The European Commission (EC) published proposals for its Net-Zero Industry Act (NZIA) on 16th March 2023. It sets out measures to ready the EU’s regulatory framework for an increase in net-zero technology projects and forms part of a broader goal, set out in the European Green Deal1, of being the “first climate-neutral continent by 2050”.
To accompany the NZIA, the EC also published further details on its plans to auction renewable hydrogen production through the the European Hydrogen Bank (EHB)2. Mandated to invest EUR 3 billion, the EHB is intended to kick start the EU’s hydrogen market, with the potential to help the EU to both meet its long term climate neutrality goal and consolidate energy security over the next few years by ending imports of Russian fossil fuels.
The EC announced the Green Deal Industrial Plan (the Plan) on 1st February 2023. It builds on previous initiative such as the EU’s Green Deal and REPowerEU. The Plan sets out how the EU intends to make itself more competitive through clean-tech investment, and bolster the move to climate neutrality.
The first of the Plan’s four pillars aims to create a “predictable and simplified regulatory environment for net-zero industries”. To this end, the EC has now published the following:
- The proposed NZIA, which sets out measures to ready the EU’s regulatory framework for an increase in net-zero technology projects (published 16 March 2023)
- A European Critical Raw Materials Act which outlines the EU’s intention to support the energy transition through a secure and sustainable supply of critical raw materials (published 16 March 2023)
- A proposed Reform of the EU electricity market design which seeks to fortify EU defences against market manipulation in the wholesale energy market (published 14 March 2023)
- Recommendations on how to exploit the potential of energy storage, encouraging member states to consider the specific characteristics of energy storage when designing network charges and tariff schemes and to facilitate permit granting (published 14 March 2023)
The announcement on 16 March 2023 was accompanied by more detail from the EC on the design and function of the EHB, which is intended to be fully operational before the end of 2023. The aim of the EHB is to reach the REPowerEU3 targets which would see the EU producing 10 million tonnes (mt) of domestic renewable hydrogen by 2030 alongside an equivalent amount of imported renewable hydrogen4.
Net-Zero Industry Act
At its core, the NZIA seeks to ensure that the EU’s regulatory framework can facilitate the quick deployment and up-scaling of net-zero technologies. By offering a fast-track for European projects within the Single Market, the NZIA aims to boost competition in the sector and deliver on the EU’s goals for energy independence.
The NZIA sets out 8 ‘Strategic net-zero technologies’ that the EC deem both commercially viable for up-scaling and conducive to the Plan. These are:
- Batteries and storage
- Biogas / biomethane
- Carbon capture and storage
- Electrolysers and fuel cells
- Heat pumps and geothermal energy
- Grid technologies
- Onshore wind and offshore renewable energy
- Solar photovoltaic and solar thermal technologies
Other net-zero technologies will also fall under the remit of the Act.
The proposed NZIA does not set out concrete details of how current regulations will shift; however, it envisages the following actions and instruments as falling within the NZIA’s remit:
- Setting enabling conditions: streamlining the permitting procedure for net-zero technology manufacturing projects and introducing “Net-Zero Strategic Projects” in relation to manufacturing projects involving technologies identified as ‘strategic’. These Net-Zero Strategic Projects will be given ‘priority status’ benefiting from the fastest possible permitting processes and potentially being considered of overriding public interest
- Accelerating CO2 capture and storage: sets out the EU’s objective of reaching 50 million tonnes of annual CO2 storage capacity by 2030 and introduces requirements for the EU’s oil and gas producers to contribute to this goal
- Facilitating access to markets: introduces sustainability and resilience criteria to public procurement and auctions, as well as actions to support private demand
- Enhancing skills: supporting the establishment of specialised European Academies to ensure availability of a skilled workforce in the sector
- Fostering innovation: championing regulatory sandboxes as means of innovating net-zero technologies in a controlled way for a limited time period
- Building industrial partnerships: anticipates EU collaboration with like-minded countries and engagement in net-zero industrial partnerships to diversify trade and investments in net-zero technologies
The proposal also establishes the Net-Zero Europe Platform to assist the EC and Member States in coordinating action and exchange of information, including around Net-Zero Industrial Partnerships. This platform will invite industry representatives and experts to contribute to discussions. The platform will support investment by identifying financial needs, bottlenecks and best practice for projects across the EU, and foster contacts across Europe’s net-zero sectors.
