Hydrogen sector gets new legal framework boost in France

This ordinance n°2021-167 dated 17 February 2021 comes at the right time for businesses investigating the potential of hydrogen, such as Renault which entered into a joint-venture with Plug Power, a leading provider of turnkey hydrogen solutions building the green economy, to explore opportunities for hydrogen solutions in on-road vehicle as part of its commitment to sustainable mobility. Other investors have also started to plough capital into hydrogen projects, with the help of the French state. One investment fund dedicated to investing in renewable gas projects, Eiffel Gaz Vert, successfully raised €210 million in commitments last year.

France has set the objective of developing low-carbon and renewable hydrogen and its industrial, energy and transportation uses, with the prospect of reaching around 20 to 40% of total hydrogen and industrial hydrogen consumption by 2030. France considers that hydrogen could be vital to decarbonisation of the industrial sector, including for heavy transport. To achieve this aim, the French government has set up a support mechanism applicable to hydrogen produced from renewable energy or by water electrolysis using low-carbon electricity. With the new ordinance, it is already possible to assess the impact of the French legal framework on future hydrogen production business cases, such as power-to-gas, electrolysis, and steam reforming, and as such on technical choices and electricity supply strategies.

Definition of the different types of hydrogen

The ordinance provides more clarity to the labelling of hydrogen. Ambiguous references to green, blue, yellow or grey hydrogen have been dropped and replaced by new definitions focusing on the environmental properties of the hydrogen produced.

Three types of hydrogen are defined by the French government: renewable, low-carbon and carbonaceous (carboné) hydrogen.

A CO2 emission threshold must be reached for hydrogen to be considered renewable or low carbon. Renewable hydrogen must be produced from renewable energy sources and must not present any interference with the use of these energy sources. Production processes such as steam reforming will not be considered as renewable hydrogen as a result of this definition. All other production modes that meet that same CO2 emission threshold will produce low-carbon hydrogen. The CO2 emission threshold is yet to be determined – this decision will be made in connection with ongoing EU discussions on the creation of a common classification system for sustainable economic activities. The hydrogen produced with fossil energies will be considered as carbonaceous (carboné) hydrogen.

In an earlier draft version of the new ordinance, hydrogen produced by "water electrolysis" fell within the definition of renewable hydrogen. Under the finalised ordinance, however, hydrogen produced with all types of electrolysis is considered to be renewable hydrogen. However, of hydrogen produced with all types of electrolysis, only that produced using water electrolysis will be eligible for public subsidy.

Although this new regulation provides more clarity, one may question the need to distinguish between renewable hydrogen and low-carbon hydrogen. If the main objective of the French government is the decarbonation of the industry in France, this could easily be achieved with hydrogen produced from nuclear electricity or from electricity powered by renewable sources. This could be a sign that French energy policy has definitively taken a "green" turn.

Implementation of hydrogen production guarantees

A major aspect of the hydrogen ordinance is the introduction of two systems for the traceability and for the origin of the hydrogen. As with electricity produced from renewable energies and biogas, the system is based on guarantees, which may certify the renewable or low-carbon origin of the hydrogen produced. The introduction of traceability guarantees is, however, specific to hydrogen.

While guarantees of origin use the "book and claim" principle – i.e. the hydrogen molecule and its environmental properties can be sold separately – for the electricity produced from renewable sources, traceability guarantees require that the molecule and its attributes remain attached from production to consumption. Traceability guarantees also prohibit the mixing of several types of hydrogen in the same supply chain and therefore impose a dedicated mode of transport and distribution. Traceability guarantees are also the only certificates that enable a consumer to prove their actual consumption of renewable or low-carbon hydrogen, while guarantees of origin only certify that part of the price is paid to a producer of “decarbonated” (décarboné) hydrogen with no direct material link between production and consumption.

The distinction between these two types of hydrogen production guarantees has been pointed out as a source of complexity by several hydrogen operators, potentially leading to increased management costs. For example, while the ordinance was still in draft form, the French Renewable Energy Trade Association (SER - Syndicat des Energies Renouvelables) requested the removal of the distinction between the two guarantees since, in their view, several terms of the draft ordinance seemed difficult to implement or did not reflect the commercial reality, especially in relation to transportation of hydrogen. The French Energy Regulation Commission (CRE - Commission de Régulation de l’Energie) also questioned the respective roles of the two types of production guarantees.

An independent authority will manage these two guarantees of traceability and origin, similar to the one already existing for guarantees of origin for electricity produced from renewable energies. From 30 June 2021, this authority will have to be able to accept the guarantees of origin of renewable hydrogen delivered by EU members states in line with the EU’s 2018 directive on the promotion of the use of energy from renewable sources. The guarantees of origin of low-carbon hydrogen from other EU member states may also be recognised and treated on condition that a similar level of requirements is met.

The ordinance also implements specific guarantees of origin for renewable hydrogen injected into the natural gas network or natural gas distribution networks, the so-called power-to-gas projects, though low-carbon hydrogen has been excluded from the scope of these provisions. The implementation of these guarantees comes at the right time as France has officially kicked off its first power-to-gas project.

The H2V59 project located in Dunkirk aims to create a green hydrogen production plant connected to the power grid. The French gas company, GRDF, has been granted the right to inject a mixture of natural gas and green hydrogen into the gas distribution network. It should be noted that the interconnected nature of Europe’s gas networks means further regulation in the context of these power-to-gas projects is anticipated and additional requirements put in place are likely to flow down into grid connection agreements and engineering, procurement and construction (EPC) contracts to manage the risks on interfacing.

Support mechanism for renewable and low-carbon hydrogen produced by water electrolysis

Production costs of hydrogen produced by electrolysis are currently much higher than the cost of hydrogen of fossil origin produced by the traditional technology of steam methane reforming. The investment needed for electrolysis units is also significant. Public funding is therefore necessary to support the deployment of renewable and low-carbon hydrogen.

In that respect, the ordinance introduces a grant scheme to produce renewable and low-carbon hydrogen by water electrolysis via public tender, similar to those currently existing for renewable energies in France. The French government will propose contracts supporting the investment or the operation of such projects with the declared intention to focus on large hydrogen projects. Smaller projects and less mature technologies will be the subject of dedicated calls for tenders.

Under the terms and conditions of the underlying contracts, the selected candidates of these calls for tenders could benefit from an investment grant, an energy premium (complément de rémuneration) or a combination of the two. The French Energy Regulation Commission recommended that the government set up energy premiums based on the quantity of energy produced, rather than investment incentives. France Hydrogène, the French association for hydrogen and fuel cells, also advocated for the establishment of such premium. A premium system based on the energy produced and delivered provides an effective incentive for the implementation, and subsequently the productivity, of the projects funded.

The French Energy Regulation Commission also questioned the maturity of the hydrogen sector and the relevance of organising support in the form of a call for tenders at this stage. As an alternative, the French Energy Regulation Commission advised the implementation of over-the-counter contracts for the transitional phase, allowing tailor-made measures and solutions for identified projects and adjustment of the remuneration to the costs actually borne by producers.

Although further details are expected in future regulations, this ordinance already makes it possible to forecast the impact of French law on the renewable or low-carbon hydrogen projects of industrial players. The groundwork has been laid to legally safeguard the deployment of hydrogen technologies and the sector. The grant scheme established by this text will most certainly be a major factor in making France's energy strategy a success in respect of the challenges for the country’s energy sovereignty and technological independence.

Co-authored by Léa Fournier of Pinsent Masons.