8.2.1 Theoretical Benchmark and Market Failures

In economics, a market can be defined as a facility that allows buyers and sellers to exchange any type of goods, services, and information.Footnote ² These facilities used to exist mainly as physical marketplaces where the parties met each other in person. Increasingly, however, they exist in the form of virtual places where the parties submit their bids on digital platforms and the market operator sets the clearing prices and quantities. Irrespective of the way markets are organized in practice, they are meant to help the parties to realize the best deal for themselves. When these markets function well, one can say that the goods are produced and allocated to users in the most efficient way. This means that the goods are supplied by producers having the lowest costs, which refers to the productive efficiency in a market, and that these goods are consumed by the consumers that have the highest willingness to pay for these goods, which is referred to as the allocative efficiency of a market. The amount of goods produced is determined by the point where the marginal costsFootnote ³ of the producers equal the marginal willingness to pay of consumers. After all, if a good is consumed by a consumer with a lower willingness to pay than the marginal costs needed to produce that good, then this exchange between producer and consumer would result in a loss of welfare. This loss of welfare is seen as an allocative inefficiency, as the allocation results in lower welfare than what would be possible. One can also say that in well-functioning markets, the exchange of goods results in the maximum possible welfare.Footnote ⁴

It is important to realize that this theoretical notion of a well-functioning market is not meant to describe real markets, but it can be used as a benchmark for the assessment of actual markets. This also holds for microeconomic theories in general, which are meant to provide analytical frameworks that can be used to analyse actual behaviour of economic agents, such as consumers, producers, and traders. In practice, however, many markets suffer from fundamental shortcomings which prevent the market resulting in an efficient allocation of goods. These fundamental shortcomings are called market failures. The concepts of well-functioning markets and market failures can be used by regulators to determine to what extent and what type of regulatory intervention is needed. Below we will discuss a number of these market failures and how they can be addressed by regulators.

For a perfectly functioning market, a number of conditions have to be fulfilled. One of these conditions is that no market player is able to strategically influence the market outcomes, which means that the market prices are fully exogenous to the suppliers and consumers. If this is not the case, then market prices may get distorted by some suppliers with the result that (other) individual producers and consumers are not correctly informed about the marginal conditions of the other players. For instance, if the market price exceeds the marginal costs of the marginal supplier, then a consumer may decide not to consume a good even though that consumer’s willingness to pay may be higher than these marginal costs. As a result, an allocative inefficiency exists, which is a loss of welfare, referred to as ‘deadweight loss’. This also implies that in a perfectly functional market the only option firms have to make higher profits is to either reduce their costs or to improve the quality of their products and to sell the products to consumers with a higher willingness to pay for such products. In other words, in such markets all suppliers can be seen as price takers, as they can only respond to the market price but not influence it. Generally, one can say that the higher the number of producers in a market, the less firms are able to act strategically. The relation between market structure (degree of concentration) and intensity of competition is, however, not that straightforward as even in industries with only a few firms operating on the particular market, fierce competition may exist, while in industries with a large group of firms, these firms may be able to make joint agreements on, for instance, the magnitude of their supply to the market. Regulators address the risk of abuse of market power by general competition oversight, which consists of two main components: merger control (to prevent the establishment of dominant firms) and antitrust (to monitor and punish the abuse of market power by dominant firms or firms jointly participating in a cartel).

Another condition for a well-functioning market is that no firm has a strategic advantage over others because it is better able to access the market, for instance by using specific infrastructure which cannot be used by others. In other words, all firms should operate on a level playing field. When strategic advantage may result from the usage of essential infrastructure, regulators can implement rules regarding the usage of the infrastructure by other market players. A structural competitive advantage may also result from the presence of economies of scale or scope. This can occur in the case of activities with large fixed costs, such as investments in electricity and gas networks, which have the effect that one firm can conduct these activities more efficiently than a number of (smaller) firms. Such cost advantages result in natural monopolies, which means that the technological characteristics of a given industry results in the fact that it is most efficient to have one firm being responsible for the total supply. As is the case with other (normal) monopolies of firms having market power, unregulated naturally monopolistic firms (such as operators of natural gas and electricity grids) may abuse their position by charging so-called monopoly tariffs, which are tariffs intended to maximize the profits of the firm instead of being related to the marginal costs of production. Hence, such firms with a natural monopoly are not price takers but can be seen as price setters. These firms may also increase their profits by saving on costs for quality improvements or maintenance of their assets, which implies that the resulting higher profits come at the expense of lower quality for customers. To address this type of market failure, regulators may implement rules that restrict the freedom of naturally monopolistic firms regarding the tariffs they charge (so-called tariff regulation) and rules regarding the minimum required quality levels of service provision to customers (so-called quality regulation). In addition, it is crucial for all potential network users to get access to the network, which is called third-party access (TPA).

What is also necessary to obtain well-functioning markets is the presence of full transparency. Producers and consumers need to know what the relevant product characteristics are and under what conditions market transactions can be concluded. In practice, however, markets may fail to realize an efficient allocation in the presence of information asymmetry, which means that the parties (suppliers and buyers) cannot have the same type of information on the characteristics of the commodities. This market failure may result in so-called adverse selection, for instance when high-quality products cannot compete with products of lower quality, where the higher-quality product is more costly but consumers are uncertain about the quality of the product. Consumers are generally not prepared to pay their maximum price for a high-quality product if they are uncertain about the true characteristics (quality) of a product. This may occur if consumers cannot fully assess the quality of a commodity and, as a result, they may not be inclined to pay the full price. If this market failure occurs, coordination or regulation is required, for instance by organizing a trustworthy certification scheme.

Another type of market failure consists of externalities, which occur when economic agents do not take into account all costs or benefits of their activities. Negative externalities result in too high a level of activities from a social point of view. An example of such an externality is carbon emissions resulting from the use of fossil fuel energy. Positive externalities result in too low a level of activities of firms as they cannot capture all the benefits of their activities. This may, for instance, occur if the benefits of innovation cannot be protected by innovative firms. In that case, firms will not innovate enough, or at least they innovate less than they would do if the benefits could be fully captured. Another type of externality is called network externalities, which may result in a limited number of suppliers capturing the full market and, as a result, other firms being unable to enter the market. If network externalities exist in the market, the parties should coordinate how they want to organize the market, or a regulator should impose regulations on market design.

A final type of market failure is the presence of so-called hold-up, which is that the parties are hesitant to take actions which would be beneficial from a social welfare point of view. This may occur in the case of long-term investments without long-term contracts with customers or without the existence of liquid markets. For instance, in the case of a natural gas grid, the owner may be uncertain to what extent the users of that grid will keep using the grid and to what extent they are willing to pay the required tariffs. Because of that uncertainty, the owner of that grid may be hesitant to invest in grid extension unless users have made explicit long-term commitments about their future usage or regulators have indicated that future losses due to a lower utilization will be reimbursed. Consequently, the presence of this market failure may result in too little investment because firms are uncertain about the ex post revenues once they have made an investment. When this market failure exists, coordination or regulation is needed to give investors more certainty about the future revenues.

8.2.2 Regulatory Measures to Develop Energy Markets

If there are no fundamental shortcomings, markets just develop when individual suppliers and consumers see opportunities to start exchanging goods. In several cases, however, some factors lead to situations where markets cannot develop themselves and therefore they need regulatory help. This is true in particular for energy markets, where, because of some peculiarities, these markets cannot fully develop automatically without any help. Energy markets are based on physical networks, conveying natural gas, electricity, heat, and hydrogen and require government intervention to develop. In many countries in the recent past, the previously centrally coordinated systems for the delivery of gas and electricity have been replaced by markets through policy interventions. These interventions included various measures, which can be distinguished as liberalization by fostering competition and creating liquid marketplaces, restructuring of the industry, regulating natural monopolies and externalities, and removing bottlenecks for international trade.

With the liberalization of markets, a main goal is to develop effective competition and create liquid markets. A market is called liquid when the price of a good traded is not noticeably affected by actions taken by an individual. The liquidity depends on the transaction costs parties must put up with and the confidence they have in the market system. The latter depends on transparency of the operation of the market. When these conditions are met, the market will attract more parties, increase its volume, and further improve its liquidity. However, at times not every aspect of a market is well suited for competitive behaviour. One factor making parts of the market unsuitable for competition is the presence of natural monopolies. In electricity and gas markets, and possibly also in hydrogen markets, the networks are characterized by economies of scale, which make it unfeasible to create parallel networks. This situation requires the implementation of tariff regulation, quality regulation, and regulation of TPA.

Energy markets also require regulatory measures to address externalities, in particular environmental emissions. By imposing emissions standards or introducing emissions trading schemes or fossil-fuel energy taxes, the parties are incentivized to take the (negative) external effects into account when they are making decisions on production, investment, or consumption.

