Lessons from the European Union’s inaugural Hydrogen Bank auction (2024)

Large private companies’ willingness to pay for renewable hydrogen

The cost of producing renewable hydrogen in Europe exceeds that of fossil (natural gas-based) hydrogen by between €4 and €6 per kilogramme. The EHB set a first-round subsidy ceiling price of €4.50/kg, roughly equivalent to the green premium needed for the most competitive projects. However, the winning bids were less than 10 percent of this, at an average of €0.40/kg, meaning that the remaining 90 percent of the green premium is being covered by the end consumer and some other supply-side support we will discuss later.We can infer from these results that some European buyers are willing to pay a substantial premium for renewable hydrogen over fossil hydrogen (the blue box in Figure 2 is tall relative to the overall cost indicated in green).

This is good news for two reasons. First, it demonstrates that renewable hydrogen does not need to reach price parity with fossil hydrogen (or even close) to begin displacing meaningful volumes of the fossil incumbent. Second, the burden of narrowing that cost gap does not need to be carried solely by public funds.

Figure 2: Logic of the renewable hydrogen premium and public subsidy

^{Source: Bruegel.}

For context, the winning bid prices in the EHB auction were a fraction of the roughly €11/kg subsidy for winning bids in the UK’s latest renewable hydrogen auction round, and well below the United States tax credit of $3/kg, which was created under the Inflation Reduction Act. This preliminary information suggests that the EU is getting very good value from its limited funds. The use of a competitive auction design helps, with projects receiving what they ‘need’ rather than what they ‘want’. Regulations that require existing fossil hydrogen consumers to switch to renewable hydrogen (ie the RED) also help.

Two caveats apply here. First, European projects receive further non-Hydrogen Bank financial support. From 2025, renewable hydrogen producers will be considered like their fossil counterparts in the EU emissions trading system (ETS). Consequently, they will receive a share of free carbon allowances. Fossil hydrogen producers must use the allowances to compensate for their carbon emissions, but for renewable producers with no emissions to declare, these allowances can be sold for profit. The action is intended to create a level playing field whilst allowing the carbon price to function. We calculate that these could be worth roughly €0.7/kg based on recent ETS prices, although the number of free credits allocated will already begin to be phased down from 2026.

Second, the winning bids from this first auction round should be operational by 2028 and therefore exempt for 10 years from the obligation to comply with the ‘additionality’ principle for renewable electricity generation⁴Defined under a RED delegated act. See European Commission press release of 20 June 2023, ‘Renewable hydrogen production: new rules formally adopted’, https://energy.ec.europa.eu/news/renewable-hydrogen-production-new-rule….. The exemption allows projects to use previously subsidised renewable electricity capacity, which comprises a large share of the capital investment for a renewable hydrogen project. This additional cost will be relevant for future projects (though second-round winners are also likely to be exempt).

Renewable pressures for the map of industrial geography

The most competitive bids were clustered in the northernmost and southernmost regions of the EU (illustrated by darker green shading in Figure 3), where renewable electricity is the cheapest. This supports the ‘renewable pull’ hypothesis for energy-intensive manufacturing industries, for which theoretical evidence is provided by Verpoort et al(2024).

Figure 3: Average cost of hydrogen (€/kg) implied from Hydrogen Bank bids

The disbursem*nt of EU support for clean technologies is geo-agnostic and driven by techno-economic analysis to identify the most competitive projects. That is the case both for the EHB and the broaderInnovation Fund, which supports green tech⁵Funded from EU ETS revenues; see European Commission, ‘Innovation Fund: Deploying innovative net-zero technologies for climate neutrality’, undated, https://cinea.ec.europa.eu/programmes/innovation-fund_en.. If competitiveness is increasingly determined by a ‘renewable pull’, difficulties will arise in reconciling European economic efficiency with national political interest.

An innovative feature of the EHB is its offer for ‘auctions-as-a-service’. Participating countries can contribute domestic funds to the wider European auction, which are then used to support their most competitive domestic bids that did not clear under the European-wide budget threshold. This financial support benefits from special treatment under state aid procedures (European Commission, 2024).

The EHB auctions-as-a-service mechanism means countries can use national subsidies to protect or grow domestic hydrogen production. Germany is the sole country to have used this feature so far, contributing €350 million⁶See European Commission press release of 5 April 2024, ‘Commission approves €350 million German State aid scheme to support renewable hydrogen production’, https://ec.europa.eu/commission/presscorner/detail/en/ip_24_657.through auctions-as-a-service to support 0.09 GW of domestic projects in the first round. The same €350 million distributed to the most efficient European project would have supported approximately 0.7 GW or around eight times more capacity. Austria is reportedly⁷Rachel Parkes, ‘Austria earmarks €400m to subsidise domestic green hydrogen projects, using EU auctions-as-a-service’, Hydrogen Insight, 28 February 2024, https://www.hydrogeninsight.com/production/austria-earmarks-400m-to-sub….also poised to contribute €400 million to clear domestic projects at a similar bid price to Germany.

A tension may emerge between regions with natural competitiveness for renewably fuelled energy-intensive sectors and fiscally powerful countries with existing competitiveness in fossil-fuelled energy-intensive sectors. Striking the correct balance between exploiting areas of renewable abundance while managing existing areas of industrial agglomeration, across the European Union, will be essential. Nevertheless, the results of the first EHB auction were as positive as could have been hoped for the EU’s clean hydrogen goals.

References

Eicke, L., N. Kramer and R. Quitzow (2023) ‘How Decarbonization Will Transform the Geography of Industrial Production: New Evidence on the “Renewables Pull” Hypothesis’, RIFS Blog, 29 December, available athttps://www.rifs-potsdam.de/en/blog/2023/12/how-decarbonization-will-transform-geography-industrial-production-new-evidence#

European Commission (2024) ‘Auctions-as-a-Service for Member States’, Concept Note, available at https://climate.ec.europa.eu/system/files/2023-11/policy_funding_innovation_conceptpaper_auctionsasaservice.pdf

Robinson, C. and C. Laurencin (2023) ‘Europe back in the driving seat? Europe agrees on renewable hydrogen consumption targets’, S&P Global Blog, 5 April, available athttps://www.spglobal.com/commodityinsights/en/ci/research-analysis/back-in-the-driving-seat-europe-agrees-on-renewable-hydrogen-c.html

Verpoort, P.C., L. Gast, A. Hofmann and F. Ueckerdt (2024) ‘Impact of global heterogeneity of renewable energy supply on heavy industrial production and green value chains’, Nature Energy 9: 491-503, available athttps://www.nature.com/articles/s41560-024-01492-z