Financing of the hydrogen core grid

On 12 April 2024, the German Parliament passed the third amendment to the Energy Industry Act (EnWG). The amendment introduces new regulations for hydrogen grids, in particular, on the financing of the hydrogen core grid in Germany.

The hydrogen core gird will comprise 9,700 km of pipelines, in part based on the conversion of existing natural gas pipelines and in part on the construction of new pipelines. The core gird is a key element of the national hydrogen strategy, which aims to promote the production and use of green hydrogen as a low-carbon energy source for various sectors.

The latest amendment strives to overcome the remaining obstacle for the construction of the core grid – financing. The key issue is that the initial demand for hydrogen at the outset of the ramp-up is expected to be low while the network costs are expected to be high. If the initial customers were to bear these costs alone, there would likely be no demand for hydrogen at all. To address this issue, the amendment establishes an intertemporal cost allocation mechanism, which consists of three elements: a ramp-up fee, an amortisation account and a bridging loan. 

The ramp-up fee is a uniform tariff that applies to all entry and exit points of the network, and that is initially set below the network costs to stimulate the demand for hydrogen. The federal network agency (BNetzA) will be able to adapt the tariff every three years. Once a market has been established, the tariff is expected to exceed the acutal grid costs. The amortisation account is an account that records the difference between the revenues and the costs of the network operators, and that is intended to be balanced by 2055. The bridging loan is a loan provided by a state-owned bank (KfW) to the entity running the amortisation account. The loan is secured by the federal government and serves to cover the differences between actual network costs and the ramp-up fee until the ramp-up fee levels or exceeds the cost.

The mechanism also includes a risk-sharing element between the network operators and the federal government, in case the hydrogen market does not develop as expected. If the amortisation account shows a deficit by 2055, the federal government will cover the remaining amount, but the network operators will have to pay a deductible of 24% of the deficit tot he state by 2057.

The mechanism also allows the federal government to terminate the amortisation account before 2055, if it becomes clear that the hydrogen market will not reach a cost-covering level by then. In that case, the network operators will have to pay a reduced deductible of 16% to 24% of the deficit, depending on the year of termination. The erliest point for such termination is the year 2038 with effect as of 2039. Additionally, if the network operators are unable to pay their deductible, they will have to transfer their network assets to the federal government at the imputed residual value.

The amendment also sets a fixed rate of return on equity for the network operators, which is 6.69% for both converted and new assets. This rate is lower than the rate for hydrogen networks under the existing hydrogen grid fee ordinance, which is 9% for new assets and 7.73% for old assets. The reason for the lower rate is that the network operators benefit from the federal guarantee for the bridging loan and the amortisation account, which reduces their risk profile. However, some critics argue that the rate is still too low, given the uncertainty and complexity of the hydrogen market and the high deductible that the network operators face in case of failure.

The third amendment to the EnWG is a milestone for the development of the hydrogen core network in Germany, as it provides a legal framework and a financial incentive for the network operators to invest in the network infrastructure. However, the amendment also entails significant risks and challenges for the network operators, as they have to bear a substantial share of the potential losses.

By 21 May 2024 the hydrogen core grid oprerators are required to file their application for the construction of the hydrogen core gird, provided they indeed deem the introduced financing mechanism to provide sufficient investment incentives.