Although energy markets typically include some monopolistic elements that cannot be eliminated by increasing competition, there are other elements that are well suited for competition. To foster the entry of players in those segments of the market, authorities can choose to restructure the market in such a way that the monopolistic and competitive activities are not done by the same firm. This is called vertical unbundling of activities and is a well-known way to prevent conflict of interest. Another restructuring measure is the horizontal splitting of large incumbent firms into competitive segments. Without this, incumbent firms may have excessive market power, which will enable them to behave strategically – raise the market price to the monopoly level. A final form of restructuring is the privatization of ownership of incumbent firms. Privatizing the commercial elements of a sector gives those firms stronger incentives to be efficient as they face more pressure from the providers of equity or the capital market.

Vertical unbundling of monopolistic segments and the introduction of TPA does not automatically result in a competitive market. Effective market competition can only be achieved when the number of firms active in the market is sufficiently high while consumers are able to make a choice of their preferred supplier and the type and number of products they prefer. The benefits of such effective competition are that the market price is more related to the marginal costs. A regulatory measure that may further enhance competition is international market integration. When regional markets become more integrated with each other, domestic firms are able to operate in other markets as well. This (potentially) increases the number of players in all the regional markets which will foster competition and, therefore, the final price will be a better reflection of costs. Next to improving competition, market integration may also result in higher productive efficiency since firms with lower costs will replace those with higher costs. Second, and especially important in energy markets, there will be more flexibility to deal with demand or supply shocks. A larger integrated market has more options to deal with shocks to demand or supply than a market in a smaller region.

8.2.3 Regulatory Failures

When a market suffers from a fundamental shortcoming, like the ones described above, regulatory measures may help to improve the development or functioning of the market. However, finding and implementing the best type of regulation is often challenging. In this respect, it is important to realize that governments may also fail to implement the most appropriate regulatory measures. Such regulatory failures may be the result of various factors.

The first factor to mention is the information asymmetry between government (including the regulator) and market parties. Governments are generally less well informed than the parties about the precise characteristics of technologies (such as their costs and revenues), the actual outcomes of markets (such as profits realized by the various parties) or the (in)ability of the parties to enter into a market. Because of such information asymmetries, regulatory measures may be too generous at the expense of the public budget, or they may be too strict, with the result that the measures are less effective. Information asymmetry may also refer to a lack of information on the actual behaviour of market parties. This regulatory failure results in so-called moral hazard behaviour by regulated parties, which is, for instance, that they make less effort to realize their own objectives because of the impact on regulatory decisions. As an example, subsidies to compensate for all costs of a renewable energy project take away the incentives for firms to reduce these costs. Another example of moral hazard resulting from regulation is the so-called cost-plus tariff regulation of grid operators, which entails that these operators are allowed to raise their tariffs in response to an increase in their own costs. These operators don’t have any incentive to become more efficient, while they would have such incentives if their regulated tariffs were not related to their own costs.

Regulatory failures may also be due to rent-seeking behaviour by some parties. This can be related to information asymmetry, as an information advantage by market parties may be used to plead for regulations which are beneficial to them, but are not in the general interest, while the regulator is unable to check this. The likelihood of such behaviour is the greater, the more regulators depend on information provided by the regulated parties. Rent-seeking behaviour is also more likely to occur when parties are able to jointly act as a coherent group submitting internally consistent messages to politicians.Footnote ⁵ In such circumstances, it is more difficult for politicians to withstand such pressure from interest groups.

Regulatory measures may also not be in the public interest when politicians pursue their own (political) interests instead of the general welfare. This may occur when politicians implement measures which foster the interests of those they expect to support them. To give an example: politicians with the majority of their voter base amongst homeowners instead of renters may promote financial measures supporting the installation of rooftop solar photovoltaics systems while this measure, from an overall welfare perspective, may not be efficient.

8.3.1 Market Failures in Hydrogen Supply Chains

To determine whether the development of a market for hydrogen needs specific regulation, we first analyse the presence of market failures in the hydrogen supply chain.Footnote ⁶ This supply chain basically consists of the production, transport, storage, distribution, and consumption layers (see Figure 8.1). While the supply chain refers to how the hydrogen flows from production to consumption, the term hydrogen markets is understood in this chapter as how the commercial relations between agents in this supply chain are organized. Just as with natural gas and electricity markets, the functioning of hydrogen markets is related to the functioning of the physical infrastructure. Below we analyse for the various components of the supply chain and the markets to what extent there is potential for market failures, like economics of scale, externalities, structural lack of competition, information asymmetry, or hold-up. If such failures are found, we explore potential regulatory solutions to address them.

Figure 8.1 Supply chain of hydrogen.

Source: Author

8.3.2 Production of Hydrogen

Hydrogen is an energy carrier, not an energy source, which implies that it has to be produced from other energy carriers.Footnote ⁷ This production can be done in various ways which can be distinguished into two groups: production based on fossil energy, in particular natural gas, and production based on electricity. In the first method, the methane molecules (NH₄) of natural gas molecules are split into H₂ and CO₂. This is still the common method of hydrogen production. When the CO₂ is captured and stored (so-called carbon capture and storage – CCS), for instance in depleted gas fields, the resulting hydrogen can be almost 90 per cent carbon free (not 100 per cent as full capture is technically not possible). One of the technical methods in this type of hydrogen production is called steam methane reforming. In the second method, water molecules (H₂O) are split into H₂ and O₂ using electricity. This is called electrolysis, which can be differentiated into different types – such as alkaline electrolysis, which is the oldest technique, and proton exchange membrane (PEM) electrolysis.Footnote ⁸ Depending on how the electricity is generated, the resulting hydrogen can be called fossil-based (when the electricity is generated by fossil-fuel power plants) or fossil free (when the electricity is generated based on renewable sources or nuclear power). As electricity is a secondary energy carrier, this type of hydrogen can be seen as a tertiary energy carrier. This is relevant for the economics of hydrogen production as the costs of the primary energy carriers used and the efficiency of the conversion processes determine the costs of hydrogen supply.

To determine to what extent the production of hydrogen is characterized by economies of scale, one can look at the required investments per megawatt (MW) of capacity in relation to the magnitude of demand in the market. In this respect, it appears that production of hydrogen can be compared to the production of electricity. The installations required to convert an energy carrier into hydrogen or electricity require similar amounts of investments. An advanced combustion turbine gas plant requires about 0.5 million euros/MW, which is a bit less than the investment size of a steam-methane reforming plant, while the investment in an electrolysis plant is equal to about 1 million euro/MW. Coal-fired and, in particular, nuclear power plants are, however, much more capital intensive.

In addition, it appears that neither type of hydrogen production requires specific locational circumstances. Steam-methane reforming plants need access to the gas network, as they need gas as input, and electrolysis plants need access to the electricity grid and water network, as they need electricity and water as inputs, but access to these networks is in principle everywhere available in most countries, due to the existing TPA regulation of gas and electricity grids. In the case of steam methane reforming in combination with CCS, proximity to a transport and storage system for CO₂ is also required, and here we may find some locational constraints.

The above implies that, from a competition point of view, the supply side of hydrogen production needs no particular economic regulation as the relatively small scale of the production facilities and the absence of strong locational advantages prevent the occurrence of a natural monopoly. Hence, the existing regulation of TPA to electricity and gas networks will be sufficient along with the general competition policy oversight to realize competition in the production of hydrogen.

For the negative environmental externalities occurring through the production process, however, regulation is required. As in the case of steam methane reforming, even when combined with CCS, there are always remaining carbon emissions because of technical constraints regarding the conversion process of making hydrogen based on natural gas as well as the transportation of carbon. Hence, these emissions should be subject to environmental regulation, such as a cap-and-trade emissions scheme, in order to give the hydrogen producers incentives to take these emissions into account when they decide upon investment and production levels. In the case of electrolysis, the production of hydrogen does not generate any carbon emissions, but indirectly these emissions do occur when the electricity is generated based on fossil fuels. This negative environmental externality is (partly) addressed through environmental regulation of the electricity industry, such as through emissions trading schemes, support schemes for renewable electricity (which reduces the share of fossil-based electricity in the mix) and taxation on the use of fossil fuel energy in electricity generation. In addition, when hydrogen from various sources is transported through one network, potential users of that hydrogen are not able to determine the environmental burden during the production process of the hydrogen they want to use. Hence, regulation is needed to enable producers of hydrogen to inform their customers about the carbon content of their production process. This regulation will be discussed below in Section 8.3.7 on retail markets.

