At this moment about 165 projects for green hydrogen are under development in the Netherlands, which – according to TKI New Gas – is an increase of 25% compared to last year. As a result, project leaders are optimistic about achieving the ambitions of the Dutch Climate Agreement: hydrogen production capacity of 500 MW by 2025, and 3 to 4 GW by 2030.
In line with these projects, calls are being made for the rapid development of Netherland’s regulatory framework for the hydrogen market. A recent letter from the Dutch Minister of Energy and Climate to parliament shows that in the coming months important decisions will be taken regarding regulation of the hydrogen market, market development and infrastructure.
Below we provide an overview of hydrogen regulation in the Netherlands and offer a glimpse of what is to come in the next months.
Regulatory status update
At present, as in many other countries, the Netherlands has virtually no regulatory framework for hydrogen. Hydrogen is not covered by the current Gas Act, which merely relates to natural gas that meets certain conditions: it should be in a gaseous state at a temperature of 15° Celsius and at a pressure of 1.01325 bar, consist primarily of methane or a substance equivalent to methane and should be generated in a manner prescribed in the Gas Act.
The limited legislation and regulations that currently exist are mostly based on the use of hydrogen as an industrial gas and raw material for the chemical industry. There is no doubt that this legislation is insufficient and inappropriate for the use of hydrogen in new applications, such as decarbonising the transport sector, providing storage for renewable energy and serving as a substitute for natural gas in the heating of buildings.
In anticipation of the development of a legal framework for hydrogen, a number of legislative changes have already been made to specific laws. For example, in the Offshore Wind Act the definition of wind energy has been amended to include both electricity and other energy carriers generated by a wind farm, such as hydrogen and the Act implementing the EU Renewable Energy Directive on guarantees of origin introduces guarantees of origin for gas from renewable sources, other than green gas, for which guarantees of origin already exist.
Hydrogen market organisation
As a first step to develop a regulatory framework for hydrogen, the Minister of Energy and Climate announced the envisaged market organisation for hydrogen production, infrastructure, storage and import facilities in a recent letter to parliament.
Production of hydrogen by means of electrolysis will primarily be a market activity. Only to the extent that private parties fail to develop electrolysis facilities in a timely manner, grid operators and their group companies will be allowed to develop electrolysis facilities, but subject to stringent conditions.
With respect to hydrogen infrastructure, a distinction can be made between the national hydrogen infrastructure (i.e. the backbone of the system), the regional infrastructure and commercial networks. Hynetwork Services (HNS), a subsidiary of Gasunie, is developing and will manage the national hydrogen infrastructure by re-using the existing gas infrastructure. A roll-out plan is currently being implemented.
In his letter to parliament, the Minister gave little information on the organisation of the regional hydrogen network. The regional distribution of hydrogen is expected to mainly involve the use of hydrogen for heating purposes. The regulator has published a tolerance policy for projects that will start before these regulations come into force.
Private parties will, in principle, be allowed to develop and operate hydrogen networks, provided that these networks are either existing geographically demarcated networks or are eligible for an exemption from regulation by the regulator (ACM). However, it is currently being investigated whether new large-scale private networks, for which necessity and added value have been demonstrated, should become part of the national hydrogen network in order to prevent market fragmentation and inefficient competition. Furthermore, given the significant potential for the production of hydrogen at sea, research will be carried out concerning a public offshore hydrogen network operator.
Storage and import
Given the urgency to develop storage and import facilities, the development of these facilities will not be reserved for private parties. Until there will be sufficient competition in the field of hydrogen storage and import facilities, the group companies of grid managers (not the grid managers themselves) will be allowed to participate in projects for the development of large-scale storage facilities and import terminals. In European negotiations on access to these facilities, the Netherlands will support a system of negotiated access for import terminals and for member states to have a choice between negotiated and regulated access to storage facilities.
Roadmap to full regulatory framework
Together with EU legislation currently being prepared in the context of the EU decarbonisation package that will guide the development of national law, market organisation will form the basis of Dutch hydrogen legislation as it is being developed.
Since the hydrogen market is still in its infancy, a three-stage approach towards a full Dutch regulatory framework is foreseen. In the period up to 2025 (the early development phase), EU legislation will not yet be in place. During this period, the Netherlands aims to implement a system of hybrid negotiated third-party access whereby the Ministry of Economic Affairs and Climate will set the conditions for access to the hydrogen infrastructure and for tariffs, and HNS will publish standard connection and transport contracts after consultation with the market.
