Capacity or Production? Evaluating Support Models for Clean Hydrogen in the EU
Highlights from the online debate: Capacity vs. Production: Which Support Model for Clean Hydrogen?
As the European Union advances its strategy for decarbonising industry and energy systems, clean hydrogen is increasingly seen as a potential tool to support emissions reductions in sectors where electrification is difficult. Within this context, the Florence School of Regulation (FSR) hosted a timely online debate on 7 May 2025 titled “Capacity vs. Production: Which Support Model for Clean Hydrogen?” The event focused on the design of hydrogen support schemes, bringing together research and policy perspectives.
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The discussion highlighted that even marginal differences in the efficiency of these mechanisms can have significant implications.
Given the high system costs involved in scaling hydrogen production and infrastructure, the way public support is structured can have major consequences for both value for money and deployment speed.
The event was opened and closed by Marzia Sesini (FSR), and questions from the audience were moderated by Nicolò Rossetto (FSR).
Insights from Research: Comparing Support Mechanisms
The event began with a presentation from Alexander Hoogsteyn (KU Leuven), who shared findings from his recent paper, “Interactions and Distortions of Different Support Policies for Green Hydrogen.” The research explores how different types of support mechanisms affect the rollout of hydrogen projects, suggesting that capacity-based mechanisms for clean hydrogen can be more effective than the more common production-based support. Capacity-based schemes provide predictable revenues to investors, which can help overcome uncertainty around demand and utilisation. Alexander also highlighted examples of support system designs used in various countries, showing how local context shapes the choice of policy tools.
Importantly, the analysis emphasised the interactions between hydrogen support and broader policy frameworks, such as electricity market design and renewables regulation. This interdependence reinforces the need for coherence across instruments.
The Policymaker Perspective: Flexibility and Learning by Doing
Ewelina Daniel (DG CLIMA, European Commission) responded to Alexander with an overview of the rationale behind the design of the European Hydrogen Bank (EHB). She explained that the EU has chosen a production-based approach for the early initiatives of the Bank, grounded in the principle that public funds should be tied to actual hydrogen output. In her view, this helps ensure accountability and cost-effectiveness in the use of public money.
Ewelina also noted that the EHB includes some flexibility in annual production volumes, which helps projects adjust to variability in output without being penalised. This design feature of the support mechanism put in place helps address some of the limitations of a strict production credit.
Ewelina concluding by emphasising that experimenting with support schemes is an expected and necessary part of policy development. The EU is using the initial auctions not only to allocate funding, but also to gather practical experience to inform future refinements, indeed.
Audience Questions and Further Clarifications
The discussion included several questions from the audience, moderated by Nicolò. One question from the audience asked whether changes to RFNBO (renewable fuels of non-biological origin) regulations might be needed to make projects more attractive to investors. In response, Ewelina suggested that this is not the right moment to revise recently finalised rules. Given the extensive work already undertaken to adopt these regulations, the priority should now be to implement them and focus on improving support instruments through experience and learning.
James Kneebone (FSR/EUI) contributed further reflections on the assumptions used in the model developed by Alexander. He pointed out that the projected hydrogen demand trajectory in the paper (10 million tonnes in 2030, 50 million tonnes in 2050) follows EU strategic goals but likely exceeds what will realistically be financed through instruments like the EHB. He asked whether the results of the model would be significantly different under more conservative assumptions.
In response, Alexander explained that while the total scale of hydrogen production capacity deployment would change with lower demand, the comparative performance of capacity and production support mechanisms would remain largely the same. Indeed, the higher demand scenario discussed in the paper was partially chosen to clearly highlight the differences between the two approaches, making the effects measurable and observable in the model.
James also noted that auction design is increasingly at the centre of policy discussions, especially in light of the forthcoming Industrial Decarbonisation Bank. How auctions are structured will shape not only prices, but also investor behaviour and market dynamics.
A Balancing Act: Certainty, Efficiency and Policy Coherence
A consistent message throughout the event was that the design of support schemes must balance multiple objectives. Capacity-based support offers investment certainty and is particularly useful in early markets. Production-based schemes can drive efficiency and output, but expose investors to more risk.
Speakers agreed that the success of any support scheme depends heavily on its interaction with broader policy structures. Effective design requires alignment with electricity market conditions, renewable availability, and industrial demand profiles.
Conclusion: The Stakes of Design
The FSR debate provided important insights into the ongoing development of hydrogen support policy in Europe. With the EHB now operational and further instruments under discussion, decisions made today will shape the future of clean hydrogen in the EU.
Even small differences in how support is structured can have major financial implications given the capital-intensive nature of hydrogen deployment. That makes the current focus on auction design all the more important.
Hydrogen is unlikely to be a solution for every part of the energy system, but for selected industrial and transport applications, it may play a meaningful role. Designing support tools that are robust, flexible and cost-effective will be essential to unlocking that potential.
The featured academic paper can be accessed via ScienceDirect.
