In any case, RED III’s sustainability criteria only require reporting about the avoidance of excessive water consumption in areas where water is scarce,¹¹⁵ not compulsory limits.

The second environmental concern when it comes to renewable hydrogen is the combination of all sorts of environmental impacts along the supply chain to produce renewable hydrogen, especially the impacts of mining for the electrolyser’s materials as well as for the renewable energy installations,¹¹⁶ and the impacts of the siting of the latter during construction and operating life.¹¹⁷ These are indirect impacts, but they may be massive given the vast quantity of electricity necessary for the production and import of 20 million tonnes of hydrogen/year by 2030 according to European policy.¹¹⁸ Some of these impacts may be countered in protected areas, as mentioned previously in this section, but all the impacts in non-protected areas may be ignored and renewable energy installations already have a history of local environmental impacts when poorly developed.¹¹⁹ In such cases, the sustainability criteria should be broadened to ensure sustainable hydrogen production.

Finally, renewable hydrogen presents the risk of social impacts along its supply chain. Once more, the quantity of electricity to be produced from renewable sources implies a massive development in some countries foreseen as ideal renewable hydrogen suppliers to Europe, such as Morocco.¹²⁰ This can delay progress in access to electricity for local populations in some areas as well as the decarbonization of the country’s electricity mix.¹²¹ The need for such a quantity of large-scale projects also entails a high risk of negative social impacts, including poor labour practices, (indigenous) land grabbing and many types of human rights violations,¹²² as here again shown by a history of social injustices created by poorly developed renewable energy installations.¹²³ Even though the inclusion of social sustainability criteria for bioenergy has been ruled out so far, mainly due to WTO law,¹²⁴ the inclusion of renewable hydrogen under this regime makes the case for this inclusion even more pressing.

Another possible interpretation of the application of RED III’s sustainability criteria that strongly diverges from the developments in this section is to consider that as RED III’s article 29 is entitled ‘Sustainability and greenhouse gas emissions saving criteria for biofuels, bioliquids and biomass fuels’, it explicitly excludes RFNBOs and would only apply to biogas (understood as a component of ‘biomass fuels’)¹²⁵ as per the writing of article 8 (1) and 2 (2) of the rGD. In this case, article 8 (1) could be criticized for its lack of clarity. In addition, specific sustainability criteria would have to be adopted at an unspecified date, leaving the sector in a limbo.

10.4 Conclusion

With the adoption in 2023 of RED III and the rGD, renewable hydrogen should now be subject to bioenergy’s sustainability criteria provisions. It follows the same overall principles: applicable whether produced in the EU or imported and compulsory to get public support and to count towards MSs’ renewable energy targets. Yet applying the bioenergy sustainability criteria one-on-one to renewable hydrogen creates some issues. While the legal linkage between rGD and RED III and the GHG emissions reductions is clear, the final interpretation of the application of the sustainability criteria related to land use remains vague. Looking at the content of these land use criteria, some of them appear useful to tackle some environmental impacts of the supply chain behind the production of renewable hydrogen, essentially when it takes place in protected natural areas. However, for developments outside these areas, for water consumption in water-scarce areas and for social impacts, the bioenergy sustainability criteria are unfit.

Actually, these loopholes in existing sustainability criteria also fail to address similar impacts from bioenergy, as long noted by academics and NGOs. As mentioned in Section 10.2.3, in 2016 the European Commission rejected the inclusion of some of these issues in the sustainability criteria due to the industry complaining about the administrative burden that these additional criteria would cause. Yet the case of renewable hydrogen adds more weight to these demands, even if they increase the administrative burden. Social issues must also be tackled. It was mentioned that WTO law is an obstacle, but some scholars think it would be possible to include such criteria, especially based on the requirements that are already widely used in private certification schemes.¹²⁶ Otherwise, the EU would have to negotiate bilateral agreements including social criteria with its anticipated main providers. In both environmental and social cases, low sustainability criteria threaten the long-term acceptance and therefore sufficient supply of renewable hydrogen to the EU.

