Certification – Roadmap to RFNBO status Renewable hydrogen and “green” e-fuels in the EU (Part 2)

1. Certification overview

Our previous article, When is H2 = RFNBO? Renewable hydrogen and “green” e-fuels in the EU (Part 1), provided an overview of the requirements to be met under RED II¹ and the Delegated Acts² to enable e-fuels, particularly hydrogen and its derivatives, to qualify as a renewable fuel of non-biological origin (RFNBO) in the regulatory regimes of the European Union (EU) and therefore count towards the EU’s decarbonisation targets (among other things).

The RED II/Delegated Acts requirements are there to ensure that what is marketed as renewable hydrogen meets objectives (such as additionality) which are important if the “hydrogen revolution” is to live up to its promise from a climate policy perspective. However, the mere existence of such requirements is not enough by itself. Producers need a robust means of demonstrating and evidencing compliance with those requirements, whether to potential buyers or to those investing in or providing publicly funded financial support for their projects.

This is where certification comes in. RED II contemplates processes through which biofuels, bioliquids and biomass fuels can receive certification of compliance through either:

• national schemes (developed by member states); or

• international voluntary schemes (approved by the EU pursuant to Article 30(4) of RED II).

The Delegated Acts contemplate extending such certification schemes to RFNBOs and, whilst RFNBO certification remains in its infancy (we are still waiting for the first RFNBO schemes to be approved by the European Commission (EC)), it is expected that: (i) existing schemes³ may expand to cover RFNBO certification; and (ii) such schemes (and any new schemes) will likely operate in a similar manner to the existing certification schemes used for biofuels, bioliquids and biomass fuels, which we consider in section 5 below.

2. National schemes

RED II states that member states may set up national schemes through which compliance of a product with the RED II requirements is verified by competent national authorities. A member state may notify its national scheme to the EC and the EC will determine whether such scheme will be accredited by it (as discussed further in section 4 below), in which case the certification produced by such accredited scheme will be accepted across the EU.

More generally, in support of establishing certification schemes, member states are required to take measures to ensure that:

• reliable information is submitted regarding a product’s compliance with RED II requirements;

• data used to develop the information is available on request;

• there is an adequate standard of independent auditing of the information submitted; and

• evidence of audits can be provided.

3. International voluntary schemes

The so called “voluntary schemes” allow private organisations in member states, as well as third countries, to develop certification schemes that will be recognised across the EU if they are approved by the EC. Voluntary schemes can have global coverage (i.e. they will assess and certify fuels produced in any jurisdiction).

Voluntary schemes will be subject to the same recognition criteria as national schemes, as discussed below.

4. EC recognition of schemes

The EC will approve a scheme if it evidences, amongst other things, “adequate standards of reliability, transparency and independent auditing”. More specifically, the EC will consider certain criteria, such as:

• whether producers comply with the applicable production criteria as set out in RED II and, in respect of RFNBOs, the Delegated Acts;

• whether sustainability characteristics can be traced to the origin of the feedstock;

• whether all information is well documented; and

• the results of audits conducted before participation and ongoing audits.

For producers wishing to sell into more than one market, EC recognition of a certification scheme will be preferable given that this ensures the certification will be accepted in all member states (thereby reducing the administrative burden of multiple approval processes). Individual member states may also accept evidence from voluntary or national schemes which are not recognised by the EC if the competent authorities in those member states are confident about the quality of the certification services provided by such schemes.

However, it seems likely that most producers would opt for an EC-recognised standard. In a sector where a large amount of cross-border trade is expected (whether in the basic product, hydrogen or derivatives of it), there may be EU single market law risks associated with tying, for example, national rules about the marketing of products or eligibility for financial support to purely national schemes of certification.⁴

5. Certification process

As noted above, whilst we are waiting for the first RFNBO certification schemes to be approved by the EC⁵, we can look at the process for certification of biofuels, bioliquids and biomass fuels for guidance and indication of how RFNBO certification might operate.

This process is generally outlined below:

• Understanding compliance criteria: before initiating the certification process, the producer needs to thoroughly understand the compliance criteria set out in RED II. These criteria encompass sustainability and greenhouse gas emissions savings, land use requirements and other environmental considerations.

• Selecting a recognised certification scheme: the next step involves choosing a recognised voluntary scheme (or national scheme) that has been approved by the EC or is otherwise accepted by the member state(s) in which the product is to be sold.

• Conducting an initial assessment: the producer should then carry out an initial assessment to evaluate current practices against the standards outlined in the chosen scheme.

• Implementing necessary changes: based on this assessment, necessary changes should be implemented within the producer’s processes to ensure compliance with all requirements of the scheme.

• Third party auditing: once all required changes have been made, a third party auditor will verify adherence to all regulations stipulated in the chosen scheme and under RED II as part of an independent audit process.

• Submitting documentation for review: following successful verification by an auditor, the producer will submit documentation evidencing compliance with relevant standards for review by the certifying body of the chosen scheme.

• Obtaining certification: if all documentation is deemed satisfactory by this body, the producer will receive certification confirming that the biofuels meet the EU’s stringent sustainability criteria under RED II.

A fascinating glimpse of where the certification process may end up is offered in the H2Global/Hydrogen Europe policy paper of 4 October 2023, Standardizing Hydrogen Certification. As has been proposed in other markets, the authors advocate a system of digital passports that would travel with hydrogen molecules as they move through international supply chains.

