Towards European Hydrogen Market Design: Perspectives from Transmission System Operators

Despite hydrogen being central to Europe’s decarbonisation strategy, only a small share of renewable hydrogen projects reached final investment decision. A key barrier is uncertainty about how future hydrogen markets will be designed and operated, particularly under Renewable Fuels of Non-Biological Origin requirements. This study investigates the extent to which future hydrogen market design can be adapted from existing natural gas markets, and the challenges it must address. The analysis was based on a survey targeting European gas transmission system operators, structured around five components: market design principles, trading frameworks, capacity allocation, tariffs, and balancing. The survey produced two outputs: an assessment of mechanism transferability and an identification of challenges for early hydrogen market development. Core market design principles and trading frameworks are broadly transferable from natural gas markets, as entry-exit systems and virtual trading points. Capacity allocation requires targeted adaptation to improve coupling with electricity markets. Tariffs require adaptation through intertemporal cost allocation, distributing infrastructure costs over time to protect early adopters. Balancing regimes should be revisited to reflect hydrogen’s physical characteristics and different linepack flexibility usages. Key challenges for early hydrogen markets include: temporal mismatches between variable renewable supply and expected relatively stable industrial demand, limited operational flexibility due to scarce storage and reduced pipeline linepack, fragmented regional hydrogen clusters, and regulatory uncertainty affecting long-term investment decisions. These findings provide empirical input to the hydrogen network code led by the European Network of Hydrogen Network Operators and offer guidance to policymakers designing hydrogen market frameworks.

💡 Research Summary

This paper, “Towards European Hydrogen Market Design: Perspectives from Transmission System Operators,” presents a critical empirical analysis of how a future European hydrogen market should be structured. It addresses the paradox between hydrogen’s central role in EU decarbonization strategy and the low rate of final investment decisions (FID) for renewable hydrogen projects, identifying uncertainty over future market rules as a key barrier.

The core research investigates two questions: 1) To what extent can future hydrogen market design be adapted from the existing EU natural gas market? 2) What specific challenges must this new market design address? The methodology is based on a structured survey of seven European Gas Transmission System Operators (TSOs) from six member states (Belgium, Denmark, France, Germany, Lithuania, Netherlands), who are pivotal future actors as Hydrogen TSOs. The survey covered five regulatory areas: market design principles, trading frameworks, capacity allocation, tariff structures, and balancing regimes.

The analysis yields two primary outputs. First, a transferability assessment categorizing gas market mechanisms for hydrogen use. It finds that core market design principles (e.g., entry-exit systems, third-party access) and trading frameworks (e.g., Virtual Trading Points) are largely replicable, providing stability. However, capacity allocation requires targeted adaptation to better couple with electricity markets, crucial for electrolyser operation. Tariff structures need adaptation via “intertemporal cost allocation” to spread massive early infrastructure costs over time and protect early adopters. Most significantly, balancing regimes require major overhaul due to hydrogen’s physical properties; its lower volumetric energy density drastically reduces pipeline “linepack” flexibility, necessitating a greater reliance on active storage and revised within-day operational procedures.

Second, the study identifies and classifies key challenges for early hydrogen markets. Operational challenges include: i) the temporal mismatch between variable renewable supply and relatively stable industrial demand, ii) limited operational flexibility due to scarce storage and reduced linepack, and iii) initially fragmented regional hydrogen clusters rather than a unified network. The primary regulatory challenge is the regulatory uncertainty stemming from the ongoing, multi-year process to establish binding Hydrogen Network Codes, which hampers long-term investment.

In conclusion, the paper argues for an adaptive design approach: leveraging proven gas market fundamentals where possible, but mandating significant modifications—especially in balancing and tariffs—to account for hydrogen’s distinct physics and nascent infrastructure state. The findings provide direct, evidence-based input for the European Network of Network Operators for Hydrogen (ENNOH), which is currently drafting the EU’s Hydrogen Network Codes. By highlighting both transferable mechanisms and unique challenges, this research offers actionable guidance to policymakers aiming to create a bankable, efficient, and integrated European hydrogen market that can unlock the necessary investments for decarbonization.