Green Hydrogen, bidding zones, and the green grid exception
Green Hydrogen, bidding zones, and the green grid exception
A dive into the intricacies of the European rules for producing green hydrogen
“The devil is in the details” - a popular idiom.
After introducing green hydrogen in a recent post, we will now delve deeper into the production side of hydrogen in Europe, and more importantly, we will focus on an important aspect: the bidding zones1 and their links with the EU rules for green hydrogen production.
In this post, we will delve into an essential aspect of the EU rules—the "green grid" exemption. This provision offers hydrogen producers a notable latitude by relieving them from strict adherence to two pivotal criteria: additionality and temporal correlation. However, with the increase of bidding zones, this green grid exception may become counterproductive for the objective of ensuring that green hydrogen is produced from additional renewables only.
Let’s dig in.
EU rules on the production of renewable hydrogen
In June 2023, the EU Commission formally adopted the rules on the production of renewable hydrogen. As we could expect, understanding the rules is not a straightforward exercise. Green hydrogen2 must be produced from renewable electricity but since all power plants are mixed into the large interconnected European system, we need to find rules to establish what is green and what is not. From an official communication of the EU (emphasis added throughout):
When electricity is sourced from the grid, it becomes more difficult to ensure its renewable nature, because grid electricity is usually generated by a mix of renewable, nuclear and fossil sources. This requires setting criteria according to which electricity used for electrolysis can be counted as renewable. To ensure that renewable hydrogen production does not divert renewable electricity away from other uses (such as heat pumps or electromobility), a criterion on additionality could be introduced to ensure that only new and additional renewable electricity generation capacity would be used. Criteria on temporal and geographic correlation could help to ensure that there is a physical flow of renewable electricity to the electrolyser and thus to avoid the activation of fossil power plants to meet the electricity demand for electrolysis.
The EU has established three rules to be followed when developing a hydrogen project connected to the main grid3:
Additionality: renewable hydrogen production should come online within 36 months after the operation of the renewable assets. The logic is that hydrogen should not cannibalize renewable electricity meant for other uses. In addition, renewable production should not have received operational or investment subsidies.
Temporal correlation: Starting from 2030, hydrogen has to be produced in the same one-hour period as renewable electricity4.
Geographic correlation: the electrolyzer must be located in the same bidding zone, or a bidding zone presenting a market price lower than where the electrolyzer is located.
For more details on the three criteria, you can find information here. Our objective is not to dissect all the rules precisely but to highlight one exception that is primordial in our opinion.
The “green grid” exception
The green grid exception is defined as follows:
If hydrogen production located in a bidding zone with an average renewable electricity share exceeding 90 % in the previous calendar year, it may be counted as renewable if it does not exceed the proportion of renewable electricity in the bidding zone. If the 90 % share is reached in 1 calendar year, it is considered to be reached in the following 5 calendar years.
The green grid exception removes simultaneously the additionality and the temporality criteria5. With this exception, an electrolyzer located in a “green” bidding zone can use electricity from the grid directly and be considered green. This is advantageous as the electrolyzer can be run only considering the electricity price on the market. It does not need to follow the strict hourly correlation, nor develop or contract an additional renewable generation facility. The latter one, the lack of requirement for additionality, allows him to tap into the previously (subsidized or not) renewables capacity.
Of course, it is important to know how the percentage is calculated. Article 4 on General rules for counting electricity taken from the grid as fully renewable from the rules defining renewable hydrogen production in the EU6 makes an analogy to the rules set out in Article 7(2) of Directive (EU) 2018/2001. The calculation is made more explicit in the manual of the SHARES tool. The SHARES tool has been made for the harmonized calculation of the share of energy from renewable sources. The RES-E, or renewables in the electricity sector, is the ratio between the gross electricity production from renewables and the gross final consumption of electricity. The consumption is calculated as the total production of all sources plus the imports minus the exports.
A critical distinction in green hydrogen production lies in the consideration of the bidding zone rather than the member state, as originally outlined in Article 7(2) of Directive (EU) 2018/2001. This signifies that a nation possessing multiple bidding zones may maintain a renewable energy source (RES-E) share below 90% and yet qualify for the green grid exception within one of its bidding zones.
What about the nuclear route?
There is also a nuclear route for the production of green hydrogen. Indeed, there is a provision stating that for a bidding zone with an emission intensity of electricity lower than 18 gCO2e/MJ, it may count as renewable if hydrogen producers conclude one or more renewables PPAs7 fulfilling temporal and geographical correlation. Practically, it means that the hydrogen operator must still sign a PPA with a renewable producer and ensure the hourly matching between hydrogen production and renewable production, which is less favorable than directly using grid electricity.
Where does this green grid exception exist?