6. A note on renewable energy certificates

RED II also refers to a “Guarantee of Origin” (GO), that is “an electronic document which has the sole function of providing evidence to a final customer that a given share or quantity of energy was produced from renewable sources”. GO is the EU term for a renewable energy certificate (REC). Outside the EU, RECs that are used are largely International Renewable Energy Certificates (I-RECs).

RECs have been used in relation to the sale of renewable electricity for some time. They enable companies to track energy sources and claim ownership of renewable energy produced by them, therefore enabling them to meet decarbonisation goals.

RED II prohibits member states from recognising REC certificates issued by third countries unless the EU has concluded an agreement with that third country on mutual recognition of GOs issued in the EU and compatible GO systems established in that third country, and only where there is direct import or export of energy.⁶ The EU has a European Energy Certificate System (EECS) which is administered by the Association of Issuing Bodies, AIB.

AIB facilitates a trading hub which acts as the central point for members to transfer certificates between member registries. The EU therefore recognises GOs issued by the applicable bodies of each of the AIB members.⁷ Similarly, I-RECs are transferred through a global registry administered by Evident. To transfer I-RECs within the registry, the issuers and participants must be members of the Evident registry. Evident members are largely non-European countries (such as the GCC, the US, Japan and Mexico).

RECs are therefore separate to the certification process discussed in this article. However, they may (though are not strictly required to) be used in the process for demonstrating compliance with the First Delegated Act and therefore in obtaining RFNBO certification. It is assumed, however, that the REC used would need to be recognised by the EU (i.e. the REC would likely need to be a GO).

7. Conclusion: key takeaways

No certification?

Compliance with RED II standards (and certification of it) is only required for the hydrogen/RFNBO to be counted towards the mandatory targets set under RED II as well as the targets enshrined under related schemes, such as FuelEU Maritime and FuelEU Aviation. However, it is also likely to become the default sustainability criterion for funding under public support schemes, such as the EU Hydrogen Bank.

It should be noted that RED II does not prohibit or restrict the placing of non-RED II compliant hydrogen on the market in the EU and such hydrogen may have residual value, even though not considered an RFNBO (for example, purchasers may still be able to use it in industrial processes and claim a reduction on their reported emissions).

Early offtake agreements requiring certified RFNBO products

A key negotiating point for discussions in the early RFNBO offtake agreements will be around compliance of the product supplied with sustainability requirements, including providing certification from an agreed scheme on delivery. How any non-compliant or “off-spec” product is then treated will be a commercial issue between the parties. Clearly the product will still have some residual use as described above and the offtaker may therefore still buy and on-sell such product, albeit with a refund from the seller of all or part of the green premium and any additional costs incurred by the offtaker in arranging the sale of such off-spec product.

Change in law risk

A bigger challenge facing the early offtake negotiations is how the risk of a change in the RED II requirements is allocated between the buyer and the seller (i.e. a regulatory change which results in the product no longer receiving RFNBO certification). Such a change could result in increased production costs for the seller to ensure that the product can continue to get certified by meeting the new requirements. If the buyer strictly requires RFNBO-certified products, then the buyer will require the seller to modify the production process to conform, in which case it may be reasonable for the seller to pass such increased cost through to the buyer through an increase to the green premium paid for the product.

Third country certification

If GOs are to be used to verify the renewable energy source used in the production of RFNBOs, and therefore as part of the RFNBO certification process, there may be an additional certification hurdle for producers outside the EU to satisfy, given that such producers will not have GOs (which are recognised in the EU), rather they will likely have I-RECs. Producers outside the EU seeking to have their product certified as an RFNBO may therefore face a more challenging certification process. This, however, remains to be seen.


Footnotes:

1. Revised Renewable Energy Directive (EU) 2018/2001 of 11 December 2018 on the promotion of the use of energy from renewable sources. ↩︎
2. Commission Delegated Regulation (EU) 2023/1184 of 10 February 2023 Supplementing Directive (EU) 2018/2001 of the European Parliament and of the Council by establishing a Union methodology setting out detailed rules for the production of renewable liquid and gaseous transport fuels of non-biological origin (First Delegated Act) and Commission Delegated Regulation (EU) 2023/1185 of 10 February 2023 Supplementing Directive (EU) 2018/2001 of the European Parliament and of the Council by establishing a minimum threshold for greenhouse gas emissions savings of recycled carbon fuels and by specifying a methodology for assessing greenhouse gas emissions savings from renewable liquid and gaseous transport fuels of non-biological origin and from recycled carbon fuels (Second Delegated Act). ↩︎
3. To date, the EC has recognised 15 voluntary and national schemes. ↩︎
4. Admittedly, the process of notifying such rules to the EC under the “Technical Standards and Regulations” Directive (EU 2015/1535) may serve to flush out any single-market based objections to such measures, but – arguably – if a national certification scheme is sufficiently robust to survive scrutiny under Directive 2015/1535, it is not obvious why it would not be recognised by the EC for RED II purposes. ↩︎
5. ISCC EU (which already provides existing certification schemes for biofuels and biomass fuels), CertifHy and REDCert are three voluntary schemes that have submitted an application to the EC for accreditation of an RFNBO certification process. The EC’s decisions on these schemes are pending.  ↩︎
6. UK-issued GOs are not currently recognised in the EU. UK recognition of EU GOs ceased from 1 April 2023. ↩︎
7. Most, but not all, EU/EEA member states are AIB member countries and some non-EU/EEA countries have at least applied for AIB membership: see here for details. ↩︎