European Hydrogen Bank strategy to be tested at autumn auction

The European Hydrogen Bank (EHB) aims to bring down hydrogen prices by subsidizing production in a similar vein to the Contracts for Difference (CfD) scheme introduced for renewables.

European flags fly outside the European Commission in Brussels (Source: Reuters/Yves Herman)

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The model has worked well for renewable energy technology such as wind and solar feeding into an established, ready-made power market, but the hydrogen market is more complex, catering to multiple offtakers types with different needs.  

Only the pilot auction later this year will show if such a strategy will be successful for renewable hydrogen.

Details of the auction came in March after the European Commission announced the revision of the EU’s emission trading system (ETS), the Carbon Border Adjustment Mechanism (CBAM), the EU Green Deal Industrial Plan, the Net-Zero Industry Act.

The faster-than-usual response by Brussels is thought to have been at least partially prompted by the U.S.’s Inflation Reduction Act (IRA) which was agreed in August.

The IRA’s Clean Hydrogen Production Tax Credit (H2PTC) will provide an estimated $13 billion 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 the Renewable Hydrogen Coalition webinar ‘Hydrogen Bank: A game changer for renewable hydrogen in Europe?’

“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 first, pilot auction will take place under the EU’s Innovation Fund in autumn of this year and will be run with a dedicated 800 million euros ($876 million).   

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 sucessful.

“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.

15 EU member states provide 5.4 billion euros in public funding for hydrogen value chain "IPCEI Hy2Tech"

(Click to enlarge)

Source: European Commission

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 80-100 GW of electrolyzer output capacity (compared to the current existing 160 MW) and roughly 150-210 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 335-471 billion euros, with 200-300 billion euros needed for additional renewable electricity production, the EC says.

An additional 500 billion euros 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.    

By Paul Day