To play its part in decarbonisation, hydrogen needs to get from where it is made to where it is needed.

Today, this is achieved via a combination of road transport and privately owned pipelines, including grids connecting a few closely located producers and industrial consumers (for example in Belgium and the Netherlands).

But more infrastructure will be needed to create a market for hydrogen on a national or European scale. We are likely to see a mix of:

Blending hydrogen with natural gas in existing infrastructure.
Repurposing existing natural gas infrastructure to dedicate it to hydrogen.
Rolling out new, dedicated hydrogen infrastructure.

These approaches may be adopted simultaneously. Alternatively, some regions may opt for blending hydrogen as a stepping stone on the way to dedicated hydrogen infrastructure.

Whatever the approach, there are two important challenges to address:

The commercial framework for hydrogen: Making efficient use of existing infrastructure, and ensuring a balance between supply and demand (both at an overall level in the gas system, and in particular parts of the network).
Hydrogen infrastructure regulation: Ensuring the right pipelines are delivered, in the right places, and that they can be accessed by those who need them, to support cost-effective delivery of hydrogen.

Challenge 1: Commercial framework

In many ways, the commercial framework for dedicated hydrogen infrastructure could operate along similar lines to that in place today for natural gas. Blending, however, raises specific challenges:

How to keep the hydrogen blend within the blend limit?
How to manage specific gas quality requirements of certain user types, e.g. if a natural gas filling station for vehicles is connected to the gas network?
How to ensure that blending does not lead to lock-in effects that prevent the full replacement of natural gas by carbon-neutral energies in the long term?
How to strike a balance between the benefits of cross-border trading (blended) gases and the need to ensure the right quality of domestic gas supplies?

There are seven elements of the commercial framework that need to be considered, whatever the approach to transportation:

Some of the relevant considerations under each of the seven building blocks are outlined here:

Component	Considerations
Trading arrangements	Arrangements for trading energy and settling imbalances will need to be in place.
Connections	A regime will be needed to enable the connection of hydrogen production facilities.
Dispatch	Dispatch (i.e. injection of hydrogen into the grid) must be managed under both a hydrogen-dedicated network and blended system. Under a blended system, this will need to ensure that the maximum blend is not breached at any time.
System operation	A regime will be needed to operate the system in a way that maximises safety, reliability and efficiency of service under both a hydrogen-dedicated network and blended system. Under a blended system, systems must be in place to deal with the interaction with other gas injections and large loads.
Network pricing (incl. connection charges)	Transportation changes (entry and exit) will need to take account of hydrogen injection points and flows.
Shrinkage	A shrinkage regime will be required to procure hydrogen that is lost from the transportation network. The measurement of shrinkage gas will need to take into account the lower CV of hydrogen gas injections and potentially different shrinkage properties.
Billing	Under both a hydrogen-dedicated network and blended system, a billing regime will be required to pass on the network costs of transportation to customers. In a blended hydrogen system, billing may need to be adjusted to reflect varying CV at different points in the grid.

Challenge 2: Infrastructure regulation

Two key aspects of regulation are:

Incentivising the right level of hydrogen infrastructure at the right time, in the right places and at the lowest cost.
Enabling competition in hydrogen production, trading and sales by granting non-discriminatory access to hydrogen infrastructure.

EU regulation in natural gas and electricity markets has been very successful with regards to the second point, and there are good reasons to apply this proven regulatory framework to hydrogen infrastructure.

However, the starting point for hydrogen is different to that of electricity and gas. The bulk of electricity and gas infrastructure had already been built when regulation was introduced in the late 1990s, so the regulatory framework was not created to incentivise the development of new infrastructure.

In fact, since the introduction of regulation, many major investments have been made under a regulatory exemption, where investors need to prove that they would not undertake the investments if the asset were not exempted from regulation.

By contrast, the hydrogen infrastructure that might be required in the future is still to be built or repurposed, and the associated upfront investment costs will be significant.

If the regulatory framework is similar to that of gas and electricity, securing finance will be difficult. If grid operators can only earn money from hydrogen user tariffs, there will be few, if any, users during the construction phase. Subsequent growth in the user base may also be uncertain, while tariff regulation and limitations to long-term capacity contracting impose asymmetric risks for investors.

There are several options to deal with this, with any consideration needing to be linked into the wider discussion of government support in chapter 3. In the event that subsidies are required, the following options must be considered:

Direct state financing to support infrastructure investments – though this would be a departure from typical practice and would lead to tricky state aid questions.
Allowing network operators to cross-subsidise upfront financing, using income from natural gas user tariffs, to overcome the challenge of limited hydrogen users in the ramp-up phase. This, however, deviates from the ideal of cost-reflectiveness and poses controversial distributional questions (e.g. why should a small residential natural gas consumer pay for the infrastructure of large industrial hydrogen consumers?).
Step-wise introduction of regulatory elements, where more interventional elements (such as tariff regulation) are activated only as the maturity of the hydrogen infrastructure increases – although this imposes regulatory uncertainty for investors.
Enabling the opportunity for investors to build or repurpose dedicated hydrogen infrastructure assets under a temporary exemption from regulation. This avoids asymmetric risks and grants investment certainty, but may result in a late actual application of infrastructure regulation, if most yet-to-be-built assets receive a 20-year exemption from regulation.

EXPLORE OUR WORK IN THIS AREA:

EU-level policy action to facilitate low-carbon gases

A commercial framework to facilitate hydrogen blending

A co-ordinated EU approach for managing different types of gases in the gas system

Regulating dedicated hydrogen networks

Import of hydrogen and low-carbon gas to Europe: The role of LNG terminals

UK Committee on Climate Change publishes Frontier report on the future of gas regulation