There is potentially another externality related to the supply of hydrogen in the market, which is the security of supply externality. When significant amounts of hydrogen are coming from a small number of countries, this may result in geopolitical dependence, as we have seen in the natural gas market.Footnote ⁹ In order to address this risk, governments could foster diversification of the sources of hydrogen imports by enabling parties not only to import from nearby sources at lowest costs, but also to import from sources at a greater distance.Footnote ¹⁰

8.3.3 Transport of Hydrogen

Just as hydrogen can be produced in various ways, it can also be transported through various modes: via pipelines, trucks, and ships. The different forms of transportation require different amounts of investment, which affects the economies of scale and potential sources of market power. In the first mentioned way, hydrogen is transported in gaseous form, and in the latter two in liquid form. Before hydrogen can be transported in gaseous form through a pipeline system, its volume is reduced (the energy content per unit of volume is raised) through compressing, just as is the case with the transport of natural gas through pipelines, which means that additional investments have to be made. In the case of transport via trucks or ships, the temperature of hydrogen needs to be lowered in order to raise the energy content per unit of volume, which is required to reduce the transportation costs.Footnote ¹¹

These transportation options have strikingly different economic characteristics. The transport of hydrogen by pipeline is characterized by scale economies as the investment costs per unit of energy transported decrease more the larger the capacity of the transport infrastructure. Although the capital costs of pipelines are high, the large quantities that can be transported (up to 9,000 kg/h) and the relatively low operation costs reduce the costs per kilogram (kg) of hydrogen. Hence, with large quantities of hydrogen, transport via pipelines is the most suitable and cost-efficient option. In addition, the greater the quantity transported, the lower the unit costs. For smaller quantities, however, the construction costs of a pipeline per unit of hydrogen are simply too high, which means that in such a situation transport by truck is more efficient. Therefore, transport through pipelines has to be regarded as a natural monopoly when the amount of hydrogen to be transported exceeds a minimum threshold. This in particular holds for the situation in which existing natural gas pipelines can be repurposed for hydrogen. In that case, the average costs per unit of transport are much lower than in alternative transportation modes, which gives the operator of such a pipeline system a competitive advantage.

A consequence of the cost advantages of pipeline transport compared to transport by truck is that when the hydrogen market evolves, transport will be done through pipelines. Because of the natural monopoly characteristic of pipelines, it is not efficient to have more than a single network for the transport of hydrogen, which means that competition cannot evolve in the transport business. The transport of hydrogen, therefore, needs to be subject to economic regulation, just like the transport of natural gas and electricity. This regulation should entail tariff regulation, protecting network users from tariffs that are too high, giving network operators incentives to operate as efficiently as possible, and enabling other market participants (producers and users of hydrogen) to make use of the transport infrastructure.

As hydrogen transportation infrastructure has to be developed, investors in this infrastructure need to have some certainty about future utilization and revenues. Without this certainty, they may delay their investment. Governments can play a role in providing regulatory certainty about how the future revenues will be determined and how extensive the future utilization of the infrastructure may become.Footnote ¹²

8.3.4 Storage of Hydrogen

Hydrogen can be stored in several ways. The simplest option is to store hydrogen in tanks, for which it needs to be compressed, but even with high pressures the required volumes remain large, which makes it an unrealistic option for large-scale storage. To store the same amount of energy by hydrogen compared to natural gas, the required volume is about four times greater.Footnote ¹³ The volume of the storage can be reduced through liquefaction, but this requires significant amounts of energy, which also makes it less attractive from an economic point of view. An option to store large quantities of hydrogen in an efficient way is to make use of salt caverns or depleted natural gas fields.Footnote ¹⁴ Salt caverns in particular do have great potential in many countries because of their widespread presence (although this is not possible everywhere), and their ability to provide large-scale storage which can be used with a high level of flexibility in terms of injection and withdrawal.Footnote ¹⁵

Storing hydrogen can be relevant when the timing of production and consumption are not similar. When hydrogen is mainly used for industrial processes or heavy transport, consumption will be fairly flat, which implies that the producers of hydrogen do not need to (greatly) adapt their production profile. This situation differs, of course, when hydrogen consumption is more volatile. This will occur when hydrogen is used for producing heat in households and offices, as then the demand will depend on the outside temperature. If the temperature drops, the supply side should be able to increase its supply to the market to meet demand. For competition to be effective under such circumstances, it is crucial to know what type of and how many facilities would be required to realize this increase in supply. The more facilities required to provide the flexibility in supply, the less individual suppliers are in a strategic position to influence market outcomes. To obtain a better impression of the competitive situation in case of a cold two-week winter period (as an example), one can estimate the number of facilities required for various types of techniques.

If storage were available in the form of salt caverns, then about fifty of them would be needed to meet the Dutch demand for hydrogen for heating purposes during a cold winter period as defined above. However, if depleted gas fields could be used, then only three fields would be needed. In the latter case, a monopoly may easily occur if these fields were all operated by a single firm. In such case, regulation would be required to assure that the flexibility to supply extra hydrogen during cold winter days is available to the market at reasonable prices. This regulation would be comparable to the current regulation of storage in the natural gas market because of the importance of having flexibility in the form of storage available at reasonable prices if hydrogen is used for heating homes.

The same conclusion holds when instead of depleted gas fields or salt caverns another large-scale storage option were to become available. As many technologies to store hydrogen as liquid, compressed gas, or chemical storage are under development, this may result in a storage solution which outcompetes other technologies in terms of efficiency and costs.Footnote ¹⁶ In that case, the storage side of the hydrogen market may be characterized by a few players, which would require regulation as mentioned above. However, if hydrogen is not (so much) used for heating homes but more in industry then there is less need to implement strict access regulation storage as industries generally have more options to deal with supply disruptions, while their demand for hydrogen would be less dependent on external weather conditions than the demand from households.

8.3.5 Consumption of Hydrogen

In its pure form, hydrogen is currently mainly used in industry (in particular refining, ammonia, chemicals, metals, electronics), while in a blended form (mixed with other gases), it is mainly used for creating methanol and heat.Footnote ¹⁷ In oil refining, hydrogen is used to convert crude oil into various end-user products such as transport fuels and feedstock for the chemical industry. This use of hydrogen is currently responsible for a major share in the carbon emissions of the industry, as the hydrogen that is used here is produced as a by-product of fossil energy or created through steam methane reforming. In the future, emissions stemming from the production and consumption of hydrogen have to be reduced sharply, which can be done by either using renewable hydrogen or capturing and storing the carbon emissions in the production process (see Section 8.3.2). This transition requires environmental regulation, in particular by imposing a carbon price on remaining carbon emissions or a constraint through, for instance, a cap-and-trade emissions trading scheme.

In the future, low-emission hydrogen demand will not only come from the abovementioned industries, but also from the transport sector, in particular from heavy freight transport, where hydrogen can be used in fuel cells as well as in internal combustion engines.Footnote ¹⁸ To realize this potential, more specific regulation is needed regarding the development of appropriate charging infrastructures.Footnote ¹⁹ In addition, hydrogen may also play a role in providing seasonal flexibility to electricity markets which are characterized by high shares of renewable generation. The potential of this usage depends on the competitive position of hydrogen storage combined with hydrogen power plants in comparison to other options to provide flexibility to electricity markets (such as hydropower and demand response).Footnote ²⁰ As long as electricity prices reflect the changing scarcity conditions in these markets, no specific regulation is needed to foster particular sources of flexibility, such as hydrogen. Note that this statement refers to the wholesale market, as in the retail market the end-user prices are generally less directly related to changing market circumstances. For hydrogen producers, however, the wholesale market is relevant as that is where they buy their electricity.

8.3.6 Wholesale Markets

Just as for the natural gas market, a hydrogen wholesale market could function based on a transport and storage infrastructure that is accessible by all those who want to trade in hydrogen. After all, the wholesale market will include a physical exchange of the commodities, although financial markets will also emerge, once the physical trade options exist. The latter markets are more related to the desire of parties to hedge their risks through long-term financial forward contracts or options. The physical market can exist as an over-the-counter (OTC) market with bilateral exchange through a broker or an exchange with standardized products and clearance by the exchange operator, who also takes over the financial risks. The last option facilitates the liquidity of the wholesale market as it results in standardization of the products which reduces the transaction costs, while transparency on prices and market conditions is fostered, which results in a higher volume of trades.

The hydrogen market may learn from how the market for natural gas developed over the past decade. Because of the differences in quality of various gases depending on their source, the trade in natural gas is done in uniform thermal (energy) units (in MWh), which strongly facilitates trade. To sell the commodity as a homogenous product, each type of gas is valued in terms of the energy content it carries. This means that it is not the volume (such as cubic metres – m³) of the gas that is sold, but the amount of energy it carries, since heating is the main purpose of natural gas. In addition, to reduce the transaction costs and increase the transparency of trade, market hubs have been created in many countries: for example, the Title Transfer Facility (TTF) in the Netherlands, Net Balancing Point (NBP) in the United Kingdom, NetConnect Germany and GasPool in Germany (which recently have merged into Trading Hub Europe (THE)) and Virtual Gas Trading Point PSV in Italy. These marketplaces are virtual hubs based on an entry–exit system in which parties can transfer gas already injected into the national grid to other parties. As long as the gas is within the system, it can change owner. It is common that gas ownership changes numerous times between entry and exit. This is the so-called churn rate.Footnote ²¹ In particular, the churn factor of the TTF has increased strongly over recent years, thereby indicating that this market has become highly liquid. One factor behind the liquidity of the TTF are the high quantities supplied relative to the quantities demanded. The total supply to the Dutch natural gas market has been about twice as high as total Dutch gas consumption, while in most other countries this ratio is much lower.