European Hydrogen Bank
The European Hydrogen Bank is a newly established entity which has a mandate to invest EUR 3 billion to kick start the European hydrogen market and work towards achieving the European Green Deal ambitions. The EHB will guarantee the purchase of hydrogen by using resources from the European Innovation Fund and allocating the cash via auction rounds.
The EC’s communication of 16 March 2023 set out the EHB’s four pillars –EU domestic market creation; international imports to the EU; transparency and coordination; and streamlining of existing financing instruments - all of which are intended to be operational by the end of 2023.
The EC is designing the first pilot auctions on domestic renewable hydrogen production, which will be the first financial tool of the EHB. These auctions will be launched (under the auspices of the European Innovation Fund) in the autumn 2023, with a first round dedicated auction budget of EUR 800 million.
The EC has indicated that, for the purposes of the auction, there will be a strict definition of renewable hydrogen. The EC has separately proposed a comprehensive legislative framework for the production, consumption, infrastructure development and market design for hydrogen. It has also proposed detailed rules to define what constitutes ‘renewable’ hydrogen in the EU, with the publication two Delegated Acts . However, much of this framework is not in force and is still the subject of much debate. The EC has not, as yet, elaborated on what will be considered as renewable hydrogen for the purposes of EHB investment, but it is expected that the term will be aligned with the definition laid out in the final versions of the Delegated Acts.
The initial auction has been described as ‘players only’ with a fixed price premium on offer. In light of this, the following will likely be required:
- A financial guarantee (e.g. performance bond).
- Evidence of firm commitments from offtakers e.g. a signed MoU (this does not need to be legally binding but it should evidence a clear intent to conclude the deal).
- Evidence of a secured site for the project.
- Agreements in place for electricity connection and water supply.
- (If the project intends to use a pipeline) evidence that there will be a pipeline in place by completion date.
- FEED should be completed after a feasibility study but before the EPC phase, and submitted as part of pre-qualification.
To receive the award, a project must have a realistic prospect of completion and it is likely that the EHB will look favourably at the identification of key offtakers in hard to electrify sectors. The EHB will also monitor the Member State location of bidders to ensure an even spread of funding and avoid offering direct state aid to H₂ producers. The intention is that the funds are used for EU-level supply, not just production and supply within individual member states. This is because member state funding should be used for projects falling within that category. The data generated from the first auction will likely be captured and analysed in order to inform future budgets - this information could include the location and type of projects and the stage of completion.
A best case scenario sees successful projects as those in a position to take FID as soon as the bank awards funding. The market has sought a floor price (at least initially) to enable bidders to have some price certainty – this point is currently under consideration.
On the international front, the EHB’s second financial pillar, market analysis and stakeholder feedback to date point to a need for a dedicated instrument that can support renewable hydrogen imports into the EU. Accordingly, the EC is exploring how to design the international side of the EHB to promote a coordinated EU strategy for renewable hydrogen imports. Current proposals include the offer of a green premium for renewable hydrogen imports via a similar auction system as proposed for the domestic market. The use of a symmetric approach for international and domestic production could be beneficial in establishing the EHB’s international pillar in a quick and cost effective manner.
With that in mind, the EC has stated it will explore a ‘Team Europe initiative’ by the end of 2023, to pool Member State resources and to facilitate synergies with existing EU funds and its Global Gateway Strategy6. The EC has stated it is considering whether to utilise a similar model to the German H2 Global initiative7, but this is still very much under consideration.
The EC sees net-zero technology as a huge growth area, with the EU’s net-zero ecosystem doubling in value from 2020 to EUR 100 billion in 2021. Despite this, dependency on largely Chinese imports caps the EU’s ability to compete. The NZIA seeks to address this issue and enable Europe to capitalise on a global market, estimated to be worth approximately EUR 600 billion per year by 2030.
A key consideration for companies and projects outside of European markets is whether they will be eligible for funding applications to the EHB. No announcement has been made on this yet, although the EC has indicated it is considering adopting a similar scheme to Germany’s H₂ Global.
The proposed NZIA still needs to be debated by the European Parliament and the Council of the European Union before its adoption and entry into force.
The full domestic auction design is still being finalised and will be published before the final stakeholder consultation workshop (currently scheduled for 16th May 2023). An announcement clarifying the application criteria for EHB funding is expected in the next couple of months and further detail on the EHB’s international initiative and its proposed financial tools is anticipated once the EC has completed its further work in this respect.