11 Public Participation in the Hydrogen Economy Lessons Learned from the Northern Netherland Hydrogen Valley

Lorenzo Squintani and Stan Schouten

11.1 Introduction

As underlined by the Hydrogen Strategy for a Climate Neutral Europe and the REPowerEU programmes,¹ both discussed in Chapter 2 by Hancher and Suciu in this book, the development of a hydrogen economy is considered of strategic importance for the achievement of the European Union (EU) climate goals by both the EU and several of its Member States. As for any socio-technical transition, the development of the hydrogen economy requires careful policy and regulatory drafting, as well as the concrete implementation of projects affecting people’s living environment. Public participation is mandated under international, European and national law to ensure that the hydrogen economy best fits within the environmental and societal needs of the interested regions.

Public participation, defined as collaborative participation where project proponents or policymakers invite citizens to discuss and decide together upon policies and projects affecting the environment, can indeed improve the quality of decisions and their ability to generate consensus, and thus acceptability,² although some practitioners might experience it as a time-consuming exercise. Moreover, public participation is regarded as a pillar of environmental democracy under the Rio Convention,³ and the Aarhus Convention, which establishes rights and obligations for its signatory parties in order to spur participatory democracy (articles 6–8 of the Convention).⁴

Both the EU and all of its Member States are party to the Convention and have adopted legislation to implement it, as will be discussed further below. However, some discrepancies between the requirements of the Convention and the legal frameworks of certain Convention Parties have already been discussed in the literature.⁵ Besides, empirical evidence suggests that a major problem with the implementation of the Convention concerns the manner in which such frameworks are applied in practice.⁶ There are, as of today, no studies focusing on public participation with a view to the development of the hydrogen economy, at the level of compliance of the regulatory frameworks with the Convention or at the level of the application of participatory rights in practice.

This chapter aims to close that gap by answering how the EU and national standards on public participation have been shaped and applied in practice in the development of the hydrogen economy when looking at them from the perspective of the Aarhus Convention.⁷ We present here the results of the case study focusing on the Netherlands, which hosts the first fully fledged hydrogen valley of the EU, namely the Northern Netherlands Hydrogen Valley (so-called HEAVENN project).⁸

After presenting the EU and Aarhus Convention frameworks for public participation and showing their points of convergence and discrepancies (Section 11.2), we will discuss the policy framework shaping the Northern Netherlands Hydrogen Valley (Section 11.3). Specific focus will be placed on the organization of public participation in the setting up of policy documents, plans and strategies by public and semi-public bodies⁹ in this valley, as the lacunas in the drafting and application of the regulatory framework on public participation in the field of the hydrogen economy become most visible here. Although studies on public perceptions about hydrogen are yet to deliver accurate empirical data,¹⁰ it can be expected that hydrogen storage will be the hydrogen-value-chain aspect most prone to attract societal debate. Accordingly, Section 11.3 will focus on an ongoing public participation procedure regarding hydrogen storage in depleted salt caverns in the Hydrogen Valley in the northern Netherlands. In Section 11.4, we will discuss the potential implications of our findings and conclude accordingly. In doing so, this chapter will provide data for comparative purposes and for the further development of the conceptual and applied frameworks for the hydrogen economy.

11.2 The EU Legal Framework for Public Participation in Energy Matters

11.2.1 General Issues: Lacunas in the EU Framework for Public Participation on Hydrogen Plans and Programmes

Public participation in energy matters is covered by the general framework on public participation in environmental matters. This is due to the fact that energy policy and activities usually, if not always, have implications for the environment.¹¹ In the EU legal order, public participation is, firstly, explicitly envisaged under article 11(1) of the Treaty on European Union (TEU), stating that EU institutions shall give citizens and representative associations the opportunity to make known and publicly exchange their views in all areas of Union action. This also includes energy. Furthermore, specifically on energy and environmental themes, the EU framework has been created in light of the Aarhus Convention.

This Convention is a so-called mixed agreement,¹² to which EU Member States and the EU itself are parties. The provisions of the Convention thus rank higher than EU secondary law, but lower than the Treaties.¹³ Moreover, the provisions of the Convention have primacy over conflicting national rules.¹⁴ This is also true regarding those provisions that have not yet been implemented by the EU legislator.¹⁵ This finding is relevant as EU law has still not fully implemented the Convention, as has been discussed elsewhere.¹⁶