8.3.7 End-User Market

Consumers may have different preferences for the type of hydrogen they want to use, just as they have different preferences for various types of electricity and gas. The economics of the transport of hydrogen, however, shows that it is not efficient to have alternative transport infrastructures. In the situation of a well-developed large-scale hydrogen market, all hydrogen coming from different sources (be it on the basis of steam methane reforming with or without CCS or on the basis of electrolysis based on grey or green electricity) will have a standardized physical quality as it will be transported through the same infrastructure. Users who prefer a specific physical quality (for example, pureness) of hydrogen, may need to convert the hydrogen to a different quality level upon its arrival at their location. This will likely hold for various industries, such as chemicals, glass-making, and steel. If hydrogen is used for heating, for instance in industry, users only have to adapt their appliances to the hydrogen quality transported through the network.

A more important distinction in quality is related to the way in which the hydrogen is produced, as consumers may have a preference for low-carbon hydrogen. This quality is not related to the physical characteristics of hydrogen, but to how ‘sustainably’ it is produced. To facilitate these consumer preferences, a certification system is required, just as currently exists for electricity and gas based on the European system of Guarantees-of-Origin. This certification scheme, which is included in the European Renewable Energy Directive II, provides an internationally consistent approach to monitor carbon emissions throughout the supply chain, taking into account that hydrogen can be used in various types of end-user products, such as ammonia or fuels.Footnote ²² As countries and regions are currently developing their own certification schemes, it will be crucial for international trade to harmonize these into a global scheme.

9.3.1 Puglia

The Italian region of Puglia, with its capital Bari, is very active in promoting hydrogen, via both policy and law. In 2019 Puglia adopted a regional Act on the promotion of the use of hydrogen,Footnote ¹⁴ and various interesting projects are being developed in the Puglia region. The reason why this region is specifically interested in hydrogen is due to the high potential of energy production from renewable sources,Footnote ¹⁵ with relatively low demand for electricity in the region. Hence, hydrogen production infrastructure can facilitate the grid integration of fluctuating renewable energy sources.Footnote ¹⁶

9.3.2 Groningen

The north of the Netherlands, with a key role for Groningen,Footnote ³⁸ refers to itself as the first ‘hydrogen valley’ of Europe.Footnote ³⁹ That is, inter alia, because over recent years many hydrogen-related projects have been or are currently being developed in this region.Footnote ⁴⁰ There are three main reasons why Groningen as a region has an interest in the development of a hydrogen economy: first, Groningen is home to one of the largest natural gas fields in Europe.Footnote ⁴¹ The region traditionally focused on gas production, but due to earthquakes, and the resulting damage,Footnote ⁴² it was decided that the gas production should end.Footnote ⁴³ However, Groningen is still home to significant amounts of knowledge and skilled workers in the gas industry, which could be used for the setting up of a more sustainable gas industry.Footnote ⁴⁴ Thus, hydrogen can play a role in the transition from a natural gas industry region to a clean energy region. It must be noted in this context that the gas industry has played a large role in lobbying for hydrogen activities in the region.Footnote ⁴⁵ A second reason for Groningen’s interest in hydrogen is that it is currently one of the regions with the highest penetration of renewable energy in the Netherlands, and it has high ambitions with regard to the development of renewable energy (solar power plants and wind energy) in the years ahead. Hydrogen production could help facilitate grid integration of renewables.Footnote ⁴⁶ A third reason is that hydrogen can be used as a feedstock for the industrial clusters of the region.Footnote ⁴⁷

9.3.3 Comparison

In this section, the ‘hydrogen regions’ of Groningen and Puglia are compared on both the policy and law related to hydrogen. Main points that stand out are a focus on the energy chain; the underlying policy goals of the ambition to develop a hydrogen region; the role of municipalities; the regional legal framework; and the relation to the national legal framework. These topics are treated in more detail below.

First, regarding the hydrogen chain, both Puglia and Groningen have applied for projects related to a combination of electrolysis, hydrogen storage and various forms of hydrogen use, in order to reach a ‘hydrogen chain’ rather than separate projects.Footnote ⁷¹ This could be explained as follows. For entities to benefit from the regional focus (contrary to a national focus), it is important that the region includes various parts of the chain, such as production, storage, transportation and use, within a geographically limited area. With isolated projects, there is less benefit from a regional approach compared to a national approach, as geographical proximity between projects is not exploited. As mentioned in the updated hydrogen investment plan for Groningen, this focus on a chain of projects has the downside that delays in one project influences the projects surrounding it and can affect the activities in the entire region.

A second point relates to the underlying goals of the hydrogen ambitions. There is a clear difference between Puglia and Groningen, at least in the communication about the goals. Puglia focuses mainly on the combination of renewable energy and green hydrogen production, driven by the need for better grid integration of the large potential for renewable energy in Puglia. This is also mentioned in the Groningen case, but in policy documents it becomes clear that Groningen focuses more on industrial policy and economic considerations, and specifically on the link between green hydrogen production, infrastructure and integration in industrial processes. A secondary goal is to use hydrogen as a replacement for the natural gas sector that is seeing its activities decline in Groningen.Footnote ⁷²

Whereas the goals and background of the ambition differ, the means to reach it are similar: both regions adopted specific policy instruments to this end, which focus not only on the energy installations as such, but also on other aspects such as expanding knowledge and skills in the hydrogen industry and collecting data and trends on the development of the regional hydrogen economy. In both cases, a coordinating and monitoring body is present.

The involvement of municipalities is different in Groningen and Puglia. Whereas they are essential to the policy framework in Groningen, this is less so (or at least less visible from the outside) in Puglia. In Groningen, some municipalities are actively promoting the use of hydrogen in municipal vehicles or in a ‘hydrogen neighbourhood’ in which hydrogen is used as a means of heating. A recommendation in this regard is to couple the development of a hydrogen economy to other municipal tasks, such as heating transition (in the Netherlands) or transportation policy (local public transport for example). This may deliver mutual benefits to the policy goals, such as the use of waste heat from hydrogen production that can be used in a municipal heat network.

The next point of comparison is the development of a regional legal framework. Puglia and Groningen differ significantly in their approaches. This difference stems from the constitutional and political differences between the regions: Italy is a republic, and regions in Italy are more accustomed to adopting their own legislation on a wide variety of topics. Thus, Puglia laid down its policy in a Regional Act, whereas Groningen only has policy documents. Although the difference between the two regions can be explained, the outcome is that Puglia creates more legal certainty. The Regional Act explains the ambitions, instruments and scope of the hydrogen plans unambiguously and for the longer term. Groningen does not have a similar Act but did adopt a regional investment plan on hydrogen that lays down ambitions and projects as well as a development plan for the longer term. However, this document has less legal value than an Act.

Both regions rely on national legislation on hydrogen infrastructure and safety of installations. In the Netherlands, the legal framework is under development, after a long period of discussions on which entity should own and operate hydrogen infrastructure. In Italy, the lack of legislation on hydrogen transportation via pipeline is a legislative gap: pipelines are a logical mode of transportation to match production and consumption of hydrogen within a region. Both countries have legislation regarding transportation of hydrogen via road, rail and waterways, which is based on European law regarding dangerous goods.

Finally, a missed opportunity is that neither of the countries has specific legislation on the integration of hydrogen in the energy sector, whereas in both countries, a main reason for the development of a hydrogen economy is to relieve the stress put on the electricity system regarding the increased load and penetration of intermittent renewable energy sources.

10.2.1 What Are Sustainability Criteria?

To address the notion of sustainability criteria one must first refer to the concept of sustainable development. In the early 1970s, sustainable development emerged as an alternative to the unlimited economic growth model and in response to the previous decades’ concerns about risks and damage of technological advances, development failures and evident growth limits in an already overexploited planet.Footnote ²⁰ Recognizing the tension between economic growth and environmental protection, the 1987 Brundtland Commission report Our Common Future defined sustainable development as ‘development which meets the needs of current generations without compromising the ability of future generations to meet their own needs’.Footnote ²¹ The report emphasized the needs and interests of human beings and stressed the necessity to apply an integrated decision-making process taking into account both economic development and environmental protection to further human welfare.Footnote ²² Since then, and especially since the 1992 Earth Summit in Rio de Janeiro, sustainable development has gained popularity and prominence in varied spaces and discourses, has been placed at the centre of international development policy and has been incorporated into numerous national and supranational legal instruments.Footnote ²³

While the Brundtland definition of sustainable development is the most widely used, a plethora of other definitions, meanings, approaches and interpretations exists.Footnote ²⁴ Some argue that because of its complex and disparate historical origins, sustainable development ‘remains both context specific and ontologically open’.Footnote ²⁵ Yet it is widely admitted that sustainable development rests on three distinct but interdependent, equally important and mutually reinforcing pillars, namely environmental, social and economic. The environmental pillar (environmental sustainability) requires the preservation and maintenance of the natural environment to support development and human quality of life. The social pillar (social sustainability) encompasses many issues such as human rights, equality, cultural identity and public participation, all of which promote peace and social stability. Lastly, the economic pillar (economic sustainability) implies the maintenance of the natural, social and human capital required for incomes and living standards.Footnote ²⁶ Sustainable development can only be achieved through multilevel efforts to integrate these three pillars in a balanced way, so prioritizing is not an option; they ‘cannot be pursued in insolation for S[ustainable] D[evelopment] to flourish’.Footnote ²⁷

