Renewable fuels of non-biological origin would play an expanded role in satisfying EU decarbonisation targets.

By Paul A. Davies, JP Sweny, Michael D. Green, James Bee, and Alexander Leighton

The European Council has formally endorsed the proposed amendments to Directive (EU) 2018/2001 on the promotion of the use of energy from renewable sources (the Renewable Energy Directive), as provisionally agreed in principle between the European Council and European Parliament during the trilogue process.

The amendments, commonly referred to as RED III, would mandate that the share of renewable energy in the EU’s overall energy consumption must rise to a minimum of 42.5% by 2030, with a further non-binding EU-wide goal to achieve 45% by this date, in order to meet the EU’s legally binding target of a 55% reduction in greenhouse gas emissions by 2030 as compared to 1990 levels. RED III therefore proposes a more ambitious mandatory target than the 32% set under the existing text of the Renewable Energy Directive.

Decarbonisation Targets

RED III proposes sector-specific decarbonisation targets for Member States to meet across the transport, industrial, buildings, heating and cooling sectors. In addition, RED III envisages an expanded role for the use of so-called renewable fuels of non-biological origin (RFNBOs), such as green hydrogen, in contributing to decarbonisation targets across multiple sectors. While under the existing Renewable Energy Directive, RFNBOs may only be counted as renewables for the purposes of achieving renewables targets in the transport sector, RED III would allow RFNBOs to count towards the share of renewables used in the particular sector in which they are consumed (not just in transportation) provided that there is no double-counting of the electricity used to produce the RFNBOs and the use of the RFNBOs themselves. The delegated acts outlining the detailed rules on the EU’s definition of RFNBOs were published on 20 June 2023, and will enter into force on 10 July 2023. Importantly, RED III recognises that industrial and chemical sectors may be difficult to decarbonise via electrification only and that the use of RFNBOs will be crucial in reducing greenhouse gas emissions from heavy industries such as steel production.

RED III sets the following specific sub-targets related to RFNBOs use:

• Transportation sector: A combined sub-target of 5.5% for advanced biofuels and RFNBOs, of which 1% must be met solely by RFNBOs.
• Industry: A minimum of 42% of the hydrogen used should come from RFNBOs by 2030 and 60% by 2035.

Commentary

By expanding the range of sectors in which RFNBOs can count towards decarbonisation targets, RED III aims to address the perception that the existing Renewable Energy Directive treats the contribution of RFNBOs too narrowly. The existing Renewable Energy Directive has previously attracted criticism that it is out-of-step with other EU policies which aim to encourage the production and use of green hydrogen and other RFNBOs in a broader range of industries.

Challenges

Despite the ambitious intentions of and targets set by RED III, the question remains whether Member States and private industry would respond by increasing the production and use of RFNBOs. If the mandatory-RFNBO components of the decarbonisation targets are perceived as too low, or compliance with the methodology used to determine whether electricity used to produce the RFNBOs is fully renewable is disproportionately costly or complex, Member States and market participants may struggle to justify the investments needed to scale-up manufacturing, transportation, and utilisation of RFNBOs more generally (absent any additional incentives or benefits).

RED III itself recognises some of these challenges. In particular, it would require the European Commission to report to the European Parliament and European Council by 1 July 2028 with an assessment of the impact of the methodology for assessing fully renewable electricity used for the production of RFNBOs. The report should assess the impact of the “additionality” and “temporal correlation” and “geographic correlation” requirements (which aim to stop RFNBO producers from using renewable electricity such that a shortfall has to be met from traditional fossil fuel sources) as well as the “affordability and availability” of RFNBOs. If the methodology falls short of ensuring sufficient availability and affordability, or does not substantially contribute to greenhouse gas emission savings, energy system integration, or the RED III targets, the Commission would be required to review, and if necessary modify, the methodology to facilitate the “ramp-up” of the hydrogen industry.

Exemptions

Member States would be permitted to take advantage of certain exemptions within RED III to reduce the target for the use of RFNBOs in the industrial sector. The targets of 42% by 2030 and 60% by 2035 mentioned above can be reduced by 20%, provided that:

• the Member State is otherwise on track to meet the binding overall EU decarbonisation target of 42.5% by 2030; and
• the share of hydrogen (and its derivatives) from fossil fuels consumed in that Member State is not more than 23% in 2030 and 20% in 2035.

These industrial RFNBO targets and exemptions only apply to hydrogen used in industrial processes, and not to the overall share of input fuels or feedstock, and therefore the impact of these particular rules may be limited if Member States’ industries do not use a high proportion of hydrogen generally.

Next Steps

Further implementing legislation will be required to supplement RED III. This will include:

• expanding the delegated act which establishes the methodology for when the electricity used to produce RFNBOs is considered fully renewable beyond the narrow application to the transportation sector; and
• drafting detailed rules concerning the treatment and categorisation of imported RFNBOs (given that the Renewable Energy Directive applies irrespective of whether the RFNBOs are imported from third countries or produced domestically).

RED III requires approval by the European Parliament before being formally adopted.