Towards European Hydrogen Market Design: Perspectives from Transmission System Operators

Abstract

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.

Figures (7)

• Figure 1: Network Codes development process for hydrogen in the European Union. This publication aims to contribute to the fourth step by providing informed insights that will be useful to ENNOH in drafting the Network Codes. Image adapted from ENTSOE2023ProcessGuidelines.
• Figure 2: Three-stage methodology for assessing hydrogen market design through TSO consultation.
• Figure 3: Transferability assessment of natural gas market design structure for the hydrogen market. Market design components across five regulatory areas are classified into three categories based on TSO consensus: fully replicable (green), replicable with minor changes (yellow), and replicable with major changes (orange). Assessment based on consultations with seven European gas TSOs representing Belgium, Denmark, France, Germany, Lithuania, and the Netherlands.
• Figure 4: Expected evolution according to surveyed TSOs of shipper types across hydrogen market development stages.
• Figure 5: Intertemporal cost allocation under hydrogen entry-exit regulation. Panel (a) shows classical versus intertemporal tariffs across market stages. Panel (b) shows regulatory debt evolution over time. Adapted from Martinez-Rodriguez2026PipelineNetworks.