Relevant for this study is the fact that the Aarhus Convention prescribes public participation for all (national) plans and programmes on the environment, and thus also those on the hydrogen economy. The main directive implementing the Aarhus Convention with a view to its application at a national level, the so-called Aarhus Directive,¹⁷ does not cover the actual EU energy law framework. Nor are the Renewable Energy Sources Directive¹⁸ and the Gas¹⁹ and Electricity²⁰ directives listed regarding the scope of application of the Aarhus Directive, to mention just a couple of examples from energy law. The proposed directive on gas and hydrogen also lacks a provision aimed at amending the Aarhus Directive.²¹ The proposal does not, alternatively, contain ad hoc provisions on public participation. Public participation in the development of hydrogen markets will thus not be mandated under these pieces of EU secondary law. The Strategic Environmental Assessment (SEA) Directive, which covers public participation in plans and programmes relating to energy, only addresses public participation when such plans and programmes are likely to have significant environmental effects.²² Under the Aarhus Convention, any plan or programme relating to the environment must be subject to public participation, even when it does not have potential serious negative effects on it.²³ The EU framework for public participation in the hydrogen economy is thus deficient.

This does not mean that the EU and its Member States do not have to comply with the Convention on these aspects. Decision 2005/370/EC has made the Convention part of the EU acquis communautaire.²⁴ As mentioned above, this means that the Convention is, in its entirety, binding upon the EU and its Member States, as recognized by the Court of Justice.²⁵

In the rest of this contribution, given the broader and more elaborated scope of the provisions of the Convention and the great overlap between the wording of its provisions and the pieces of EU legislation most directly aimed at implementing them,²⁶ the Convention is used as the basis to explain public participation in the development of the hydrogen economy. The focus will be on the importance of ensuring public participation with a view to policies, plans and programmes (Section 11.2.2), including when these are set up by semi-public bodies (Section 11.2.3). Of course, the Aarhus Convention only pursues minimum harmonization,²⁷ which means that the EU and its Member States can decide to go beyond such a minimum, a practice called green-plating.²⁸

11.2.2 Specific Issues: The Importance of Ensuring Public Participation as Regards Policies, Plans and Programmes

This section shows the importance of ensuring public participation early in the chain of decision-making on the hydrogen economy. It focuses on public participation at the level of policies, plans and programmes, and unveils the shortcomings of the EU framework in this regard. Public participation is regulated under three provisions of the Convention: article 6, regarding specific activities significantly affecting the environment; article 7, on plans, programmes and policies; and article 8, dealing with executive regulations and other generally applicable and legally binding rules. Although this chapter focuses on policies, plans and programmes on hydrogen, this provision cannot be understood in isolation from article 6. This is because, for plans and programmes, article 7 refers back to certain obligations set out under article 6.²⁹ We will thus first introduce article 6.

The public participation legal framework set out in article 6 is more detailed in comparison to those for plans and programmes and for policies. It consists of eight categories of obligations. First, it establishes a notification duty. Properly informing the public concerned³⁰ – either by a public notice, such as a newspaper announcement, or an individual notice, such as a letter – is essential for effective participation in the decision-making procedure.³¹ To this extent, the notification must include all relevant information about the project and the public participation procedure. Second, the responsible party, which could also be a private party, should set reasonable time frames to inform the public concerned and to allow for a response. The Convention does not define the concept of ‘reasonable time frames’ and this could vary in accordance with the kind of activity under scrutiny.³² Third, the procedure should take place when all options are possible and participation can be effective. Under this provision, the concepts of ‘early engagement’ and ‘effective participation’ are linked to the moment in the decision-making process in which public participation is organized. What matters is that ‘events on the ground’, such as the availability of certain technological choices,³³ have not effectively eliminated alternative options.³⁴ This does not mean that during the establishment of specific activities the public concerned must be able to comment upon options that were subjected to an earlier public participation procedure.³⁵ For example, options that have been subjected to public participation in the context of establishing a plan or programme do not need to be subjected to public participation during the adoption of specific activities implementing such a plan or programme.³⁶ Fourth, private initiators should be encouraged to engage in public participation prior to a permit application. Public authorities, however, should retain control of and responsibility for the procedure.³⁷ Fifth, the public concerned must be able to access all relevant information, in accordance with the provisions on access to information under the Convention.³⁸ Sixth, the public must be allowed to submit views. This provision represents the embodiment of public participation – that is, the ability to express a view, or arguably even a feeling,³⁹ in writing or orally, to the discretion of the public.⁴⁰ Seventh, the responsible authority should take the views expressed by the public into due account, therefore ensuring a ‘real voice’ to the public. However, this does not mean that it has to align the decision to such views.⁴¹ According to the European Commission, this duty ‘means that the Commission will duly consider the comments submitted by the public and weigh them in the light of the various public interests in issue’.⁴² Basically, this duty means, in legal terms, that a decision-maker must show why a particular comment was rejected on substantive grounds.⁴³ Still, it does not amount to a right of the public to veto the decision, according to the Aarhus Convention Compliance Committee (ACCC).⁴⁴ The eighth, and final, obligation is that the decision-maker should inform the public about the final decision and how the views have been taken into account.⁴⁵