The second phase (the period 2025 to 2030) will concern development and early operation. During this phase, EU hydrogen law will be implemented into national law, with an initial system of hybrid negotiated third-party access subject to guidance by the regulator and subsequently a transition towards regulated third-party access.
The third phase, 2031 and after, will be the operational phase. In this phase, a full Dutch regulatory framework for hydrogen will likely be in place, with regulated third-party access whereby the regulator sets or approves the tariffs and rules regarding balancing, capacity allocation and congestion management.
During these three phases, the scope and the level of detail of the regulatory framework will increase as the hydrogen market develops.
Connection and transport contracts
Since the ambitious time schedule for the development of the hydrogen market requires HNS and market parties to make investment decisions over the short term, clarity is required on the contractual terms and conditions for connection to the hydrogen grid and the transport of hydrogen. For this reason, the contractual framework for the connection and transport of hydrogen is being developed ahead of the regulatory framework. This means that contracts, which focus on the first pre-regulatory phase, will have to be amended in the future to accommodate national or international legislation that have come into effect. Earlier this year, HNS organised a market consultation concerning the draft General Terms and Conditions that will apply to the contract data sheets for agreements between shippers and HNS concerning entry and exit capacity and other services, as well as the draft Connection Agreements for hydrogen producers (i.e. entry) and for hydrogen buyers (i.e. exit). HNS aims to finalise these documents as soon as possible.
This documentation will set uniform national conditions for three key HNS services: transportation, pipeline flexibility and connection. Regional pipeline specifications may, however, require deviations, which will be agreed upon between HNS and its customers.
The transportation service will be based on the shippers model used in natural gas contracts, and will include inter alia capacity fees for contracted entry and exit capacity, hourly balancing, one uniform fee independent of the transportation distance, a take-or-pay obligation and a minimum contract duration of ten years. The documentation will take into account a number of significant differences between the fully developed natural gas system and the hydrogen system that is in the early phase of development. It will take into account, for example, that the impact of incidents can be higher in the hydrogen market because – unlike in the gas market – there are in this early phase of the hydrogen market’s development no control options to mitigate incidents, such as n+1 redundancy, compressors and blending stations.
According to the General Terms and Conditions, HNS will offer pipeline flexibility as a temporary service to meet market needs during the period in which storage and other flexibility services are not yet available. This will allow parties to have a certain imbalance in their portfolio. The availability of pipeline flexibility will depend on pipeline characteristics and customer profiles and will therefore significantly differ per region. HNS expects that this service will end sometime between 2027 and 2030.
In anticipation of the establishment of a harmonised EU standard for hydrogen quality, the Ministry of Economic Affairs and Climate will establish a framework for hydrogen quality, which will form the basis for the provisions on hydrogen quality in the Connection Agreements. Pursuant to a recent report of KIWA and DNV commissioned by the Ministry, a minimum hydrogen purity of 98 mol% was recommended as an initial quality requirement. Pursuant to this report, however, it is expected that in time the quality requirements will be adjusted to purities in excess of 98 mol%. The Ministry has announced that it will launch a market consultation on the national hydrogen quality standard. An important question in this context is whether the costs of purification should be socialised among the users of the national hydrogen network. The earlier consultation on market organisation showed that there is no consensus on who should bear the purification costs.
Notably, the HNS has decided not to develop a standard Investment Agreement for the realisation of a connection to the hydrogen network, as this involves specific circumstances. These agreements will therefore be developed by the HNS and the customer/producer on a case-by-case basis.
Deployment of incentives to develop the hydrogen market
In order to develop the entire hydrogen chain of production, and transport, storage and consumption simultaneously, a combination of subsidies and obligations is being considered, which must be launched no later than 2023. It is noteworthy that for the industry the Ministry is investigating the use of contracts for differences. In the past, the offshore wind sector advocated contracts for differences, but to no avail. In addition, the Minister has indicated that he wants to contribute to the realisation of certification schemes for hydrogen.
The ambition to become independent from Russian fossil fuels gives the development of the hydrogen market an even greater sense of urgency. It will not be possible to wait for EU legislation. The first steps towards the development of a Dutch regulatory framework for hydrogen have been taken and there is a great deal in the pipeline over the coming months. As seen in previous legislative processes, such as offshore wind, the Ministry and the HNS are open to input from the market through consultation procedures and webinars. Our hydrogen team will closely follow developments and keep readers informed.