German H2 legislation: developments & challenges Series: Inside the energy transition – the (un)heated energy talk | Interview Thorsten Müller and Oliver Antoni

“Even in the legal findings phases, investments will continue to be made only if there is confidence in the reliability of existing regulations”, explains Prof. Dr Thorsten Müller, Research Director at the Stiftung Umweltenergierecht on the subject of hydrogen. The Stiftung Umweltenergierecht heads Working Group 5 of the Northern German Living Lab (NRL), which deals with new market and business models as well as regulatory frameworks for the transformation of our energy system towards climate neutrality. Oliver Antoni is in charge here. In the run-up to the foundation’s 15th anniversary, we had the opportunity to interview Prof. Müller and Mr Antoni about the current developments and challenges of German hydrogen legislation as part of our format “The (un)heated real talk”.

EEHH: Prof. Müller, thank you very much for taking the time. Stiftung Umweltenergierecht has been following the legal framework of the energy transition for 15 years now. When you look back on this time, which developments were particularly formative from your point of view?

Thorsten Müller: It has been 15 eventful and, for legal scholars, extremely exciting years. The sheer number of legal amendments and court decisions has raised many more research questions than we have been able to answer. We only have to think of the two very extensive legislative packages at the European level – the Clean Energy for all Europeans Package and the Fit for 55 Package – which subsequently triggered extensive revision of German law. The developments in the legal framework were not linear – there were ups and downs – nor were they parallel in the different areas of the energy transition. One of the defining developments is certainly the establishment of climate neutrality as a goal in the EU and in Germany. The climate protection decision of the Federal Constitutional Court in 2021, which established climate neutrality as a constitutional obligation, was downright historic. That this is not merely a German spin is demonstrated by the many other decisions, such as those of the European Court of Human Rights, the International Tribunal for the Law of the Sea or the International Court of Justice. We have to face up to this obligation, even if it gets uncomfortable. With Russia’s war of aggression on the whole of Ukraine and the associated energy price crisis, the second dimension of the transformation has become very clear to the general public. The energy transition also serves to secure and strengthen independence. The qualification of renewable energies as “freedom energies” illustrates this very well.

EEHH: Green hydrogen is considered the key to the defossilisation of industrial processes. You spoke at the consortium meeting about three levers to create an effective framework for the hydrogen ramp-up: direct financial support, creation of demand and adaptation of the legal framework. From your experience in the NRL, which direction is the most suitable?

Thorsten Müller: The question of suitability must always be that of optimising the overall system. Then it quickly becomes clear that the three levers have different significance. The legal framework must always be adapted when new technologies or processes are to be implemented. These encounter a set of rules that was designed for different circumstances and therefore does not fit the new ones. Taking hydrogen as an example, this begins with the approval of electrolysers, involves the creation of the necessary, new hydrogen networks and ends with a reconfigured economic framework for the operation of electrolysers and consumers. In order to make the latter meaningful, the legislator must decide if control has to be implemented and, if so, in which direction. If demand is created, for example through quota regulations for green hydrogen or the stimulation of consumers, use is predefined. In the case of subvention for production, the product will initially be used in the areas with the highest willingness to pay. But only if there is actually a sufficiently predictable demand – a prerequisite that has also led to problems in the NRL.

Experience has shown that no matter how well a project is structured and financially supported, in the end it comes down to finding a customer who is willing to buy the quantities produced at a realistic price in the long term. However, we currently have a problem on the demand side due to the cost structures, which could not be solved even with existing incentives in order to achieve sufficient certainty for investment decisions.

EEHH: Mr Antoni, you head Working Group 5 of the Northern German Living Lab. Many of the planned projects in the consortium could not be implemented because the appropriate legal framework was missing. What specific regulatory obstacles have become apparent in the project work so far?

Oliver Antoni: At the beginning of the project period, it was unclear under what conditions hydrogen would be considered “green” or renewable. That was the central question for a long time, because every investment decision depends on it. The regulations for this were not defined by the European Commission until 2023 with a Delegated Regulation on the Renewable Energy Directive. The requirements include, among other things, a close temporal connection between electricity generation and the production of renewable fuels of non-biogenic origin, i.e. “green” hydrogen. This is to ensure that renewable electricity is actually used for hydrogen production. However, the stricter the requirements for temporal correlation, the higher the electricity procurement costs – and thus the hydrogen production costs – will be.

In this respect, the Delegated Regulation does not constitute a regulatory obstacle in the sense of legal ambiguity or inconsistency. Rather, it is a deliberate decision by the EU Commission in the interplay between the greatest possible impact on climate protection and a rapid market ramp-up. Nevertheless, it remains to be said that it was not possible to implement some projects economically under these conditions. The European Commission is currently preparing a report to evaluate the requirements for green hydrogen. However, the report does not have to be submitted until 1 July 2028. Moreover, it is often overlooked that the Renewable Energy Directive already sets comprehensive requirements for the production of renewable fuels and that a revision of the Delegated Regulation – without prior amendment of the Directive itself – would therefore only be possible within this narrow framework.