Although sustainable development has achieved notorious prominence in various spaces, it remains a highly contested concept. For instance, it has been criticized for being a rather vague, ambiguous and inherently anthropocentric and political concept, based on Western thinking and serving neoliberal interests by not questioning the economic growth ideology or the consumerist culture.Footnote ²⁸ Others consider sustainable development as an oxymoron because economic development or growth is inconsistent with environmental protection or sustainability.Footnote ²⁹ Despite criticisms, it is argued that sustainable development has become the internationally accepted decision-making framework for achieving, maintaining and improving human well-being for both the present and future generations and that the challenge is to use and improve this framework taking into account and seeking to achieve environmental protection, social justice and economic development.Footnote ³⁰

Tying sustainable development to sustainability, both concepts are frequently used interchangeably, while they are intrinsically different: sustainable development is the journey to achieve sustainability.Footnote ³¹ Yet some argue that sustainability ‘has been co-opted into the sustainable development discourse where development is first and foremost about human survival and meeting human needs, but does not necessarily have much to do with genuine sustainability, which is reliant upon the continuation of the earth’.Footnote ³² For others, the ‘transformation and operationalization at the practical level’ is the main obstacle regarding both concepts.Footnote ³³

Sustainable development and sustainability form the basis for understanding sustainability criteria and their content. Sustainability criteria have been explored from various scientific perspectives and interpreted in different ways.Footnote ³⁴ Defining product sustainability criteria, Pavlovskaia states that these ‘are requirements to the sustainable quality of a product and its sustainable production, which have to be fulfilled in order to acquire a sustainability status or certification’.Footnote ³⁵ In this sense, it is argued that product sustainability criteria can be applied to identify unsustainable trends and effects and to assess opportunities and risks deriving from economic, environmental and social sustainability dimensions, also helping to assure long-term sustainability and secure investment.Footnote ³⁶

Sustainability criteria can be binding when included in a legal framework – for instance, the EU’s binding sustainability criteria for bioenergy as detailed in Section 10.2.2, but can also be established in voluntary schemes, such as those existing in the coffee sector.Footnote ³⁷ These criteria can be of a qualitative or quantitative nature; are usually developed for certain purposes and according to specific conditions; are not static, so continuous assessment, reconsideration and improvement can be required; and different actors at different levels can be responsible for setting and supporting their implementation.Footnote ³⁸

The three pillars of sustainable development, it has been argued, ‘are attractive as organizing categories for sustainability criteria’.Footnote ³⁹ In fact, it could be said that, to avoid negative sustainability impacts – for instance of a product – sustainability criteria should comprehensively address the most urgent sustainability concerns focusing on environmental, social and economic aspects, as they all are important to assure sustainability compliance, although particular contexts and specific conditions should be considered when identifying and developing the criteria.Footnote ⁴⁰

Moreover, for sustainability criteria to work as intended, they should be understandable and it should be possible to implement and monitor them, as well as to control compliance through the establishment of an organizational structure.Footnote ⁴¹ To verify compliance with defined sustainability criteria, certification processes have been created in some cases – for instance, to certify that a product was sustainably produced.Footnote ⁴² Thus, alongside the creation of different types of sustainability criteria, different certification systems have also been established.Footnote ⁴³ In any case, it is argued that the establishment and implementation of sustainability criteria should be done in a transparent and consistent manner and that the control systems linked to their fulfilment should be reliable, trustworthy and transparent.Footnote ⁴⁴

10.2.2 Sustainability Criteria for Bioenergy in EU Law

Sustainability criteria for the production and import of bioenergy into the EU were included in the law for the first time in the 2009 Renewable Energy Directive (hereinafter RED I).Footnote ⁴⁵ The scope of this Directive was limited to biofuels and bioliquids. According to the Directive, both are produced from biomass, but biofuels are liquid or gaseous fuels for transport, while bioliquids are liquid fuels for energy purposes other than for transport, including electricity, heating and cooling.Footnote ⁴⁶

The mandatory sustainability criteria of the EU have two components. First, biofuels and bioliquids must achieve a certain threshold of greenhouse gas (GHG) emissions savings in comparison to the use of fossil fuels.Footnote ⁴⁷ Second, the raw materials cultivated for the production of biofuels or bioliquids must not come from land with high biodiversity value, land with high carbon stock or from peatlands.Footnote ⁴⁸ If these criteria are not met, the biofuels or bioliquids can still enter and be sold in the EU market, but they cannot receive financial support or count towards the renewable energy targets of EU MSs.Footnote ⁴⁹

Compliance with the sustainability criteria must be proven by the producers of biofuels or bioliquids through independent audits;Footnote ⁵⁰ in other words, through private voluntary certification schemes. Alternatively, third countries may conclude bilateral or multilateral agreements providing for sustainability criteria equivalent to those in the Directive,Footnote ⁵¹ exempting the producers from independent audit.Footnote ⁵² However, the vast majority of producers of biofuels and bioliquids made use of the private schemes instead of these options.Footnote ⁵³

In addition to the sustainability criteria, the European Commission must report every two years to the European Parliament and the Council on the impact of the increased demand for biofuels on the availability of food and on social sustainability in and outside of the EU.Footnote ⁵⁴ It must also report on the respect for land use rights and indicate whether the supplying countries have ratified and implemented a number of Conventions of the International Labour Organization (ILO).Footnote ⁵⁵ Auditors of private schemes also have reporting obligations on topics not limited to the sustainability criteria. They must inter alia provide information about soil, water and air protection, about the restoration of degraded land and about the avoidance of excessive water consumption in areas where water is scarce.Footnote ⁵⁶

In the midst of mounting controversy on the effect of the increase in biofuels consumption in the EU on food prices and about their real GHG emissions savings,Footnote ⁵⁷ RED I was amended in 2015.Footnote ⁵⁸ This amendment mainly served to include provisions to limit indirect land use change (ILUC). ILUC happens where pasture or agricultural land previously destined for food and feed markets is diverted to biofuel production, displacing the non-fuel demand to new, non-agricultural land.Footnote ⁵⁹ When this involves the conversion of land with high carbon stock, it can lead to significant GHG emissions.Footnote ⁶⁰ To tackle this issue, the amended directive caps the total share of energy from biofuels produced from food crops to 7 per cent of the final consumption of energy in transport in the EU by 2020.Footnote ⁶¹

Only three years later, RED I was overhauled and gave place to RED II.Footnote ⁶² This new version of the Directive separates sustainability from GHG emissions saving criteriaFootnote ⁶³ while they were mashed in RED I. Yet the criteria follow the same logic: they are mandatory but limited to GHG emissions savings on the one hand and the risk of land use change on the other.Footnote ⁶⁴ They do not restrict market access but are a condition to access financial support and count towards MSs’ renewable energy targets,Footnote ⁶⁵ and compliance is controlled by private certification schemes.Footnote ⁶⁶

Three novelties with relevance to this chapter were introduced. First, the directive’s scope on biofuels and bioliquids was extended to biomass fuels too, defined as gaseous and solid fuels produced from biomass.Footnote ⁶⁷ Second, the requirements on GHG emissions savings have been made more stringent and are increasing in line with the opening date of a facility. Third, it has to be noted that sustainability criteria only apply to biomass fuels used for producing electricity, heating and cooling or fuels from a certain installation size onwards, namely a total energy generation capacity of a rated thermal input of 20 megawatts (MW) for production from solid biomass and of 2 MW from gaseous biomass fuels.Footnote ⁶⁸ This last point is of interest, given that current electrolysers for the production of green hydrogen are operating mostly at a similar scale (between a few MW to around 20 MW), which makes an analogy easy.

In October 2023, once again, a revised version of the RED was adopted. RED III amends and reshuffles the provisions detailing the GHG and sustainability criteria applicable to bioenergy and RFNBOs, strengthened some GHG reduction targetsFootnote ⁶⁹ and doubled the previous target for the share of renewable energy within the final consumption of energy in the transport sector to 29 per cent by 2030.Footnote ⁷⁰ Yet no major change impacted the sustainability criteria, the sectors to which they apply, and so on.

In a nutshell, sustainability criteria in EU law tackle GHG emissions and (direct or indirect) land use change that impacts upon environmentally valuable types of land. These GHG emission reductions are a condition for bioenergy to qualify for financial support and to count towards renewable energy targets. They apply to both domestic production and imports and compliance is (mostly) checked by private certification bodies. However, issues such as soil, air and water quality and their usage or social aspects are not part of the criteria. These are merely subject to a reporting requirement.

10.2.3 The Critique of Sustainability Criteria for Bioenergy in EU Law

The critique of sustainability criteria for bioenergy in EU law mainly focuses on two dimensions: the environmental and the social spheres. Although several points of critique about the environmental impact of bioenergy on GHG emissions and on the local environment have been addressed with the legislative process leading to RED II and III, some persist. Three issues in particular remain, which will now be explained in more depth: first, the issue of green protectionism; second, the problem of non-carbon-related local environmental impacts; and third, problems with the certification process.

