Mass balance rules stemming from the REDIII
Building the foundation for Europe’s hydrogen trading future
Mass balance rules stemming from the REDIII
In RED III, it is stipulated that transactions of RFNBOs must take place on a mass-balance basis. This requirement also applies to transactions conducted within the hydrogen network. However, it is not yet clear what this requirement precisely means for transactions in the hydrogen network. There are two possible interpretations:
- In ownership transfers of hydrogen within the network, the commodity and the certificate must be transferred together to the same party.
- In ownership transfers of hydrogen within the network, the commodity and the certificate may be transferred separately to different parties.
Implementing Regulation IR 996
The European Commission is currently drafting implementing regulation IR 996, which will, among other things, set out how mass-balance rules are to be applied in a network. The provisions in IR 996 on this point will have a significant impact on at least two – and possibly more – key aspects of hydrogen market development:
- Market liquidity
- Functioning of the balancing market
IR 996 is also expected to detail the operation of the UDB (European central register), whose implementation was announced in RED. This database will be used to log transactions of RFNBOs. The introduction of the UDB is primarily intended to prevent fraud. The design choices made here are also expected to affect market liquidity and the functioning of the balancing market, and thereby influence the development of the hydrogen market and the scale of investments – although this factor is currently not a focus in implementation.
Dutch Incentive Schemes
For various Dutch incentive schemes (mobility obligation, SDE, offtake obligation, and industrial offtake subsidies), IR 996 is relevant because the Dutch government aims to comply with RED requirements, ensuring that realised projects count towards the obligations under RED. How the entire system of sustainability certificates (POS, GvO, HWIs, EREs), the requirement to log RFNBO transactions in the UDB, and the mass-balance requirement will be implemented, is therefore not yet clear and will be determined in IR 996.
To increase the likelihood that EU implementing regulation 996 will support – rather than hinder – the creation of a liquid hydrogen market, a study is being performed. This study will develop proposals on how the implementing regulation should be designed to best facilitate hydrogen market development. These proposals can be used for discussions with the European Commission.
Why is this study relevant?
If the sub-project EU Mass Balance Certificates in the Network is not carried out, the Netherlands risks falling behind in the development of a transparent, well-functioning, and internationally competitive hydrogen market. Trading hydrogen with sustainable certification plays a key role in providing market insight and price transparency for hydrogen production, as well as enabling the exchange of surpluses and shortages, allowing market participants to hedge against market fluctuations.
Unlike the current system of Guarantees of Origin, which allows the certificate and the energy carrier to be traded and transported separately, the new European regulations on green hydrogen certification require the trading and transport of hydrogen together with its certificate (the mass balance principle). There is considerable uncertainty about how this will be administered in practice. This severely hampers trade, prevents producers and end-users from finding each other, and creates extensive market uncertainty – leading to further delays in development.
This also causes major problems for the network operator, as it is simply unclear who is responsible for what, and when. Several questions to the European Commission requesting clarification have remained unanswered for years. This study aims to provide clarity on these issues.
Potential Consequences
If these questions are not answered, the potential consequences may include:
- Market uncertainty: Market participants will remain uncertain about trading requirements for even longer, leading to further delays in decisions and transactions in the hydrogen market, or higher transaction costs, resulting in fewer transactions and less market optimisation – hence less or more expensive green hydrogen.
- Network operator challenges: Gasunie will be unable to quickly set up a system to help facilitate green trading from the network, increasing uncertainty among parties about green hydrogen transactions through the national network. This will lead to more delays and reductions in transactions, and may even contribute to a trend of working only with local partners for direct delivery on industrial sites or via private pipelines – thus hindering the development of a national market.
- Exchange market impact: The above uncertainties, delays, and loss of a national trading perspective are clearly detrimental to the prospects for exchange-based hydrogen trading. Furthermore, the exchange itself requires the findings of this project to create a reliable and tradable exchange product that is both regulatory-compliant and practically sound. Without this project, both market liquidity and a meaningful exchange product would be missing.
Research activities
- Analysis of the certificate-physical hydrogen linkage: Mapping the implications of the mandatory linkage for market processes and trading systems.
- Hydrogen market and exchange design adjustments: Modelling market structures that align with European regulations and the certification system.
- Infrastructure planning and phasing: Aligning investment and construction phases of the network with certification requirements.
- Stakeholder dialogue: Engaging market participants, ports, and policymakers to assess preconditions and practical implementation.
Expected results
- A substantiated design for market structure and exchange mechanisms that comply with the European certification system.
- Scenario analyses describing the effects of infrastructure phasing on the functioning of certification.
- Advisory documents for policymakers and market participants with recommendations for implementation.
- Presentations and workshops to share the outcomes with relevant stakeholders.