Three thoughts on the EU’s inaugural hydrogen subsidy auction

This is the second installment of the Topic of the Month: A new stage for the EU gas market

The first auction results from the Hydrogen Bank are in. This is the EU’s public subsidy mechanism for renewable hydrogen production investments. Support is allocated through a pay-as-bid auction with the most competitive bids winning until the €800m budget is exhausted.

The results of this first pilot auction provide some insights into renewable hydrogen pricing and investment dynamics in Europe. We explore three implications.

Firstly, the winning bids were between €0.37 and €0.48 per kg, which is much lower than the €4 – €6 per kg estimated green premium required to make renewable hydrogen cost-competitive with fossil hydrogen in Europe. This low price is broadly good news for the EU’s hydrogen ambitions, suggesting the subsidy pot will be able to support larger volumes than previously thought. Secondly, it means these subsidies cannot be the sole determining factor for investment decisions, given they cover only roughly 10% of the estimated green premium. Finally, all winning projects come from either the Iberian Peninsula or the Nordics, both areas with strong renewable energy resources. This suggests a strong effect of the “renewables pull” for investments hypothesis.

Political ambition exceeds funding reality

Assuming winning projects go ahead, and similar bids are submitted in the second upcoming auction round, the Hydrogen Bank’s endowment of €3 billion will translate into annual production of around 0.7 million tonnes (mt) by 2030 (or 6 GW of electrolyser capacity). For context, the 2020 EU Hydrogen Strategy set a target to produce 10 mt of renewable hydrogen by 2030.

Note: Our “politically binding target” assesses requirements for complying with the Renewable Energy Directive, assuming overall hydrogen production remains at today’s levels. As the targets are a percentage of EU demand, the required renewable hydrogen volume will fluctuate accordingly.

Figure 1 demonstrates the Hydrogen Bank alone is insufficient for reaching these targets. Nevertheless, given the lower-than-anticipated subsidy of roughly €0.4 per kg, the budget can support the delivery of greater volumes of hydrogen than previously expected. For context, the winning bid price is a fraction of the roughly €11 per kg subsidy for winning bids in the UK’s latest renewable hydrogen auction round, and still well below the maximum US 45V tax credit of $3 per kg. However, a recent Danish subsidy auction cleared its €164m budget below its ceiling price of €1.18 per kg, with some bids even lower than in the Hydrogen Bank auctions.

The large private willingness to pay a premium for renewable hydrogen

Given the average winning bid covers less than 10% of the green premium for renewable hydrogen production, we can infer that buyers are willing to pay a substantial premium for renewable hydrogen over fossil hydrogen. The offtaking partners for winning bids in the Hydrogen Bank were largely in the industrial and mobility sectors, with average final sale prices of €5.67 per kg and €8.34 per kg respectively.

This is partly driven by binding sectoral targets agreed by the European Council in the Renewable Energy Directive. For industry (like ammonia producers), 42.5% of hydrogen supply must be renewable by 2030. Renewable hydrogen products should constitute at least 1% of fuel supplied to the transport sector by 2030. We calculate that these obligations amount to roughly 4mt of clean hydrogen demand based on current fuel demand in these sectors.

Beyond regulation, all European renewable hydrogen production projects will also receive non-Hydrogen Bank financial support. From 2025 renewable hydrogen producers will be considered like their fossil counterparts in the EU Emissions Trading System. Consequently, they will receive a share of free allowances. With no carbon emissions to declare, these allowances can be sold for profit. These could be worth roughly €0.7 per kg based on recent ETS prices, although the number of free credits allocated will be phased down from 2026. Moreover, the winning bids from this first round of auctions are likely to be exempt from obligations to comply with the Delegated Act defining the ‘additionality’ of renewable electricity generation. The exemption allows for the use of otherwise subsidised renewable electricity capacity, which comprises a large share of the capital investment for a renewable hydrogen project.

Toward a new map of industrial geography: the ‘Renewables Pull’

Bids were clustered exclusively in the most northerly and southerly regions in the EU, where renewable electricity is the cheapest, supporting the ‘renewable pull’ hypothesis for energy-intensive industries. In short, economic pressures will arise for particular sectors to relocate from areas that historically benefitted from access to cheap supplies of fossil fuels (western/central Europe) to sites of cheap renewable energy (northern/southern Europe).

The disbursement of EU funds for clean technologies is geo-agnostic. The Innovation Fund (which provides the Hydrogen Bank funding) is distributed by objective techno-economic analysis to identify the most competitive projects. Strong determination of competitiveness by ‘renewable pull’ will create a challenge to reconcile European economic efficiency with national political interests.

Considering this, an innovative feature of the Hydrogen Bank is its offer for ‘auctions-as-a-service’. This feature allows countries to contribute national funding which will be used to fund their most competitive domestic bids that did not clear under the European-wide threshold. This financial support benefits from special treatment under the state aid procedures in place to protect the Single Market from distortions.

Member States are therefore free to use national subsidies to protect or grow domestic hydrogen production. Germany is the sole country to have made use of this feature so far, contributing €350 million 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 projects would have supported approximately 0.7 GW or around eight times more capacity. Austria is reportedly also poised to contribute €400m 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.

 

This piece is co-authored by James Kneebone, FSR and Ben McWilliams, Bruegel, and it is also published on the Bruegel website

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