As far as the first point is concerned, it has been argued that the EU created the sustainability criteria to protect ‘its own inefficient domestic biofuels production’.Footnote ⁷¹ These accusations amount to alleged green imperialism in the sense that EU institutions decide what is to be considered sustainable bioenergy and how the specific local ecological and social needs are to be balanced with economic and social development interests in producing countries.Footnote ⁷² Using other terms, this is labelled as a transnational legal process, being the ‘impact of unilateral legal developments in one jurisdiction that affect behaviour in others’.Footnote ⁷³

Second, many critics point out that sustainability criteria prioritize carbon concerns over non-carbon ones,Footnote ⁷⁴ adopting ‘a limited definition of sustainable development’.Footnote ⁷⁵ Academics would like to see sustainability criteria extended to soil, water and air protection, to the restoration of degraded land and to the avoidance of excessive water consumption in areas where water is scarce.Footnote ⁷⁶ As things stand, these are only subject to a reporting obligation to the Commission by private certification schemes.Footnote ⁷⁷ Yet several studies show that reductions in GHG emissions from biofuels are achieved at the expense of other impacts, such as acidification, eutrophication, water footprint and biodiversity loss.Footnote ⁷⁸ A 2013 study on the topic of air, soil and water protection acknowledged that introducing mandatory quantitative criteria is not feasible, given the wide variety of crops and the prevailing bio-physical, environmental and climatic conditions for producing bioenergy, and proposed instead to place greater emphasis on targeted management practices.Footnote ⁷⁹ Such practices would require compliance with relevant legislation on soil, water and air, the creation of management plans at farm level for soil and water management and the creation of river basin management plans to identify regions at risk of water scarcity.Footnote ⁸⁰ In the 2016 impact assessment for the preparation of RED II, the European Commission clearly indicated that, while the inclusion of these issues in the sustainability criteria was requested by stakeholders during the public consultation, it decided not to reopen the topic due to the industry complaining about the administrative burden that these additional criteria would bring about.Footnote ⁸¹ In addition, the Commission argued that many private certification schemes that it recognizes already require good agricultural practices, including for soil, water and air.Footnote ⁸²

Third, the private certification schemes that control compliance with the sustainability criteria have been widely criticized, as they allegedly amount to an externalization of the control of legal compliance to private parties. The literature describes this system as a hybrid approach,Footnote ⁸³ which allows a formally voluntary certification system to become de facto mandatory through formal enshrinement in law.Footnote ⁸⁴ The advantage is that some schemes are targeted to a particular feedstock and/or regional conditions and therefore have the specific expertise needed to define management requirements targeted at the local conditions.Footnote ⁸⁵ It also allows bioenergy producers to choose a more ambitious certification scheme, with higher requirements than those in RED III.Footnote ⁸⁶ Moreover, when non-governmental organizations (NGOs) are participating in certification schemes, research shows a strengthening of the criteria.Footnote ⁸⁷ However, the literature also pointed to the risk of a ‘race to the bottom’ or ‘forum shopping’, where producers overwhelmingly choose the less demanding certification scheme, even when the final product is sold with an upper quality certificate.Footnote ⁸⁸ The consequence is that to really improve the sustainability of bioenergy production, raising the ‘meta-standard’ is the safest option: sustainability criteria could integrate what is already being proposed by various certification schemes and make these elements mandatory.Footnote ⁸⁹

Besides this criticism on the environmental side of sustainability criteria, there is also long-standing dissatisfaction about the exclusion of social issues, which will be discussed now. The absence of the social dimension means that the negative effects of bioenergy production on social and human rights, such as ‘appropriate wages and working conditions or land rights of smallholders and indigenous peoples’, is often disregarded.Footnote ⁹⁰

Despite the absence of mandatory social requirements in EU law, many private certification schemes do integrate such prerequisites.Footnote ⁹¹ The situation is very similar to the one described above on the inclusion of non-carbon environmental aspects in private certification schemes. Indeed, some standards are quite comprehensive on the issue while others are very light,Footnote ⁹² and schemes with NGOs forming part of the board are more stringent in their criteria than industry-only ones.Footnote ⁹³ Yet overall social criteria are usually less present than environmental ones in the certification schemes,Footnote ⁹⁴ and they also suffer from a race to the bottom.Footnote ⁹⁵ For these reasons, scholars are prone to request the inclusion of mandatory social sustainability criteria in EU law, for instance based on what many private schemes already propose,Footnote ⁹⁶ to ‘set the “bottom line” higher’.Footnote ⁹⁷

However, there is a large stumbling block on the way to this integration. When writing RED I, the European Parliament’s Industry Committee proposed to include social aspects in the sustainability criteria.Footnote ⁹⁸ Due to deep concerns about the compatibility with World Trade Organization (WTO) rules, raised by the Commission especially, this idea was abandoned.Footnote ⁹⁹ Imposing mandatory social sustainability criteria was seen as overstepping ‘some countries’ “red lines” and thus would almost certainly trigger an action in the WTO’.Footnote ¹⁰⁰ Most of the academic debate about the legal feasibility of social sustainability criteria with regard to WTO law took place during and shortly after the establishment of RED I and many scholars considered this option to be difficult.Footnote ¹⁰¹ However, there is some discrepancy and a few authors believe that it would be possible to include such criteria, especially based on the requirements that are already widely used in private certification schemes.Footnote ¹⁰²

Based on this section, one may consider that the EU sustainability criteria on bioenergy should more accurately be renamed ‘environmental criteria’ (without downplaying all the criticisms of the scope and control of the environmental aspects). Indeed, in contrast with what was mentioned in Section 10.2.1, while the use of the term sustainability criteria suggests an inclusion of the three pillars of sustainable development – economic, social and environmental – only the environmental one is part of the binding EU requirements applying to the production and import of sustainable bioenergy products.

11.2.1 General Issues: Lacunas in the EU Framework for Public Participation on Hydrogen Plans and Programmes

Public participation in energy matters is covered by the general framework on public participation in environmental matters. This is due to the fact that energy policy and activities usually, if not always, have implications for the environment.Footnote ¹¹ In the EU legal order, public participation is, firstly, explicitly envisaged under article 11(1) of the Treaty on European Union (TEU), stating that EU institutions shall give citizens and representative associations the opportunity to make known and publicly exchange their views in all areas of Union action. This also includes energy. Furthermore, specifically on energy and environmental themes, the EU framework has been created in light of the Aarhus Convention.

This Convention is a so-called mixed agreement,Footnote ¹² to which EU Member States and the EU itself are parties. The provisions of the Convention thus rank higher than EU secondary law, but lower than the Treaties.Footnote ¹³ Moreover, the provisions of the Convention have primacy over conflicting national rules.Footnote ¹⁴ This is also true regarding those provisions that have not yet been implemented by the EU legislator.Footnote ¹⁵ This finding is relevant as EU law has still not fully implemented the Convention, as has been discussed elsewhere.Footnote ¹⁶

Relevant for this study is the fact that the Aarhus Convention prescribes public participation for all (national) plans and programmes on the environment, and thus also those on the hydrogen economy. The main directive implementing the Aarhus Convention with a view to its application at a national level, the so-called Aarhus Directive,Footnote ¹⁷ does not cover the actual EU energy law framework. Nor are the Renewable Energy Sources DirectiveFootnote ¹⁸ and the GasFootnote ¹⁹ and ElectricityFootnote ²⁰ directives listed regarding the scope of application of the Aarhus Directive, to mention just a couple of examples from energy law. The proposed directive on gas and hydrogen also lacks a provision aimed at amending the Aarhus Directive.Footnote ²¹ The proposal does not, alternatively, contain ad hoc provisions on public participation. Public participation in the development of hydrogen markets will thus not be mandated under these pieces of EU secondary law. The Strategic Environmental Assessment (SEA) Directive, which covers public participation in plans and programmes relating to energy, only addresses public participation when such plans and programmes are likely to have significant environmental effects.Footnote ²² Under the Aarhus Convention, any plan or programme relating to the environment must be subject to public participation, even when it does not have potential serious negative effects on it.Footnote ²³ The EU framework for public participation in the hydrogen economy is thus deficient.