The legal framework for public participation procedures as regards plans and programmes build on the framework for decisions on specific activities but is less extensive and specific. Firstly, the Convention does not define the concepts of ‘plans’ and ‘programmes’ concerning the environment. These instruments can take a variety of forms.⁴⁶ In the majority of the cases, plans and programmes are meant to provide a framework for adopting decisions about specific activities. Secondly, obligations regarding public participation procedures on plans and programmes refer explicitly to the second (reasonable time frames), third (early engagement) and seventh (real voice) obligations listed above. They refer also to the need to ensure transparency, fairness and access to information. Although the first, fifth, sixth and eighth obligations, indicated under article 6, can easily be read into the concepts of fairness, transparency and access to information, the different formulation of such obligations denotes the presence of more discretionary powers for public authorities on how to fulfil them than in the context of decisions concerning specific activities.

From a legal perspective, plans and programmes are not adopted in a vacuum but should fit within the existing policy framework. Under the Aarhus Convention, environmental policies can be defined as ‘a course or principle of action adopted or proposed by an organization or individual’.⁴⁷ Yet this concept remains officially undefined. From the perspective of public participation, article 7, last sentence, of the Convention shows the high level of freedom left to the Convention Parties in this area. There are no specific legal requirements in this regard. Most significantly, the duty to organize public participation procedures at a moment in time in which all options are still open does not apply to policies. This consideration holds true also for the duty to take due account of the views and feelings of the public.⁴⁸ As these two obligations aim at ensuring ‘early engagement’ and ‘real voice’ during public participation procedures, their absence underlines that, under the Convention, there are no explicit legal requirements aiming at ensuring that public participation as regards policies are effective.

This finding is particularly relevant when we consider that the content of decisions about specific activities depends on the higher-level instruments in the decision-making chain, namely plans and programmes, and policies. Besides, options discussed during the adoption of a policy, a plan or a programme do not need to be made subject to public participation during the adoption of implementing measures,⁴⁹ as indicated. At the same time, policies influence the room for input during the setting up of plans and programmes, which in turn influences the room for input during the adoption of concrete actions. Policy choices expressed in policy documents can determine that in practice certain options are no longer available at the level of decisions about specific actions.

The above shows the importance of ensuring public participation early in the chain of decision-making about the hydrogen economy, thus at the level of policies, plans and programmes.

11.2.3 Specific Issues: Ensuring Public Participation by Semi-Public Bodies

In certain Member States, such as the Netherlands, the development of the hydrogen economy is carried further by a collaboration of public and private bodies, with the latter at times being invested with powers going beyond those of private parties, as further discussed in Section 11.3 below.

In this regard, it should be noted that article 7 of the Aarhus Convention applies vis-à-vis parties that establish plans and programmes. Not only acts adopted by public bodies fall under article 7 of the Aarhus Convention. In certain cases, also policies, plans and programmes which are adopted by what national law considers private law bodies are covered by article 7 of the Convention. This is due to the fact that the concept of a public body is interpreted broadly in the context of the Aarhus Convention and EU law. What is meant by the concepts of ‘public body’ or ‘public authority’ must be viewed from the so-called Foster jurisprudence.⁵⁰ This entails that private law parties can also be qualified as public bodies from the perspective of EU law if they have powers and competences that go beyond those of ordinary private law parties. Transport system operators, distribution system operators and seaport authorities working on the development of the hydrogen economy within their respective fields of operation can all be regarded as being public bodies for the purpose of the application of article 7 of the Aarhus Convention, even in those countries in which such bodies are set up as private companies, such as the Netherlands. The fact that under EU and national law such bodies are entrusted with powers that go beyond those of private parties qualifies them as public bodies under the Aarhus Convention and the EU law that implements it. We will call these kinds of public bodies semi-public bodies, to distinguish them from the traditional public bodies – that is, public law legal persons.

