The final version of Bill No. 2.308/2023 (“Bill”) establishing the Low Carbon Hydrogen Legal Framework was signed into law on August 2, and is now in force under Law No. 14.948/2024 (“Hydrogen Legal Framework”), which, among others:
- provides the National Low Carbon Hydrogen Policy,
- creates the Special Incentive Regime for the Production of Low Carbon Hydrogen (Rehydro), and
- creates the Low Carbon Hydrogen Development Program (PHBC).
There was a presidential veto to the provisions of the Bill that dealt with the tax credits granted to the segment.
What are the main innovations of the Legal Framework and points of attention? And what are the possible impacts on the energy sectors?
Types of Hydrogen
The Legal Framework defines the different types of hydrogen based on their origins and production methods:
- Low-carbon hydrogen: Combustible hydrogen or industrial input obtained from various production sources, whose GHG emission is less than or equal to 7kgCO2eq/kgH2 (seven kilograms of carbon dioxide equivalent per kilogram of hydrogen produced).
- Renewable hydrogen: Collected as natural hydrogen or obtained from renewable sources such as biofuels or by electrolysis made from renewable sources. For the purposes of the final bill wording, the following sources were considered as renewable sources, as examples: solar, wind, hydraulic, biomass, ethanol, biogas, biomethane, landfill gases, geothermal and others defined by the government.
- Green hydrogen: Produced by the electrolysis of water from renewable energy sources or that may be recognized as renewable.
Classification is essential so that incentive policies and specific guidelines can be created for each type of hydrogen.
National Low Carbon Hydrogen Policy
The Legal Framework establishes the National Low Carbon Hydrogen Policy, which has, among its objectives:
- encourages the production of hydrogen in the country,
- promotes the expansion of the national energy matrix,
- protects the environment from the emission of polluting gases,
- increases competitiveness in the production and sale of hydrogen, among others.
What are the instruments present in the Policy to achieve its objectives?
The 4 instruments assigned to the Policy are:
- National Hydrogen Program (PNH2)
- Low Carbon Hydrogen Development Program (PHBC)
- Brazilian Hydrogen Certification System (SBCH2)
- Special Incentive Regime for Hydrogen Production (REHIDRO)
- National Hydrogen Program (PNH2)
The Program will have attributions established by regulation issued by the National Council for Energy Policies – CNPE and will implement the National Policy through governance actions.
To this end, the PNH2 will have a Steering Committee (COGES-PNH2) responsible for coordinating actions and public policies to encourage the production and use of hydrogen.
The Committee will be composed of up to 15 members of the Executive Branch, in addition to 1 representative of the States and Federal District, 1 representative of the scientific community and 3 representatives of the production sector.
Points of attention
- The way of choosing representatives who are not part of the Executive Branch will be defined by regulation, so that there is still no clarity on which technical criteria will be considered for the choice.
- At first, there is a low representation of members of the scientific community/productive sector in the composition of the Committee, which may be relevant in view of the complexity and technicality involving hydrogen.
- Low Carbon Hydrogen Development Program (PHBC)
The final version of the Bill provided for the creation of PHBC – a development program that, among others, would grant tax credits in the order of R$18 billion, between 2028 and 2032, to projects that commercialize low-carbon hydrogen and renewable hydrogen. However, the provisions that dealt with its detailing were subject to a presidential veto and are not included in the published version of the Hydrogen Legal Framework in the Federal Register.
According to a veto message, the legislative technique undertaken in the drafting of these provisions violated concepts established in financial and budgetary legislation, in addition to reflecting inaccuracies resulting from the dynamic legislative process permeated by the Bill.
Among the inaccuracies pointed out, we highlight the fact that, during its processing, the Bill failed to link the tax credits to the Social Contribution on Net Income (CSLL).
Although a new Bill (Bill No. 3027/2024) was presented on the same date of approval of the Legal Framework, which aims to improve the wording of the provisions dealing with PHBC, the fact is that this has been one of the most awaited mechanisms of the National Low Carbon Hydrogen Policy, given its tax incentive nature, which will be pending definition until the approval of the new regulation.