This does not mean that the EU and its Member States do not have to comply with the Convention on these aspects. Decision 2005/370/EC has made the Convention part of the EU acquis communautaire.Footnote ²⁴ As mentioned above, this means that the Convention is, in its entirety, binding upon the EU and its Member States, as recognized by the Court of Justice.Footnote ²⁵

In the rest of this contribution, given the broader and more elaborated scope of the provisions of the Convention and the great overlap between the wording of its provisions and the pieces of EU legislation most directly aimed at implementing them,Footnote ²⁶ the Convention is used as the basis to explain public participation in the development of the hydrogen economy. The focus will be on the importance of ensuring public participation with a view to policies, plans and programmes (Section 11.2.2), including when these are set up by semi-public bodies (Section 11.2.3). Of course, the Aarhus Convention only pursues minimum harmonization,Footnote ²⁷ which means that the EU and its Member States can decide to go beyond such a minimum, a practice called green-plating.Footnote ²⁸

11.2.2 Specific Issues: The Importance of Ensuring Public Participation as Regards Policies, Plans and Programmes

This section shows the importance of ensuring public participation early in the chain of decision-making on the hydrogen economy. It focuses on public participation at the level of policies, plans and programmes, and unveils the shortcomings of the EU framework in this regard. Public participation is regulated under three provisions of the Convention: article 6, regarding specific activities significantly affecting the environment; article 7, on plans, programmes and policies; and article 8, dealing with executive regulations and other generally applicable and legally binding rules. Although this chapter focuses on policies, plans and programmes on hydrogen, this provision cannot be understood in isolation from article 6. This is because, for plans and programmes, article 7 refers back to certain obligations set out under article 6.Footnote ²⁹ We will thus first introduce article 6.

The public participation legal framework set out in article 6 is more detailed in comparison to those for plans and programmes and for policies. It consists of eight categories of obligations. First, it establishes a notification duty. Properly informing the public concernedFootnote ³⁰ – either by a public notice, such as a newspaper announcement, or an individual notice, such as a letter – is essential for effective participation in the decision-making procedure.Footnote ³¹ To this extent, the notification must include all relevant information about the project and the public participation procedure. Second, the responsible party, which could also be a private party, should set reasonable time frames to inform the public concerned and to allow for a response. The Convention does not define the concept of ‘reasonable time frames’ and this could vary in accordance with the kind of activity under scrutiny.Footnote ³² Third, the procedure should take place when all options are possible and participation can be effective. Under this provision, the concepts of ‘early engagement’ and ‘effective participation’ are linked to the moment in the decision-making process in which public participation is organized. What matters is that ‘events on the ground’, such as the availability of certain technological choices,Footnote ³³ have not effectively eliminated alternative options.Footnote ³⁴ This does not mean that during the establishment of specific activities the public concerned must be able to comment upon options that were subjected to an earlier public participation procedure.Footnote ³⁵ For example, options that have been subjected to public participation in the context of establishing a plan or programme do not need to be subjected to public participation during the adoption of specific activities implementing such a plan or programme.Footnote ³⁶ Fourth, private initiators should be encouraged to engage in public participation prior to a permit application. Public authorities, however, should retain control of and responsibility for the procedure.Footnote ³⁷ Fifth, the public concerned must be able to access all relevant information, in accordance with the provisions on access to information under the Convention.Footnote ³⁸ Sixth, the public must be allowed to submit views. This provision represents the embodiment of public participation – that is, the ability to express a view, or arguably even a feeling,Footnote ³⁹ in writing or orally, to the discretion of the public.Footnote ⁴⁰ Seventh, the responsible authority should take the views expressed by the public into due account, therefore ensuring a ‘real voice’ to the public. However, this does not mean that it has to align the decision to such views.Footnote ⁴¹ According to the European Commission, this duty ‘means that the Commission will duly consider the comments submitted by the public and weigh them in the light of the various public interests in issue’.Footnote ⁴² Basically, this duty means, in legal terms, that a decision-maker must show why a particular comment was rejected on substantive grounds.Footnote ⁴³ Still, it does not amount to a right of the public to veto the decision, according to the Aarhus Convention Compliance Committee (ACCC).Footnote ⁴⁴ The eighth, and final, obligation is that the decision-maker should inform the public about the final decision and how the views have been taken into account.Footnote ⁴⁵

The legal framework for public participation procedures as regards plans and programmes build on the framework for decisions on specific activities but is less extensive and specific. Firstly, the Convention does not define the concepts of ‘plans’ and ‘programmes’ concerning the environment. These instruments can take a variety of forms.Footnote ⁴⁶ In the majority of the cases, plans and programmes are meant to provide a framework for adopting decisions about specific activities. Secondly, obligations regarding public participation procedures on plans and programmes refer explicitly to the second (reasonable time frames), third (early engagement) and seventh (real voice) obligations listed above. They refer also to the need to ensure transparency, fairness and access to information. Although the first, fifth, sixth and eighth obligations, indicated under article 6, can easily be read into the concepts of fairness, transparency and access to information, the different formulation of such obligations denotes the presence of more discretionary powers for public authorities on how to fulfil them than in the context of decisions concerning specific activities.

From a legal perspective, plans and programmes are not adopted in a vacuum but should fit within the existing policy framework. Under the Aarhus Convention, environmental policies can be defined as ‘a course or principle of action adopted or proposed by an organization or individual’.Footnote ⁴⁷ Yet this concept remains officially undefined. From the perspective of public participation, article 7, last sentence, of the Convention shows the high level of freedom left to the Convention Parties in this area. There are no specific legal requirements in this regard. Most significantly, the duty to organize public participation procedures at a moment in time in which all options are still open does not apply to policies. This consideration holds true also for the duty to take due account of the views and feelings of the public.Footnote ⁴⁸ As these two obligations aim at ensuring ‘early engagement’ and ‘real voice’ during public participation procedures, their absence underlines that, under the Convention, there are no explicit legal requirements aiming at ensuring that public participation as regards policies are effective.

This finding is particularly relevant when we consider that the content of decisions about specific activities depends on the higher-level instruments in the decision-making chain, namely plans and programmes, and policies. Besides, options discussed during the adoption of a policy, a plan or a programme do not need to be made subject to public participation during the adoption of implementing measures,Footnote ⁴⁹ as indicated. At the same time, policies influence the room for input during the setting up of plans and programmes, which in turn influences the room for input during the adoption of concrete actions. Policy choices expressed in policy documents can determine that in practice certain options are no longer available at the level of decisions about specific actions.

The above shows the importance of ensuring public participation early in the chain of decision-making about the hydrogen economy, thus at the level of policies, plans and programmes.

11.2.3 Specific Issues: Ensuring Public Participation by Semi-Public Bodies

In certain Member States, such as the Netherlands, the development of the hydrogen economy is carried further by a collaboration of public and private bodies, with the latter at times being invested with powers going beyond those of private parties, as further discussed in Section 11.3 below.

In this regard, it should be noted that article 7 of the Aarhus Convention applies vis-à-vis parties that establish plans and programmes. Not only acts adopted by public bodies fall under article 7 of the Aarhus Convention. In certain cases, also policies, plans and programmes which are adopted by what national law considers private law bodies are covered by article 7 of the Convention. This is due to the fact that the concept of a public body is interpreted broadly in the context of the Aarhus Convention and EU law. What is meant by the concepts of ‘public body’ or ‘public authority’ must be viewed from the so-called Foster jurisprudence.Footnote ⁵⁰ This entails that private law parties can also be qualified as public bodies from the perspective of EU law if they have powers and competences that go beyond those of ordinary private law parties. Transport system operators, distribution system operators and seaport authorities working on the development of the hydrogen economy within their respective fields of operation can all be regarded as being public bodies for the purpose of the application of article 7 of the Aarhus Convention, even in those countries in which such bodies are set up as private companies, such as the Netherlands. The fact that under EU and national law such bodies are entrusted with powers that go beyond those of private parties qualifies them as public bodies under the Aarhus Convention and the EU law that implements it. We will call these kinds of public bodies semi-public bodies, to distinguish them from the traditional public bodies – that is, public law legal persons.

11.3.1 National Policies, Plans and Programmes on Hydrogen

The current policy framework for hydrogen in the Netherlands is comprised of a multitude of letters by the Minister of Economics and Climate, ‘working plans’ drafted by working groups, and other documents. The Dutch National Hydrogen Programme 2022–2025Footnote ⁵¹ and the related Dutch Hydrogen Roadmap,Footnote ⁵² set up by a working group composed of public and private stakeholders, can be considered the main plans and strategies for the hydrogen economy. In these documents, the Netherlands sets the goal of 500 megawatt (MW) electrolyser capacity by 2025. For the period after 2031, plans exist for electrolysers on both land and at sea. For instance, by 2031 the Netherlands should have the biggest (500 MW) offshore hydrogen production plant in the world.Footnote ⁵³ This production capacity needs to be supported by a fitting hydrogen infrastructure. The idea is to reuse the current natural gas infrastructure available, which minimizes the new infrastructure that needs to be built. However, the war in Ukraine complicates the initial plans, as the natural gas pipelines are currently necessary for delivery from west to east, and are thus not available for conversion to hydrogen transport.Footnote ⁵⁴

The National Hydrogen Programme underlines the importance of public acceptability for developing a hydrogen economy.Footnote ⁵⁵ Yet public participation is only mentioned as regards the project level, by informing the general public on those decisions that have already been made.Footnote ⁵⁶ In fact, neither of these documents have been drawn up following a public participation procedure. Only stakeholders active in the field of hydrogen were invited to contribute to the working sessions which led to the programme. No public participation was organized.Footnote ⁵⁷

Besides these two programmatic documents, the Dutch Programme for the Energy Infrastructure (Programma Energiehoofdstructuur) sets out a spatial planning framework, regulating the spatial utilization of the Dutch territory for hydrogen infrastructure.Footnote ⁵⁸ It includes a partially binding spatial plan with specified general areas in which provinces should determine where hydrogen infrastructure (such as electrolysers, and storage facilities in depleted salt caverns) can be located. This document was drafted by the government, following the so-called Participatory Value Evaluation method, and the government adhered to the formal consultation procedure (in Dutch: zienswijze procedure).Footnote ⁵⁹ While the Participatory Value Evaluation is a way to investigate the preferences of a group of people on various policy options, given a fixed budget,Footnote ⁶⁰ the consultation procedure allows anyone to submit their opinion or concerns about (part of) a plan.