11.3 The Development of the Hydrogen Economy in the Netherlands and in the Northern Netherlands Hydrogen Valley

11.3.1 National Policies, Plans and Programmes on Hydrogen

The current policy framework for hydrogen in the Netherlands is comprised of a multitude of letters by the Minister of Economics and Climate, ‘working plans’ drafted by working groups, and other documents. The Dutch National Hydrogen Programme 2022–2025⁵¹ and the related Dutch Hydrogen Roadmap,⁵² set up by a working group composed of public and private stakeholders, can be considered the main plans and strategies for the hydrogen economy. In these documents, the Netherlands sets the goal of 500 megawatt (MW) electrolyser capacity by 2025. For the period after 2031, plans exist for electrolysers on both land and at sea. For instance, by 2031 the Netherlands should have the biggest (500 MW) offshore hydrogen production plant in the world.⁵³ This production capacity needs to be supported by a fitting hydrogen infrastructure. The idea is to reuse the current natural gas infrastructure available, which minimizes the new infrastructure that needs to be built. However, the war in Ukraine complicates the initial plans, as the natural gas pipelines are currently necessary for delivery from west to east, and are thus not available for conversion to hydrogen transport.⁵⁴

The National Hydrogen Programme underlines the importance of public acceptability for developing a hydrogen economy.⁵⁵ Yet public participation is only mentioned as regards the project level, by informing the general public on those decisions that have already been made.⁵⁶ In fact, neither of these documents have been drawn up following a public participation procedure. Only stakeholders active in the field of hydrogen were invited to contribute to the working sessions which led to the programme. No public participation was organized.⁵⁷

Besides these two programmatic documents, the Dutch Programme for the Energy Infrastructure (Programma Energiehoofdstructuur) sets out a spatial planning framework, regulating the spatial utilization of the Dutch territory for hydrogen infrastructure.⁵⁸ It includes a partially binding spatial plan with specified general areas in which provinces should determine where hydrogen infrastructure (such as electrolysers, and storage facilities in depleted salt caverns) can be located. This document was drafted by the government, following the so-called Participatory Value Evaluation method, and the government adhered to the formal consultation procedure (in Dutch: zienswijze procedure).⁵⁹ While the Participatory Value Evaluation is a way to investigate the preferences of a group of people on various policy options, given a fixed budget,⁶⁰ the consultation procedure allows anyone to submit their opinion or concerns about (part of) a plan.

Regarding the development of hydrogen in the northern Netherlands, the Dutch Programme for Energy Infrastructure indicates a clear preference for using salt caverns for underground hydrogen storage.⁶¹ It is also mentioned specifically that, given the recent history of mining endeavours in the north of the Netherlands which caused earthquakes and social unrest, public participation in the development of these storage facilities would need extra attention and would require ‘a fundamentally different approach than the natural gas extraction in Groningen’.⁶² This brings us to the Northern Netherlands Hydrogen Valley.

11.3.2 Hydrogen Policies, Plans and Programmes in the Northern Netherlands Hydrogen Valley

The HEAVENN project in the northern Netherlands is a six-year project that created the first region to be recognized as a hydrogen valley and to receive the accompanying EU subsidy. A hydrogen valley is a concept established by the EU for projects that successfully link hydrogen production through an effective transportation system to its various end uses. A hydrogen valley serves as a demonstration site of a profitable and holistic business model for green hydrogen.⁶³ HEAVENN’s main goal is exactly that: to create replicable business models while maximizing the abundant solar and wind energy available in the region and using green hydrogen across the entire value chain. In that way, the northern Netherlands serves as a showcase for green hydrogen development within the EU. The region covers three Dutch provinces: Friesland, Groningen and Drenthe. Most hydrogen activities take place in Groningen. We therefore analyse the policy, plans and programmes of the province of Groningen from the perspective of public participation in the next section.