- Brazilian Hydrogen Certification System (SBCH2)
SBCH2 will correspond to the voluntary national hydrogen certification environment, which will have rules on the inspection and accreditation competence of hydrogen certification companies, the attributions of the players in the certification process, and the technical standards for measuring the emission of GHGs to be defined in regulation.
According to the Hydrogen Legal Framework, the certifications issued in the national territory by SBCH2 must ensure environmental completeness and the absence of double counting, so that the system will have criteria for the suspension/cancellation of non-standard certifications and flexibility instruments in cases of temporary loss of specification.
The creation of a solid certification environment in line with global requirements may contribute to Brazil’s role in the world market, as it will allow countries that import Brazilian hydrogen to evaluate its characteristics and quality.
- Special Incentive Regime for Hydrogen Production (REHIDRO)
REHIDRO is the incentive program that will grant hydrogen producers the exemption from PIS/PASEP (Brazilian Social Contributions) and COFINS (Social Contribution on Billing) levied on the acquisition of machinery and materials for the creation of infrastructure works aimed at the production of low-carbon hydrogen.
The benefit will be in force for up to 5 years, asfrom 01/01/2025, and the authorized agents will be authorized to issue infrastructure debentures – exempt from income tax – to finance the construction of hydrogen plants.
Points of attention
- Agents who opt for Simples Nacionalwill not be able to join the program.
- The Executive Branch will be responsible for regulating the qualification requirementsfor REHIDRO, demanding caution to avoid the creation of excessive red tape, the imposition of restrictions that limit the qualification of agents and the reduction of competitiveness in the sector.
What is already known about the regulation of the Hydrogen Legal Framework?
The Brazilian Oil Agency (ANP) will be responsible for authorizing, regulating and supervising the production and sale of hydrogen, its derivatives and carriers in the country by companies or consortia of companies incorporated under Brazilian law and headquartered in Brazil, including, but not limited to, the establishment of requirements for obtaining grants, transfer of ownership, waivers, among others.
Other activities related to hydrogen will also be the responsibility of ANP, such as loading, processing, treatment, import and export, storage, warehousing, packaging, transportation, transfer and resale.
Agents already authorized to produce hydrogen, its derivatives and carriers will have priority before the ANP in the process of authorization to carry out the activities related to hydrogen described above.
The Agency will also be responsible for issuing declarations of public utility to allow the construction of infrastructure for the production of hydrogen.
It is important to recognize the modern regulatory sandbox mechanism incorporated into the Hydrogen Legal Framework, which will allow the ANP to adopt individual solutions and edit regulations related to the activities provided for in the Legal Framework until a regulation is issued.
Points of attention
- The wording of the Hydrogen Legal Framework gives ANP broad authorityfor the regulation of hydrogen, which requires the Agency to act cautiously (including through the regulatory sandbox mechanism) to avoid the creation of obstacles and the imposition of excessively onerous obstacles that restrict the development of the segment.
- The Hydrogen Legal Framework also gives the National Agency of Electric Power (ANEEL) the power to issue Declarations of Public Utility to allow the access of projects to the transmission and/or distribution system – provided that they are intended for the production of low-emission hydrogen. The Hydrogen Legal Framework also allows authorizations issued before its validity to be validated, upon analysis by the Agency within 180 days.
- The other regulatory agencies, according to the Hydrogen Legal Framework, may regulate and authorize activities related to the production of renewable hydrogen, which requires the agencies to act jointly and cautiously, so as not to create obstacles or conflicting provisions that may harm the development of the market.
What does the Hydrogen Legal Framework bring about risk management and the environment?
Considering the environmental impact of hydrogen projects and the dangerousness of the molecule, the Hydrogen Legal Framework establishes specific guidelines that entrepreneurs must adopt in the management of accident or disaster risks.
To this end, it will be necessary to prepare an Emergency Action Plan – PAE, Risk Management Plan – PGR and Risk Analysis Study – EAR, which reinforces the commitment of the Hydrogen Legal Framework to the integrity and protection of the environment, since it is by making use of them that it is possible to assess the vulnerability of the enterprise to local vegetation, predict possible environmental damage, implement monitoring systems, among others.
Point of Attention
- The criteria and the way of preparing such documents will be defined by regulation, which is why there is still no visibility of the procedure involving the licensing of projects in the segment.