European Hydrogen Bank strategy to be tested at autumn auction

(Reuters) - Later this year, the European Union will hold a pilot auction for subsidized green hydrogen contracts as it ramps up efforts to decarbonize energy supply and strengthen energy security.

The pilot auction was announced last month on the back of a suite of EC policy interventions that include a new EU Green Deal Industrial Plan and Net-Zero Industry Act along with revisions to the EU’s emission trading system (ETS) and the Carbon Border Adjustment Mechanism (CBAM).

The auction will issue financial instruments similar to the Contracts for Difference (CFDs) that provide renewable energy developers with long-term revenue guaranteed by the state. Such contracts have worked well for wind and solar technology that feeds into an established, ready-made power market, but the hydrogen market is more complex, catering to multiple offtakers types with different needs.

The EC has been under pressure to match U.S. support for clean technology provided by the Biden administration's Inflation Reduction Act (IRA). The act’s Clean Hydrogen Production Tax Credit (H2PTC) will provide an estimated $13 B in value across the hydrogen industry over the next 10 years, the Fuel Cell and Hydrogen Energy Association (FCHEA) estimates, providing up to $3 per kilo of hydrogen with credit based on a sliding scale depending on the levels of carbon emitted.

The simplicity and size of the IRA has led to unflattering comparisons with Europe’s own efforts to stimulate the hydrogen economy.

“Rules and schemes in the European market are complex, making it more challenging for project developers. This is in the backdrop of policymakers in Europe who are trying to mitigate against unintended consequences of deploying loads of low-carbon hydrogen, while trying to keep 27 member states happy,” says Head of Hydrogen Research at Wood Mackenzie Murray Douglas.

“Project developers really like the Production Tax Credit in the US because it's very simple and very generous - it will simply help get the low-carbon hydrogen industry going and allow it to compete against carbon intensive alternatives more quickly.”

Not a bank

The European REPowerEU strategy targets the domestic production of 10 million tons (MT) of renewable hydrogen and 10 MT of imported renewable hydrogen by 2030 while ending imports of Russian fossil fuels and achieving climate neutrality by 2050.

The creation of the EHB aims to accelerate investment and bridge the investment gap to reach these targets by covering and lowering the cost gap between renewable hydrogen and fossil fuels for early projects, the EC says.

“The (European Hydrogen) Bank is not a bank,” Policy Officer Innovation Fund at the European Commission Johanna Schiele said during a recent webinar.

“This is not about creating a new financial institution, but really about scaling up a hydrogen market from niche to scale by bringing together demand and supply. To do that we need to bridge the cost gap between the high cost of renewable hydrogen and the much lower cost of grey hydrogen or natural gas.”

The auction will award a subsidy to hydrogen producers in the form of a fixed premium per kilogram of hydrogen produced for a maximum of 10 years of operation.

The pilot auction will take place under the EU’s Innovation Fund in autumn of this year and will be run with a dedicated €800 MM.

Under similar terms to the U.S. IRA, at three euros per kilogram of hydrogen over 10 years, the auction would deliver about 100,000 tons of hydrogen per year, a long way from the 20 million tons a year target.

However, the pilot auction budget is expected to be a market test with more funds available for later auctions, if it is successful.

“We're really learning by doing, so the first auction will also be an indicator of how much interest and how much competition there is, where the bids come from and where the offtaker comes from. We will adjust this as we go along and as we learn from the experience of this kind of auction,” said Schiele.

Size of the challenge

The EC is aware of the size of the challenge ahead and notes that a domestic production target of 10 MT of renewable hydrogen would require around 80 to 100 GW of electrolyzer output capacity (compared to the current existing 160 MW) and roughly 150 to 210 GW of additional renewable electricity capacity.

The total investment needs to produce, transport, and consume 10 MT of renewable hydrogen are expected to be in the range of €335 to €471 B, with €200 to €300 B needed for additional renewable electricity production, the EC says.

An additional €500 B of investments in international value chains will be needed to enable the import of 10 MT of renewable hydrogen which form part of the EU plan, according to the EC.

The definition of ‘renewable’ hydrogen has created additional complexities with rules laid out by the EC in February.

There are strict restrictions on using electricity to power electrolyzers that would otherwise have been sent to the grid (additionality) or electricity from a geographical region distinct from the production location (geographical correlation), or what power to use when renewable assets such as sun and wind are lacking (temporal correlation).

“A far-from-perfect regulation is better than no regulation at all,” Hydrogen Europe CEO Jorgo Chatzimarkakis said in a statement following the release of the EC delegate act on green hydrogen definitions.

“This comes at a critical time, with the United States setting a very high benchmark with their Production Tax Credits, offered under the Inflation Reduction Act, attracting more and more investments towards their clean hydrogen market,” he said.

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