Enforcement and investment: how RED III is shaping the hydrogen market in the EU

The third Renewable Energy Directive (RED lll) is one of the most important pieces of legislation for Europe’s decarbonisation strategy. It is central to the European Green Deal, which was designed to not only deliver emissions reductions, but strengthen energy security following Russia’s invasion of Ukraine. RED lll raises the EU’s renewable energy share target to 42.5% by 2030 – up from 32% as was proposed in the second Renewable Energy Directive. Importantly, it also introduces new requirements for renewable fuels of non-biological origin (RFNBO). While just one component of the larger RED III package, RFNBO targets will have a major impact on the green hydrogen sector in the EU. By 2030, 42% of industrial hydrogen consumption and 1% of energy supplied to the transport sector must be RFNBO-compliant.  

Member State responses 

Although RED lll formally entered into force in November 2023, Member States have been slow to put it into practice. National governments were given 18 months to transpose the directive into law, a deadline that has now passed. To date, some have proposed RFNBO quotas below RED lll thresholds, and 15 Member States have yet to publish any strategy documentation, raising concerns about compliance and enforcement. 

As of July this year, the European Commission (EC) launched infringement proceedings against nearly all Member States. Denmark was the sole exception having completed the transposition of transport quotas into national law, albeit opting for a target of 0.9%, below the EU baseline of 1%. Infringement proceedings are a standard enforcement mechanism employed by the EC when Member States fail to meet deadlines set by the Commission, and delays in implementing EU directives are commonplace across various policy areas. 

The implementation of RFNBO quotas is shaping up differently across the EU with Member States adopting a range of approaches. France has proposed a transport quota for ‘low-carbon’ hydrogen from 2026, which can be met with both RFNBO and non-RFNBO hydrogen. Explicit RFNBO quotas apply only from 2030. Germany has taken a bolder approach by introducing RFNBO quotas in transport starting at 0.1% in 2026 and increasing to 1.5% in 2030, and 12% by 2040. This makes Germany the only country to extend its targets beyond 2035, providing longer-term policy certainty to industry participants and signalling long-term commitment to decarbonisation. Conversely, the Netherlands’ industry quota ambition is disappointingly low with a target of just 4% RFNBO - well below the EU’s 42% target. 

Delays and investment risks 

Delays in transposing RED lll mandates into national law are already stalling investment decisions and affecting market confidence. In the absence of clear national rules, developers cannot assess business viability, secure financing, or plan cross-border initiatives. 

Transport penalties are beginning to take shape, though slow progress on industry targets risks undermining momentum. Most transport-related penalties announced to date have been set above the cost of domestic RFNBO production, sending a strong financial signal to fuel suppliers to comply with RFNBO mandates. In contrast, industry penalties remain underdeveloped, and Member States have yet to show how they intend to promote the adoption of industrial RFNBO. Transparency of enforcement frameworks is essential to mobilise investment and safeguard policy effectiveness, but more progress is needed to provide the policy certainty required to establish large-scale investment. 

Moreover, the current pace of midstream infrastructure rollout will constrain opportunities for hydrogen trade and offtake in the early 2030s, potentially hindering momentum on hydrogen adoption. Subsidisation will also have a role in stimulating offtake, but will entail substantial costs to governments, especially in markets with higher production costs.  

Closing the hydrogen gap 

RED lll requires 2.9 Mtpa of RFNBO hydrogen by 2030, necessitating around US$73 billion in capital expenditure for green hydrogen projects alone. However, current trajectories suggest a shortfall of around 0.6 Mtpa. Quotas can still be met either by increasing RFNBO supply or by reducing overall hydrogen consumption within a Member State. On the supply side, subsidies help close the cost gap, while penalties create a deterrent for non-compliance. Imports of hydrogen derivatives could make up part of the shortfall and blue ammonia, while not RFNBO compliant, could indirectly support targets. 

To meet transport quotas, member states have the option to permit the ‘refinery route’ under which RFNBO used in refineries for the production of transport fuels can count towards transport targets. For industry, targets could be achieved through importing ammonia and methanol, for example, or closing hydrogen-intensive plants. In practice, this approach reflects partial deindustrialisation, but may also be the only financially realistic way for players to comply with quotas. 

Implications for transport and industry 

Delivering RED lll requires enormous investment. Given the two-to three-year build times for large-scale electrolysis projects, the next 24 months are critical.  

Transport appears to have the stronger compliance routes, with penalties creating clear market signals. The refinery route is emerging as the favoured compliance pathway, but not all refineries have lined up RFNBO supply or the infrastructure. With industry targets, meeting the 42% RFNBO mandate is achievable for most markets in the EU, but delays in transposition are prolonging uncertainty for developers. According to Wood Mackenzie analysis, imports will be essential to meeting industry quotas, with only Spain, Sweden, Portugal and Denmark having the domestic production surplus to comply with mandates.  

The need for clarity 

The consequences of non-compliance with RED III remain unclear. While the directive sets ambitious targets, it does not describe the consequences for Member States who don’t reach their targets. Enforcement may come through corrective measures, flexibility mechanisms, or infringement procedures. This ambiguity around enforcement risks weakens the directive’s influence and deters investment. To maximise impact, the Commission will need to establish a clearer and more robust penalty system that removes doubt and provides the certainty needed to instigate large-scale investment. 

Learn more 

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