Regarding the development of hydrogen in the northern Netherlands, the Dutch Programme for Energy Infrastructure indicates a clear preference for using salt caverns for underground hydrogen storage.Footnote ⁶¹ It is also mentioned specifically that, given the recent history of mining endeavours in the north of the Netherlands which caused earthquakes and social unrest, public participation in the development of these storage facilities would need extra attention and would require ‘a fundamentally different approach than the natural gas extraction in Groningen’.Footnote ⁶² This brings us to the Northern Netherlands Hydrogen Valley.

11.3.2 Hydrogen Policies, Plans and Programmes in the Northern Netherlands Hydrogen Valley

The HEAVENN project in the northern Netherlands is a six-year project that created the first region to be recognized as a hydrogen valley and to receive the accompanying EU subsidy. A hydrogen valley is a concept established by the EU for projects that successfully link hydrogen production through an effective transportation system to its various end uses. A hydrogen valley serves as a demonstration site of a profitable and holistic business model for green hydrogen.Footnote ⁶³ HEAVENN’s main goal is exactly that: to create replicable business models while maximizing the abundant solar and wind energy available in the region and using green hydrogen across the entire value chain. In that way, the northern Netherlands serves as a showcase for green hydrogen development within the EU. The region covers three Dutch provinces: Friesland, Groningen and Drenthe. Most hydrogen activities take place in Groningen. We therefore analyse the policy, plans and programmes of the province of Groningen from the perspective of public participation in the next section.

11.3.3 Hydrogen Policies, Plans and Programmes of the Province of Groningen

The main policy document on hydrogen in the province of Groningen is the Climate Agenda of the Province of Groningen for 2030.Footnote ⁶⁴ This policy document sets out, among others, the goals of the province in the field of hydrogen for 2030. The goals are expressed in a broad fashion, in terms of ‘supporting initiatives in the field of hydrogen’,Footnote ⁶⁵ ‘use of hydrogen as energy carrier’,Footnote ⁶⁶ ‘reserving space for onshore pipelines for transporting hydrogen’,Footnote ⁶⁷ ‘improving the business case for hydrogen’,Footnote ⁶⁸ ‘strengthening the hydrogen value chain’Footnote ⁶⁹ and ‘execution of hydrogen train pilot’.Footnote ⁷⁰ Participation is considered an important aspect of the further development and implementation of energy policies in the region, but the Climate Agenda as such was not subject to public participation. The province only invited stakeholders and experts to express their comments on the Climate Agenda.Footnote ⁷¹

Another general policy document referring to hydrogen in the province of Groningen is the Regional Energy Strategy (Regionale Energie Strategie – RES). The RES was developed by the province, municipalities and water boards of the province of Groningen. It was developed in two phases, RES 1.0 and RES 2.0.Footnote ⁷² Neither of the two documents set out specific goals or actions as regards hydrogen, but simply refer to the development of the hydrogen economy in general terms.Footnote ⁷³ Neither document was open for public participation.

The same is true for the Investment Plan on Hydrogen presented by public and private parties in the provinces of Groningen and Drenthe in 2020.Footnote ⁷⁴ Most importantly, this document indicates the storage project in Zuidwending, north-east Groningen, as one of those belonging to the Northern Netherlands Roadmap to 2030,Footnote ⁷⁵ and covered by the Investment Plan.Footnote ⁷⁶ The choice of the location for the first hydrogen storage facility in depleted salt caverns seems thus to have taken place by the time this document was established. There is no trace of public participation.

In June 2023, the province of Groningen presented its Provincial Multi-year Programme on Energy and Climate Infrastructure 1.0 (Provinciaal Meerjarenprogramma Infrastructuur Energie en Klimaat), which implements the Dutch Programme for Energy Infrastructure, discussed in Section 11.3.1 above.Footnote ⁷⁷ At the moment, this programme only focuses on electricity. Hydrogen is referred to in several places, but no specific spatial choice is expected till 2025 when version 2.0 of the programme will be published.Footnote ⁷⁸

Overall, similar to the national level, the province of Groningen’s policies, plans and programmes for hydrogen include several macro-level policy choices, which have been established without any visible public participation. After having assessed the actions of public bodies, we will now look at what semi-public bodies in the hydrogen valley of the northern Netherlands have done with their plans and programmes for the hydrogen economy from the perspective of public participation.

11.3.4 Hydrogen Policies, Plans and Programmes of Semi-Public Bodies: Gasunie

In addition to the delegated powers of the provinces, private actors are also broadly vested with public functions in the Dutch energy market. In the field of hydrogen, Nederlandse Gasunie N.V. (Gasunie) plays a major role in the development of the hydrogen infrastructure, as discussed in detail in Chapter 17 in this book, by Broersma, Jäger and Holwerda. Gasunie will be the transport system operator responsible for the hydrogen transportation grid in the Netherlands.Footnote ⁷⁹ HyNetwork Services (HNS) and EnergyStock are two subsidiary companies of Gasunie tasked by the Dutch government to develop the hydrogen network and hydrogen storage, respectively.Footnote ⁸⁰ The Gasunie group (Gasunie and its subsidiaries) have thus been entrusted with powers that go beyond those of private parties and can be qualified as a semi-public body, as also evident from the discussions by Broersma, Jäger and Holwerda in Chapter 17.Footnote ⁸¹

The main policy framework within which HNS operates is the Dutch Hydrogen Roadmap, discussed in Section 11.3.1 above. In 2023, HNS proposed amendments to it.Footnote ⁸² These were presented in a hybrid webinar, the recordings of which are available online, and those who had an interest, without further defining what this ‘interest’ might have meant, could submit their comments to the proposed amendments for four weeks starting on 23 July 2023. At the time of writing, the received comments and their implementation are not available, but HNS indicates that it will publish such information unless the party submitting the comment indicates that the comment should be treated as confidential.Footnote ⁸³

With a view to hydrogen storage, the Dutch Hydrogen Roadmap indicates the goal of having between 750 and 1,000 gigawatt/hours (GWh) of hydrogen in salt caverns by 2030.Footnote ⁸⁴ As indicated in the plan itself, this means that three or four salt caverns will be filled with hydrogen. The first caverns will be in Zuidweinding, in the north of the Netherlands, within the hydrogen valley. At the time of writing, the possible locations of the other three hydrogen caverns is still being studied.Footnote ⁸⁵

As permission for the first storage facility, the salt cavern in Zuidwending (project called Energiebuffer Zuidwending), was covered by the State Coordination Regulation (Rijkscoördinatieregeling), the public participation procedure followed the formal consultation (zienswijze) procedure,Footnote ⁸⁶ under the responsibility of the Ministry for Economic Affairs and Climate. This procedure was opened in April 2023 and closed at the end of May 2023.Footnote ⁸⁷ All received public input is available on the website of the Ministry, by means of an anonymized bundle report. This report shows that people had remarks about macro policy options, such as the alleged unreasonableness of investing in hydrogen,Footnote ⁸⁸ and the need to develop the caverns elsewhere in the Netherlands.Footnote ⁸⁹ At the time of writing, the responses to these remarks are not available.

Still, in 2022, prior to the formal participation procedure, Gasunie’s subsidiary responsible for the development of hydrogen storage facilities, EnergyStock, published a participation plan (Participatieplan).Footnote ⁹⁰ In that plan, EnergyStock defines the targeted audience groups as local residents, the government and administrative bodies, companies, NGOs, nature associations and other social parties.Footnote ⁹¹ Most importantly, this plan indicates the main focus of the participation procedure.Footnote ⁹² It also indicates that the participation procedure will not concern the location of the project as the cavern at the current location is already in use by the exploiting parties (Nobian and EnergyStock) and is the most suitable one for the project.Footnote ⁹³ This shows that this macro-level policy option was not the subject of the participation procedure. This option was adopted when publishing the National Hydrogen Programme and related roadmap, discussed in Section 11.3.1 above. Apparently this policy option is not open to debate at the level of specific decisions.

Under the Aarhus Convention, it is fine not to discuss policy options at the level of specific decisions during a public participation procedure, as explained in Section 11.2 above. This is, however, only true when the macro-level policy options were subject to a participatory process when settled. As indicated in Section 11.3.1, this was not the case when the National Hydrogen Programme and related roadmap were established.Footnote ⁹⁴ This option should, therefore, be open to the participatory process at the level of the specific project.