EEHH: In addition to the obstacles you have already mentioned, many funding privileges are time-limited and complex in terms of regulation. What regulations in this area are currently hampering nationwide investments in electrolysers?

Oliver Antoni: This is an important point you’re addressing. The hydrogen ramp-up requires reliability in the legal framework. But some privileges are indeed time-limited. For example, the grid fee exemption under Section 118 (6) sentences 1, 7 EnWG currently only applies to electrolysers that go into operation before 4 August 2029. This means there is a certain urgency in project planning and implementation, since only those plants will be able to benefit from this privileged status for a period of 20 years.

Moreover, it is uncertain whether this regulation will stand at all. According to a ruling by the ECJ in 2021, the responsibility for grid regulation does not lie with the legislator, but with the Federal Network Agency. The Agency can therefore set out deviating new regulations at any time. In the procedure for establishing the General Network Charge System for Electricity (AgNes), the Federal Network Agency recently announced that it did not intend to continue the full exemption that has been in force up to now. In view of the ECJ ruling, it also sees the reliance of existing plants on the continued existence of the exemption from network charges as protected only to a limited extent. However, grid charges are a relevant cost factor, especially for electricity-intensive hydrogen production, with a significant impact on the hydrogen production costs as a whole. Without clarity as to whether and to what extent the purchase of electricity from electrolysers could be subject to grid fees in the future, the planning of hydrogen projects is likely to be difficult.

EEHH: Many business models depend on the development of a hydrogen infrastructure. What is the current legal framework for financing such an infrastructure?

Oliver Antoni: The core network for hydrogen is financed by fees paid by network users. The fees are intended to enable the financing of the core network until 31 December 2055. This is basically no different from the electricity and gas grids. However, there is a special feature in the specific design of the fees. An intertemporal cost allocation mechanism is designed to prevent the initially low number of users of the network from being disproportionately burdened. To this end, users who will only join in the coming years and decades are also to co-finance the development of the core network. This aims at avoiding prohibitively high grid charges in the early years, which could slow down the market ramp-up. Against this background, the Federal Network Agency set a nationwide ramp-up fee last year. This is generally €25/kWh/h/a for the amortisation phase from 2025 to 2055. A comparable mechanism does not yet exist for future distribution networks.

EEHH: Prof. Müller, how has the instrument of “paramount public interest” affected the approval times of hydrogen projects since its introduction? What adjustments would be necessary to reduce bureaucracy and contribute to acceleration?

Thorsten Müller: In the hydrogen sector, the overriding public interest has so far only been defined for transport infrastructures, specifically for the hydrogen core network, other hydrogen pipelines and for H2-ready measures on gas supply pipelines. With the planned Hydrogen Acceleration Act, this classification is to be extended to plants in the areas of hydrogen production, import and storage from 2026. However, it’s impossible to quantify the specific influence on the duration of individual approval procedures precisely, as the causes of delay are too complex. But experience with the corresponding regulation for renewable energies in Section 2 EEG 2023 shows that the instrument primarily strengthens legal certainty. This can speed up procedures and facilitate the granting of permits. This is one of many pieces of the puzzle on the way to simplifying and accelerating approval procedures, but it is not an unimportant one. Nevertheless, the legislator can’t stop there: it must start with other points in regulatory law, in particular the statutory specification of the inspection requirements and the streamlining of procedures. Non-legal factors also play an important role – such as the staffing of the authorities and the status of digitalisation.

EEHH: What legislative measures do you think are important in Germany being able to achieve the RFNBO quota in transport by 2030?

Thorsten Müller: The currently planned extension of the GHG quota until 2040 and the earmarked introduction of a sub-quota for RFNBO could provide an important impetus. This gives hydrogen producers some certainty that there will be a demand for hydrogen for the transport sector in the coming decade. And for the industrial sector, too, the Renewable Energy Directive stipulates that at least 42 percent of the hydrogen used in industry should be renewable by 2030 and as much as 60 percent by 2035. This does not have to be achieved through a quota for companies, but it is also an important source of demand for investors in green hydrogen.

Regardless of individual regulations, however, I consider long-term planning security to be of particular importance and as decisive for success and efficiency. Ongoing ambiguities about possible adjustments to the legal framework are a hindrance here. Of course, it has to be possible to adapt a legal framework too. This is especially true for a new area like hydrogen law, which is still under development. The legislator – as well as the Federal Network Agency as the standard-setter in the upcoming decision on the reorganisation of grid charges for storage systems and electrolysers – is well advised to proceed with a great deal of sense of proportion when it comes to readjustments. The constitutionally assured protection of legitimate expectations can only be the lower safety cushion. Even in the “legal findings phases”, investments will continue to be made only if there is confidence in the reliability of existing regulations. Otherwise, there is the threat of risk premiums from lenders, which will make the energy transition unnecessarily expensive.