No longer a ‘pipedream’: Are the oil and gas sanctions on Russia an opportunity for Hydrogen to move to the front and centre of the energy mix?

Energy & Infrastructure Alert | March.15.2022

Introduction

In response to Russia’s military actions in Ukraine, European and other western States have imposed wide-ranging sanctions on Russian businesses and individuals. Europe’s heavy reliance on Russian oil and gas has been at the core of the coordinated sanctions policy.  The US and UK have announced bans on Russian oil and plans to move away to other technologies to reduce their reliance on Russia.  Furthermore, the EU has indicated its intention to reduce its reliance on Russian gas by 2030 at the latest.  These radical changes in European and North American energy policy provide Hydrogen a unique opportunity to fill the energy gap left by Russian fossil fuels.  Whilst sanctions and their implications are a moving feast, a combination of Orrick’s transactional and disputes teams in the energy sector, along with the antitrust team, provide a short update across various jurisdictions on what you need to know in terms of Hydrogen.

The United Kingdom

Whilst at present there is no legal framework specifically aimed at Hydrogen projects in the UK, Hydrogen has been identified as having a crucial role to play in the UK’s transition to net zero. In August 2021, the UK Government published its much awaited Hydrogen Strategy which targets 5 GW of low-carbon Hydrogen production and £4 billion investment in the Hydrogen economy by 2030. In addition, the UK Government’s Department for Business, Energy & Industrial Strategy has been consulting with industry participants in order to define a Hydrogen business model (and subsidy regime) and establish a low-carbon Hydrogen standard that could underpin the deployment of low-carbon Hydrogen for use across the UK economy.

The UK Government has also provided public funding for a number of demonstration projects in the UK, including a project for the development of a Hydrogen production facility to be part of the UK’s first net zero industrial zone in the north of England (HyNet) and a project for the development of floating offshore wind turbines with water treatment units and electrolysers for localised Hydrogen production (Dolphyn).

Further investment in the Hydrogen sector is likely to be fast-tracked as a consequence of the UK’s move to ban Russian oil and oil products by the end of 2022.  Therefore, a bespoke domestic legislative regime on Hydrogen and various associated elements seems likely to be just around the corner.  Watch this space!

The United States of America

President Biden’s ambitions to catalyse a transition from fossil fuels to environmentally friendly energy sources, such as Hydrogen, have been tapered by Congress. Although introduced on 11 April 2021, the Clean Energy for America Act was shelved due to a lack of support from the legislature. This draft legislation proposed tax incentives for clean electricity, clean transportation and the construction of energy-efficient homes and commercial buildings. Proposals to introduce a series of tax breaks for clean energy production, however, have regained momentum in recent days, particularly because it is seen as an effective tool to bolster American energy independence and fight inflation.

Despite some initial resistance from Congress, President Biden’s Infrastructure Bill came into force on 15 November 2021. Out of the USD 1.3 trillion spending-package, (i) USD 8 billion was earmarked for the development of regional clean Hydrogen hubs; (ii) USD 500 million was allocated towards a clean Hydrogen manufacturing and recycling programme to support green Hydrogen supply chains domestically; and (iii) USD 1 billion for a programme aimed at decreasing the cost of green energy production from electrolysers. Earlier in July 2021, the Department of Energy had already awarded USD 52.5 million to 31 Hydrogen-related projects.

The Infrastructure Bill’s impact on the Hydrogen industry is yet to materialise. Several energy companies active in the renewables and gas sectors have implemented small scale projects which may be scaled up in the coming years, particularly if they can benefit from the Federal funding.

Germany

Germany currently obtains around half of its natural gas requirements from Russia. It is therefore far more dependent on these imports than most European countries, which on average rely on Russian gas for only around a third of their consumption. One of Germany’s first reactions to Russia’s invasion of Ukraine was to suspend the commissioning of the new Nord Stream 2 pipeline.  Currently, Russian gas and oil imports are excluded from sanctions. However, the situation is in flux, and an embargo on Russian gas has not been ruled out.  Equally, the gas supply may be curtailed by Russia in retaliation for sanctions.

These developments will add additional momentum to Germany’s existing Hydrogen plans.  The German government decided to move into Hydrogen on a large scale in 2020, when it published its ambitious “National Hydrogen Strategy”. The strategy places Hydrogen technologies at the core of Germany’s energy transformation and aims to secure the future national supply of CO2-free energy with green Hydrogen. While the generation capabilities of existing Hydrogen projects are not sufficiently advanced to substitute Russian gas in the short term, Germany’s impetus to secure energy independence from Russia is expected to significantly accelerate the transition to renewable energies.

