The European Union is about to embark on a financing experiment that could determine the true price of renewable hydrogen in the bloc.
A first-of-its-kind pilot auction, meant to ensure there will be users ready to buy renewable hydrogen, will begin on November 23. The months-long process will see project promoters competing to receive European subsidies intended to help kick off a nascent sector.
The success of the auction is paramount, experts say, as it could lay the foundation for a new funding mechanism that could potentially help scale up other clean technologies as well.
The auctioning system’s goal to bridge supply and demand is drawing praise from both industry players and environmental nonprofits. As Cipher reported last week, the lack of robust demand for clean hydrogen is hindering the market’s development.
“This is one of the first steps to create a real market for renewable hydrogen,” said François Paquet, impact director of the Renewable Hydrogen Coalition, which includes utilities and solar and wind technology providers. “It’s aiming to solve the classic chicken and egg dilemma by trying to reconcile supply with demand.”
To bid, hydrogen producers will need to show they have a deal in the works with users who will purchase their product. Projects will need to come online five years after the award.
Funding for the pilot auction, worth €800 million, will come from the EU’s Innovation Fund, the bloc’s financial vehicle meant to help commercialize low-carbon technologies. The auction, a new tool to complement the Fund’s largely grant-based financing, is set to close in early February 2024.
Winning projects will receive support in the form of a fixed price premium per kilogram (kg) of renewable hydrogen produced over up to ten years of operation. The exact premium amount will be determined through the bidding and will represent the gap between how much it costs to produce the hydrogen and how much the user wants to pay for it.
Projects with the lowest cost gap will be awarded the money.
“We will have a better idea of how far producers are willing to go to slash production costs and how far consumers are willing to go to pay for it,” said Marta Lovisolo, senior policy adviser at Bellona Europe, an environmental nonprofit. “It’s the green premium in a sense.”
Renewable hydrogen, seen as key in decarbonizing carbon-intensive sectors like steel and cement, is produced by splitting water molecules with renewable electricity in a process known as electrolysis.
The vast majority of hydrogen used today is made from fossil fuels. Renewable hydrogen represents just a tiny fraction of the market — primarily because it’s quite expensive to produce in comparison to its dirtier alternative.
Another way to make cleaner hydrogen — from natural gas with carbon capture technology — doesn’t receive any subsidy in the EU, though it does in the United States.
Right now, no clear price for renewable hydrogen exists since there isn’t an established market to assess. The International Renewable Energy Agency places it at around $4 to $6 per kg, while the NGO Transport and Environment cites a price of €12 per kg for production in Europe. Boston Consulting Group places production prices in Europe at €5 to €8/kg by 2030, up from the original expectation of €3/kg.
The €800 million for the pilot auction is part of the Hydrogen Bank, a new financing mechanism from the European Commission with a current budget of €3 billion announced earlier this year to help kick off the renewable hydrogen market.
The funding for the first auction is not considered a lot, but there’s more at stake.
“We need to make sure this auction works,” said Paquet, who described the financing tool as a game changer. “We need to show support by bidding, even though the budget for this pilot is a joke.”
At the recent Renewable Hydrogen Summit in Brussels, various companies in the value chain asked for a “bigger carrot” — in essence, more money to help the nascent market take off.
Lovisolo agreed that funds in the current auction are limited, “covering only a small kick-off market.”
At the same time, “no matter how much money you put on the table, that will be the answer on any industry in any sector: ‘give us more money,’” she said.
The European Commission wants member countries to also pitch in cash from their national budgets for future rounds.
Germany-based company Sunfire, which manufacturers electrolyzers, the machines that produce hydrogen through electricity, will be closely monitoring the auctions.
Maren Preuß, senior manager for regulatory affairs at Sunfire, said the auction is important “for the market to understand itself better” and to move from talk to action.
Sunfire’s electrolyzers (and those of other such manufacturers) could be in higher demand as specific projects materialize.
“We need not only PowerPoints concepts, but we also need the implementation,” she said.
One shortcoming of the pilot auction, Paquet said, is there are no criteria defining which sectors can take the hydrogen, potentially side-lining the ones that need renewable hydrogen the most.
“We need to be very careful not to allow all sectors to have access to the auctions in the future,” Paquet said.
For example, in the pilot, refineries owned by big oil and gas companies could purchase renewable hydrogen to use to process fossil fuels into diesel or petrol for the transport sector.
“Refineries can pay more for the renewable hydrogen because they made big profits during the energy crisis,” Paquet said.
Oil and gas companies’ deep pockets could make it easier for them to win bids compared to, say, a chemical producer that is facing competition from China, he said.
Yet it’s those carbon-intensive sectors like chemicals, steel and cement that might need extra help, Lovisolo said: “It’s a missed opportunity to not support those sectors that are having a hard time to decarbonize, such as the steel sector.”
In the end, what matters most is launching the market, Paquet said.
“As long as we achieve this with the first pilot, that’s fine,” he said. “It’s a learning process.”