The European Commission is investigating various mechanisms for its pilot hydrogen auctions to be held later this year.

The EU’s executive body recently closed a consultation on the design of the scheme and will announce the details in June. The first pilot auction, with a budget of €800mn ($855mn), is due to be held before the end of 2023.

The Commission says the scheme will have a similar impact as the production tax credit offered under the US Inflation Reduction Act, providing hydrogen suppliers with a fixed price that they will be paid to produce a kilogram of hydrogen.

The mechanism will be targeted at purchasing domestic EU hydrogen with funds from the EU Emissions Trading System (ETS) Innovation Fund. A separate task force under the Directorate-General for Energy is looking at a mechanism for international purchases of hydrogen. Together the two mechanisms form the €3bn hydrogen bank announced by commission president Ursula von der Leyen in 2022.

“All types of renewable and low-carbon hydrogen should be covered” Hydrogen Europe

Because transport infrastructure for hydrogen is still limited, pilot auctions are expected to favour co-located projects in industry clusters.

It has not yet been decided whether blue hydrogen projects will be included in the auctions. The Commission’s focus has traditionally been on incentivising green hydrogen production, but a poll taken during the consultation showed 31pc of respondents thought that blue hydrogen should also be included in the mechanism.

“All types of renewable and low-carbon hydrogen should be covered,” the consultation response from industry body Hydrogen Europe insists. “However, bidding should take place under separate windows: one window for renewable hydrogen and another for low-carbon hydrogen types.”

Auction options

Various options were evaluated for implementing competitive bidding for hydrogen during the consultation. These include a fixed premium and a contract for difference (CfD) on both the supply and demand sides, a double-sided auction for both supply and demand, and supply and demand side auctions using carbon contracts for difference (CCfDs).

CfDs would bridge the gap between the market price and the actual cost of production, with the fund paying the difference.

A further complication for both CfDs and fixed premiums is the reference price that should be used. Because the market is not yet developed, there is no liquid price for either green or blue hydrogen. The leading options for a reference price are: the electricity price (which accounts for over 50pc of the cost of producing green hydrogen), a synthetic green hydrogen price made up of various cost assumptions, the price of CO₂ in the EU ETS or the market price of grey hydrogen.

Each mechanism and reference price has its own advantages and disadvantages. According to participants who have attended open days, the Commission is leaning towards a supply-side CfD auction, although no final decisions have been made. This mechanism has the advantage of being relatively simple to implement, with a clear focus on hydrogen capacity ramp-up in line with the EU’s capacity targets for electrolysers.

Should that option be chosen, however, it remains unclear from the consultation how the demand side of the equation would be managed—although one obvious option is a standard auction with volumes going to the highest bidder.

One major disadvantage of a supply-side CfD auction is its hydrogen focus, with limited options for adapting the process to support other technologies. The Commission initially had hopes to extend the bidding mechanism to scale up other clean energy technologies including batteries, electrolysers and other solar and wind supply chain components.

However, a CCfD bidding mechanism could be more easily adapted for the deployment of other technologies. This model would pay the difference between the carbon price in the EU ETS and the CO₂ mitigation costs of the technology in question.

Defining hydrogen

A further complication is the fact that the European Commission has not yet provided a legal definition of either green or blue hydrogen. Green hydrogen was supposed to be defined by the much-delayed delegated acts on hydrogen that still have not been adopted, while blue hydrogen is to be defined by the gas market package.

This week the European Parliament’s Committee on Industry, Research and Energy (ITRE) adopted the parliament’s position on the gas market package and voted to skip plenary, but the EU Council has still not formed a position.

The ITRE definition for blue hydrogen requires a 70pc reduction in greenhouse gas emissions compared to grey hydrogen and includes a full lifecycle assessment including upstream methane emissions—but the Council may dispute this.

The auction mechanism should be careful to define green and—if included—blue hydrogen in case these measures don’t emerge in time, according to Marta Lovisolo, a policy advisor with non-governmental organisation Bellona.

“It is problematic that there is still no definition of green or blue hydrogen at EU level,” she tells Hydrogen Economist. “We should not be throwing billions of euros of public money into something that has not been defined.”

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Author: Tom Young