In recent years, Germany has already seen the construction of the necessary infrastructure for a large-scale application of various Hydrogen projects. This includes a “Hydrogen starter network” with more than 1,200 kilometres of pipeline by 2030, the construction of Hydrogen terminals at several German ports, including Hamburg and Wilhelmshaven and of Hydrogen storage facilities. Germany’s geographic location and well-developed transportation networks (by both sea and land) have allowed Germany to consider plans to become a hub for the European Hydrogen economy. In addition to the transportation infrastructure, the complimentary renewable energy infrastructure (such as offshore wind farms in the North Sea and Baltic Sea, and storage facilities) have allowed these plans to become more than a fantasy. Aside from the national push, even on a small scale, there are advanced and ambitious projects, such as the local electrolysis of Hydrogen from surplus wind energy in the town of Bosül, which is already being used to power residents’ heating systems and local buses.

All of this is underpinned by the comparatively well-developed legislation in Germany in this sphere. Most notably, in 2021, a reform of the Renewable Energy Act (“EEG”) exempted the production of green Hydrogen from the payment of the EEG reallocation charge, and a reform of the Energy Industry Act (“EnWG”) provided the foundation for the gradual development of a Hydrogen infrastructure. Whilst the legislation is not as comprehensive as in respect of other energy sources, and some elements (such as the EnWG rules) are only of a provisional nature, it is likely that Germany will be at the forefront of the push for Hydrogen, and likely to play a significant role at a European level.

France

France is amongst the top three importers of Russian gas in Europe.  Therefore, the EU’s intention to reduce reliance on Russian oil and gas is also a priority for France.  That being said, France was already preparing for greater deployment of renewable energy sources.  In 2019, France set an ambitious target for low-carbon and renewable Hydrogen, which aimed at between 20 and 40% of total industrial Hydrogen consumption by 2030.

Less than two years later, France published Ordinance No. 2021-167  on 17 February 2021 on Hydrogen, the first solid step towards the implementation of a legal framework specific to Hydrogen as a fuel in France. This Ordinance (i) defines the different legal categories of Hydrogen; (ii) sets the regulatory framework for the traceability of renewable/low-carbon Hydrogen, by providing guarantees of origin and traceability; and (iii) introduces public support mechanisms to foster production and develop the sector by way of direct investment and/or subsidies to Hydrogen producers. As of this publication, the 2021 Ordinance is yet to be reinforced by additional “implementing” regulations, which ought to provide more precise regulatory details. This, however, has not stopped Hydrogen projects from flourishing all over France.

On 8 March 2022, the French Government reported that a first-round of 15 French projects had been selected to take part in the Hydrogen Important Project of Common European Interest (IPCEI) program. This European initiative is a State aid project (see also our Competition team’s state aid insights below) that aims to pave the way for a cleaner Hydrogen value chain in Europe.

France has vocalised its support for a self-sustainable EU Hydrogen supply, and currently plays a major role in another EU Hydrogen initiative, called the “European Clean Hydrogen Alliance”. France’s major energy companies are not only members of the Alliance, but also chair certain roundtables that were created to identify and propose mitigation measures to counter the major barriers to the large-scale deployment of clean Hydrogen.

The European Union

Earlier this year, the European Commission (“EC”) adopted new Guidelines on State Aid for Climate, Environmental Protection and Energy (“CEEAG”). These amend the criteria to be applied by the EC when determining whether State aid provided to companies in the areas of climate, environmental protection and energy is compatible with EU law.  The CEEAG bring the EU State aid regime in line with the objectives of the European Green Deal, which seeks to achieve zero net emissions of greenhouse gases by 2050: by 2024, EU Member States must modify existing aid schemes to comply with the CEEAG.

The EC will make an assessment under the CEEAG only in situations where the aid in question falls outside the exemptions contained in the EC’s General Block Exemption Regulation (“GBER”), which exempts aid below certain thresholds from the requirement to obtain prior clearance from the EC. The GBER itself is currently being revised to complement the CEEAG and align more closely with the objectives of the European Green Deal.

On 8 March 2022, as part of the EC’s “REPowerEU” initiative launched in reaction to the invasion of Ukraine by Russia, the EC set out plans to diversify gas supplies in the EU.  One of the proposals, dubbed the “Hydrogen Accelerator”, envisages an additional 15 million tonnes (mt) of renewable Hydrogen, both through imports to, and domestic production within, the EU.  It is also proposed that the EC will “further develop the regulatory framework to promote a European market for hydrogen and support the development of an integrated gas and hydrogen infrastructure, hydrogen storage facilities and port infrastructure”, prioritise State aid notifications for Hydrogen projects, and support pilot projects for renewable Hydrogen production and transport.  The EU has gone so far as to propose doubling its target for domestic Hydrogen production and imports which will, in sum, quadruple Hydrogen use in the EU.

Familiarity with the CEEAG can assist aid recipients and Member States in analysing the application of EU State aid rules to financial support provided by Member States for Hydrogen and other renewable energy projects, better positioning any necessary State aid application for a streamlined clearance from the EC.