H2: the rules of the game

Clean hydrogen is set to play a decisive role in achieving decarbonisation objectives but in order to realise the potential of hydrogen, the hydrogen market must grow, as it is currently in the very early stages of development in Spain.

For the market to evolve, it is vital to develop each of the links in the value chain, which are, broadly speaking: production, transport and distribution, supply and, of course, demand. Two key components of this value chain are production and demand. Production costs must be kept lower than those of hydrogen substitutes in order to generate the necessary demand.

Despite the market still being relatively early in its development, we are starting to see the development of joint projects between hydrogen producers and industrial agents beginning to emerge. Examples of these include: the Basque Hydrogen Corridor, the Vall de L'Hidrogen in Catalonia, the Hydrogen Valley of Aragon or the Hydrogen Cluster of Castilla-La Mancha. With the evolution of any new market, regulation is always an important factor to take into consideration.

Avoiding regulatory bottlenecks

Both (potential) producers and consumers of hydrogen seek regulation that guarantees the legal certainty and economic viability of their investments. Some key players consider subsidies for hydrogen generation necessary both to make clean hydrogen a competitive clean energy source, and to encourage cost reductions in its production. In terms of how the market is regulated, the European Commission (EC) is keen to regulate hydrogen transport activity at an early stage.

The transport of hydrogen could create a bottleneck in the development of the sector. When transporting hydrogen, operating within newly created infrastructure, large capital investments are required. In turn, due to large economies of scale, the activity will potentially be subject to regulation. Therefore, adequate regulation of transport networks will have an influence on how the overall hydrogen market develops. It is critical that this regulation does not hinder the development of a market, which already faces complex challenges elsewhere.

Although, today, most hydrogen production and consumption projects are developed in environments where hydrogen production takes place close to its consumption, to future-proof the sector, and enable the transport of hydrogen from places where its production is cheaper to places with high demand, building infrastructure for hydrogen transport is critical. For example, Nortegas has started processing the BenortH2 project, which includes a 16.5-kilometer hydrogen pipeline. Similarly, Petronor is building a hydrogen pipeline connecting the Petronor refinery with the Abanto Technology Park.

Questioning the regulation of transport infrastructure

Taking into account that hydrogen is gradually beginning to be used on an industrial scale, industry agents and hydrogen suppliers are raising questions about the regulation of hydrogen transport infrastructure, some themes have emerged:

  • Considering obligations for access to infrastructure: a common requirement in electricity or gas transport and distribution infrastructure is the obligation to give access to third parties. There are different ways of doing this. For example, the obligation of access under regulated conditions, or alternatively, the obligation to give access with negotiated conditions and with a certain degree of transparency. Third-party access requirements may also function as compensation for subsidies received.
  • Remuneration for the construction of new transport infrastructure: With regards to this issue, it is important to establish who bears the demand risk and determine the incentives for the transport company, to encourage efficiency. Different methodologies to assign these risks can be established such as, the Price Cap, Allowed Revenue Cap or Cost Plus.
  • Separation of natural gas and hydrogen asset bases: Regulation can lead to the integration or force the separation of both activities for different regulated environments. The integration of both activities in the same regulated environment would allow cross-subsidies between gas and hydrogen tariffs, and as a consequence, between their respective consumers.
  • Hydrogen tariff regime: the regulator, based on the asset remuneration methodology, can establish different ways of reflecting costs in access tariffs.
  • Possible vertical integration constraints between hydrogen producers and transport infrastructure owners: integration between hydrogen-producing companies and transport infrastructure owners could be limited by regulation on a variety of different levels.
  • Subsidies: subsidies are reviewed at different levels, with the aim of levelling out hydrogen prices so they are competitive with the prices of hydrogen substitutes. On the infrastructure development side, the status of Projects of Common Interest, as well as the Connecting Europe Facility (CEF) fund play an important role. In addition, the draft of the European Directive that will regulate the hydrogen sector, indicates that discounts could be granted on the tariffs paid by hydrogen consumers.

Currently, the EC is continuing to debate the future Directive. This Directive, and the way in which it is implemented in the different Member States, will have implications regarding:

  • The structure of the market or the degree of competition;
  • Incentives for investment in infrastructure and the risks taken by stakeholders;
  • Incentives for cost efficiency;
  • The speed of development of the hydrogen sector; and
  • Hydrogen prices for consumers.

One might think that the solution is as simple as applying regulation that already exists in electricity or gas sectors. However, it is important to note that the liberalisation of these two sectors took place at a time when the respective markets were relatively mature. In the case of hydrogen, the circumstances are very different, since it is a nascent sector in which market risks are high.

What is clear, is that the development of the hydrogen sector will not be without its challenges. Regulation must aid rapid development, whilst at the same time generating incentives for investment and ensuring the market remains competitive in the long term. There is huge potential for growth in this sector, if the right regulation is implemented and the regulatory measures that are adopted will undoubtedly play a decisive role in the shape of the market for years to come.