11.3.3 Hydrogen Policies, Plans and Programmes of the Province of Groningen

The main policy document on hydrogen in the province of Groningen is the Climate Agenda of the Province of Groningen for 2030.⁶⁴ This policy document sets out, among others, the goals of the province in the field of hydrogen for 2030. The goals are expressed in a broad fashion, in terms of ‘supporting initiatives in the field of hydrogen’,⁶⁵ ‘use of hydrogen as energy carrier’,⁶⁶ ‘reserving space for onshore pipelines for transporting hydrogen’,⁶⁷ ‘improving the business case for hydrogen’,⁶⁸ ‘strengthening the hydrogen value chain’⁶⁹ and ‘execution of hydrogen train pilot’.⁷⁰ Participation is considered an important aspect of the further development and implementation of energy policies in the region, but the Climate Agenda as such was not subject to public participation. The province only invited stakeholders and experts to express their comments on the Climate Agenda.⁷¹

Another general policy document referring to hydrogen in the province of Groningen is the Regional Energy Strategy (Regionale Energie Strategie – RES). The RES was developed by the province, municipalities and water boards of the province of Groningen. It was developed in two phases, RES 1.0 and RES 2.0.⁷² Neither of the two documents set out specific goals or actions as regards hydrogen, but simply refer to the development of the hydrogen economy in general terms.⁷³ Neither document was open for public participation.

The same is true for the Investment Plan on Hydrogen presented by public and private parties in the provinces of Groningen and Drenthe in 2020.⁷⁴ Most importantly, this document indicates the storage project in Zuidwending, north-east Groningen, as one of those belonging to the Northern Netherlands Roadmap to 2030,⁷⁵ and covered by the Investment Plan.⁷⁶ The choice of the location for the first hydrogen storage facility in depleted salt caverns seems thus to have taken place by the time this document was established. There is no trace of public participation.

In June 2023, the province of Groningen presented its Provincial Multi-year Programme on Energy and Climate Infrastructure 1.0 (Provinciaal Meerjarenprogramma Infrastructuur Energie en Klimaat), which implements the Dutch Programme for Energy Infrastructure, discussed in Section 11.3.1 above.⁷⁷ At the moment, this programme only focuses on electricity. Hydrogen is referred to in several places, but no specific spatial choice is expected till 2025 when version 2.0 of the programme will be published.⁷⁸

Overall, similar to the national level, the province of Groningen’s policies, plans and programmes for hydrogen include several macro-level policy choices, which have been established without any visible public participation. After having assessed the actions of public bodies, we will now look at what semi-public bodies in the hydrogen valley of the northern Netherlands have done with their plans and programmes for the hydrogen economy from the perspective of public participation.

11.3.4 Hydrogen Policies, Plans and Programmes of Semi-Public Bodies: Gasunie

In addition to the delegated powers of the provinces, private actors are also broadly vested with public functions in the Dutch energy market. In the field of hydrogen, Nederlandse Gasunie N.V. (Gasunie) plays a major role in the development of the hydrogen infrastructure, as discussed in detail in Chapter 17 in this book, by Broersma, Jäger and Holwerda. Gasunie will be the transport system operator responsible for the hydrogen transportation grid in the Netherlands.⁷⁹ HyNetwork Services (HNS) and EnergyStock are two subsidiary companies of Gasunie tasked by the Dutch government to develop the hydrogen network and hydrogen storage, respectively.⁸⁰ The Gasunie group (Gasunie and its subsidiaries) have thus been entrusted with powers that go beyond those of private parties and can be qualified as a semi-public body, as also evident from the discussions by Broersma, Jäger and Holwerda in Chapter 17.⁸¹

The main policy framework within which HNS operates is the Dutch Hydrogen Roadmap, discussed in Section 11.3.1 above. In 2023, HNS proposed amendments to it.⁸² These were presented in a hybrid webinar, the recordings of which are available online, and those who had an interest, without further defining what this ‘interest’ might have meant, could submit their comments to the proposed amendments for four weeks starting on 23 July 2023. At the time of writing, the received comments and their implementation are not available, but HNS indicates that it will publish such information unless the party submitting the comment indicates that the comment should be treated as confidential.⁸³

With a view to hydrogen storage, the Dutch Hydrogen Roadmap indicates the goal of having between 750 and 1,000 gigawatt/hours (GWh) of hydrogen in salt caverns by 2030.⁸⁴ As indicated in the plan itself, this means that three or four salt caverns will be filled with hydrogen. The first caverns will be in Zuidweinding, in the north of the Netherlands, within the hydrogen valley. At the time of writing, the possible locations of the other three hydrogen caverns is still being studied.⁸⁵

As permission for the first storage facility, the salt cavern in Zuidwending (project called Energiebuffer Zuidwending), was covered by the State Coordination Regulation (Rijkscoördinatieregeling), the public participation procedure followed the formal consultation (zienswijze) procedure,⁸⁶ under the responsibility of the Ministry for Economic Affairs and Climate. This procedure was opened in April 2023 and closed at the end of May 2023.⁸⁷ All received public input is available on the website of the Ministry, by means of an anonymized bundle report. This report shows that people had remarks about macro policy options, such as the alleged unreasonableness of investing in hydrogen,⁸⁸ and the need to develop the caverns elsewhere in the Netherlands.⁸⁹ At the time of writing, the responses to these remarks are not available.