According to the results of the SHARES tool, presently, three European countries boast a renewable electricity share exceeding 90%: Norway, Iceland, and Albania. Intriguingly, these nations are situated outside the European Union. Notably, other European counterparts demonstrate commendable performance in emissions, with Sweden, France, and Switzerland leading the way. It is noteworthy that they share a common factor: a reliance on nuclear power.
Presently, both France and Switzerland operate within a single bidding zone each for their respective countries, rendering them non-compliant with the green grid exemption. An intriguing contrast is found in Sweden, where all three operational nuclear power plants fall within a single bidding zone. Consequently, by splitting Sweden into 4 bidding zones, the country can benefit from the green grid exemption as well (in 3 out of 4 bidding zones).
However, a crucial trend looms on the horizon—the increase of bidding zones.
More bidding zones
In August 2022, ACER8 decided that for five countries (France, Germany, Italy, the Netherlands, and Sweden), alternative bidding zone configurations have to be investigated in the Bidding Zone Review. Germany has emerged as a focal point in discussions, contemplating no fewer than four alternative bidding zone designs9. Evidently, there is a prevailing momentum favoring the implementation of additional bidding zones across Europe, deemed advantageous for the efficient operation of the electricity system. Furthermore, there are deliberations surrounding the prospect of offshore bidding zones.
Following a pattern akin to the Swedish scenario, the strategy of subdividing existing zones heightens the likelihood of establishing a zone that aligns with the green grid exemption. Pushing this concept to its extreme10, envisioning a scenario with hundreds of zones spread across Europe, it is probable that at least a dozen of bidding zones could potentially adhere to the green grid exemption, even with the current installed generation capacity.
This has been shown by Aurora Energy Research for the German case. While the national renewable share registers at 44% in 2021, as per the SHARES tool, an intriguing prospect emerges with a potential zonal division into North and South. Such a split could enable the Northern region to avail itself of the exemption as early as 2027, which marks the soonest feasible year for such a division. This is owing to the concentration of substantial renewable resources in the North, juxtaposed with large consumption centers situated in the South.
Why could that be detrimental?
Hydrogen is poised to play a pivotal role in the long-term landscape of the energy sector. However, the primary aim of the EU rules was to ensure that hydrogen production does not siphon off green electricity from more direct applications, such as heat pumps or electromobility. This stems from the overarching principle that, in general, the direct utilization of electricity is more efficient than its conversion into hydrogen11.
The green grid exemption effectively eliminates two criteria: hourly matching and additionality. While some authors argue for a potential relaxation of the temporal correlation criterion without significant repercussions, it is crucial to underscore the importance of the additionality condition. This condition ensures that only additional green electricity is utilized, and it holds particular significance. For instance, if an electrolyzer begins production today, it would unquestionably diminish the direct use of electricity available for other consumers.
As explained earlier, the nuclear route also removes the additionality criteria12. However, retaining the hourly correlation requirement diminishes the practicality of employing an electrolyzer. This is consistent with the fact that the EU legislation under consideration pertains explicitly to hydrogen derived from renewables, not encompassing low-carbon hydrogen. An intriguing prospect lies in whether comparable regulations might emerge for hydrogen derived from nuclear sources, and how it would be coherent with the one on green hydrogen.
In conclusion
Green hydrogen is popular and considered a key element for the future energy system. Therefore, understanding the rules of the game is crucial. One of the important objectives of the rules is to ensure that additional renewables only are used. Within our interconnected European grid, there are already some bidding zones that are allowed to use electricity directly without requiring additional renewables for producing green hydrogen, and as soon as 2027, a large part of Germany will be able to do it. Nevertheless, to our opinion, it is unclear if, from a climate perspective, it is the most efficient use of electricity, especially in a country where the finance minister is stating that “As long as it is not clear that energy will be available and affordable, we should end the dreams of phasing out coal power in 2030”.
From ACER: A bidding zone is the largest geographical area in which bids and offers from market participants can be matched without the need to attribute cross-zonal capacity. Currently, bidding zones in Europe are mostly defined by national borders. Currently, only Sweden, Denmark, Norway, and Italy do not have a single bidding zone for the country.
We use the term green hydrogen as it is the most used even though the Commission is using the term Renewable hydrogen.
The hydrogen produced with stand-alone installations (not connected to the main grid) does not need to conform to these rules.
Before, the temporal correlation must be on a monthly basis.
Of course, the geographic correlation must be kept and hydrogen must be produced within the considered bidding zone.
PPAs stand for Power Purchase Agreements.
ACER is the European regulatory authority.
From a single zone to 2 to 5 bidding zones.
This is of course an improbable case but it shows that the likelihood of the exemption increases with the number of bidding zones.
This is a general rule and some exemptions may exist of course.
It is possible to sign a PPA with existing renewables.