Infrastructure and regulation: The tools to decarbonise the natural gas sector

Cristiano Francese's picture
Cristiano Francese, Consultant and Project Manager, Energy Sector
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The need for decarbonisation to reach the climate targets set in Europe represents a priority in all parts of the energy sector, with the natural gas sector representing no exception in this respect. Decarbonisation in this sector relates today primarily to the substitution of natural gas with other renewable gasses, primarily hydrogen and biomethane. The use of both of these gases in substitution to natural gas is relatively new in Europe, and specific actions are needed if their use is to increase to support the decarbonisation of the whole economy. Such actions include the development of dedicated infrastructure and regulation for renewable gasses. This article aims to identify how dedicated infrastructure and regulation for renewable gasses can be supported, and the role of the different players involved in their implementation.

Hydrogen can be considered as the main renewable gas to focus on for the purpose of this article and the measures recommended below. Hydrogen produced with power from renewable energy sources naturally represents the main alternative to natural gas capable of decarbonising such sector. Its combustion generates in fact only water vapour. As the cost of power from renewable energy sources decreases, the cost of producing hydrogen from such power source should also decrease. This would allow in turn to improve economies of scale of renewable power and hydrogen production infrastructure and to contribute to the coupling between the gas and power sectors.

The increase in the use of hydrogen instead of natural gas will require the development of additional infrastructure at the upstream (production) and midstream (high-pressure pipelines and related equipment to be adapted to transport hydrogen) and downstream (switching of appliances for double use – hydrogen/natural gas). Natural gas infrastructure operators (at transmission and distribution level) represent the main players with the ability to take action to construct the necessary infrastructure. At the transmission level, they can initiate the development of the missing links between existing/new hydrogen production sites (offshore or onshore) and the existing gas network. These pure hydrogen pipelines can be developed in cooperation with hydrogen producers in a similar fashion to the commercial arrangements historically used to build upstream gas pipelines. Such initiative would also allow transmission system operators to further diversify their business, and to create a new value chain for hydrogen, which is not yet completely in place, and that could gradually substitute the natural gas one over time. At the distribution level, the operators of gas grids can support the conversion of local gas grids to hydrogen transportation, and the conversion of gas burning appliances to hydrogen burning ones.  

All of these initiatives on the infrastructure side however need to be coupled with adequate regulatory support in order to succeed. Such support can also have different forms at the transmission and distribution level. Several examples can be identified. At the transmission level, natural gas infrastructure operators should be allowed to enter in the business of building new hydrogen pipelines. Such business should be separated from their regulated natural gas transportation one, primarily in order to avoid cross-subsidisation issues between the two. It should however also be left free from specific regulation on the management of hydrogen transportation capacity and similar regulation currently used for natural gas transportation in existing regulated pipelines in Europe. New hydrogen pipelines may in fact be developed in line with new hydrogen production facilities, which may require long-term investments. Parties investing in such facilities will need to gain adequate returns on their investments, with the need therefore to ensure long-term access to hydrogen transportation pipelines, and injection to the natural gas grid. Additional measures that would support the increase in hydrogen production include the provision of financing for dedicated hydrogen production processes. This could be done by the adequate revision of the existing mechanisms for the selection of Projects of Common European Interest, and related financing support under the Connecting Europe Facility framework. This support could be extended also to projects aimed at converting distribution grids and appliances to hydrogen use.

Additional financial support can be established by setting up mechanisms to subsidise hydrogen production, in a similar fashion to what done for renewable power production (via feed-in tariffs, etc…), and the establishment of quotas for renewable gasses that suppliers need to have in their total supply. Tax breaks for hydrogen producers and transporters could also be established. In addition, the simplification of connection rules for pipelines transporting renewable gasses to the existing transmission and distribution grid could be supported. Finally, an alignment at the European level on the percentage of hydrogen permissible in gas networks could be supported.

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