Still, in 2022, prior to the formal participation procedure, Gasunie’s subsidiary responsible for the development of hydrogen storage facilities, EnergyStock, published a participation plan (Participatieplan).⁹⁰ In that plan, EnergyStock defines the targeted audience groups as local residents, the government and administrative bodies, companies, NGOs, nature associations and other social parties.⁹¹ Most importantly, this plan indicates the main focus of the participation procedure.⁹² It also indicates that the participation procedure will not concern the location of the project as the cavern at the current location is already in use by the exploiting parties (Nobian and EnergyStock) and is the most suitable one for the project.⁹³ This shows that this macro-level policy option was not the subject of the participation procedure. This option was adopted when publishing the National Hydrogen Programme and related roadmap, discussed in Section 11.3.1 above. Apparently this policy option is not open to debate at the level of specific decisions.

Under the Aarhus Convention, it is fine not to discuss policy options at the level of specific decisions during a public participation procedure, as explained in Section 11.2 above. This is, however, only true when the macro-level policy options were subject to a participatory process when settled. As indicated in Section 11.3.1, this was not the case when the National Hydrogen Programme and related roadmap were established.⁹⁴ This option should, therefore, be open to the participatory process at the level of the specific project.

11.4 Standing of Drift Sand: A Deficient Participatory Process for Macro-Level Policy Options

The development of hydrogen infrastructure presented above shows the existence of a complex framework of policy, programmes and plans adopted by national and local authorities, as well as by semi-public bodies. The analysis presented in this book shows shortcomings in the drafting and implementation of the regulatory framework on public participation as regards the development of a hydrogen economy at all levels of governance, from the EU to the local level.

The lack of explicit requirements for public participation in the EU regulatory framework for renewable energy in general, and energy production and transport in particular, is echoed by the lack of a participatory process for the establishment of the National Hydrogen Programme and related National Roadmap. Also at regional level, the policies, plans and programmes for the development of the hydrogen economy in Groningen do not show the presence of public participation. The macro-level policy options concerning investments in the hydrogen economy, the shape of the hydrogen pipeline network, the goals as regards hydrogen storage and the location of the first depleted salt caverns to be used for such storage were decided at these levels, without public participation. This means that the policy options decided at these levels of decision-making did not benefit from the insights of the general public. The potential benefits of a participatory process as regards these macro-level policy options – substantively better, more democratic and greater acceptability – were thus left unexploited.

We showed that participatory processes were initiated at the project level for the hydrogen storage facility at Zuidwending. The outcomes of this decision-making process are still pending, but it was striking to see that the participatory plan of EnergyStock mentioned that the selection of Zuidwending as a hydrogen storage location was not part of the participatory procedure. During the formal consultation procedure, people clearly expressed remarks about such a macro-level policy option, as well as other macro-level policy options. It is too soon to make a final judgement about the compatibility of this procedure with the legal framework on public participation established under the Aarhus Convention. At the time of writing, it is not known if the comments about the macro-level policy options will be addressed. If not, the provisions of the Aarhus Convention would be breached.

Still, the lack of proper participatory processes by the establishment of the macro-level policy options at the national and regional levels remain concerning even if this specific procedure appears to comply with the Aarhus Convention requirements. Public participation contributes to better, democratically embedded and more acceptable policies, with potential benefits for their implementation at a project level, although practitioners might see it as potentially time-consuming.

To enjoy these potential benefits, it is important that the Aarhus Convention requirements on public participation are applied in full, at all levels of government, including in case of plans and programmes from semi-public bodies. Macro-level policy options can then be subject to public participation when they are drafted and thus easy to change, rather than when they are implemented at project level, often by different parties than those who can shape macro-level policy options. Finally, the visibility of the duty of public participation in the context of the development of the hydrogen economy would benefit from a clearer framework on public participation at EU level. The existing EU regulatory framework, specifically the Aarhus Directive and/or the Gas Directive now, or once repealed to cover renewable and natural gases and hydrogen, should be amended accordingly.