Projects bidding for subsidies via future rounds of the EU’s European Hydrogen Bank auction are expected to face stricter requirements, including tighter startup deadlines and the need to pay larger deposits, according to EU officials.

The second auction, scheduled to take place by the end of this year, is expected to require bidding green hydrogen projects to start up within three years of subsidy awards, compared to five years under the recently completed first auction.

Under the auction rules, projects failing to meet the startup deadline lose their deposit, or completion bond, which was set at 4% of the subsidy value for the first auction. Future auction rounds could see the bond raised to 10%, Johanna Schiele, policy officer at the European Commission’s Directorate-General for Climate Action (DG CLIMA), told a webinar hosted by industry group eFuel Alliance.

Future rounds could also include a dedicated funding budget for the maritime sector. The EU has also signalled the upper limit for bids, which was set at €4.5/kg ($4.9/kg) in the first round, will fall to €3.5/kg in the second-round auction.

Maturing market

 The EU has declared the first auction, held between December and February this year, as a success.

The auction, which cleared at a lower-than-anticipated price of €0.48/kg, demonstrated that the European hydrogen market is “more mature than expected,” the DG CLIMA's Javier Garcia Fernandez, told the webinar.

While the bidding curve showed bids up to the ceiling of €4.5/kg, the fact many bids were below the €1/kg threshold shows “the market is ready”, he said, adding that bids were “well distributed” across the curve, meaning the clearing price is not merely a reflection of outlying bids.

“We wanted to see if the hydrogen market is ready to move from individual, mostly capex-based funding instruments to an auction that covers the entire levelised cost of hydrogen” Schiele, European Commission

Seven winning projects spanning Spain, Portugal and the Nordic region will share a total of €720m of subsidies over ten years. The winning projects plan to produce a combined 1.58mt of renewable hydrogen over ten years.

The auction was heavily oversubscribed, receiving 132 bids from 17 countries. “We wanted to see if the hydrogen market is ready to move from individual, mostly capex-based funding instruments to an auction that covers the entire levelised cost of hydrogen, or the entire funding gap to grey hydrogen or gas through an instrument like an auction,” Schiele told the recent World Hydrogen 2024 event in Rotterdam. “The answer is definitely yes, this market ready. We have seen huge interest in this auction.”

The auctions are designed to drive forward a scaling up of production and the development of hydrogen as a traded commodity, she added. “An auction is essentially a mini market, and one of the design objectives that we had from the beginning of designing this instrument is to contribute to price discovery and market formation,” said Schiele.

One third of the awarded projects are in Spain, totalling nearly 3GW of capacity, with the remaining located in Portugal and Scandinavia, highlighting the competitiveness of renewable power in these areas.

The project size varies between 90–500 MW, with awarded funding ranging between around €8m– €245m.

The auction results implied a median levelised cost of hydrogen of €5–12/kg, ranging between €12.22/kg in France and €5.21/kg in Spain.

Winning strategies

Regional power prices were not the only factors at play, said Schiele. Winning projects were “very good” at negotiating with offtakers and were strong on project financials, achieving a low weighted average cost of capital. “It is not just the power price. It is also the location of the project set up. It is how much the project manages to de-risk and get private funding in before they come to us,” she added.

10% – Potential bond payment

Looking at the projects by technology, almost all bidders proposed to use alkaline or proton-exchange-membrane electrolysers, with those combining the two technologies appearing to have “a cost advantage” against others, Schiele said.

Furthermore, most of the projects are planning deploy electrolysers originating from the EU: as many as 61 bids were solely reliant on EU-supplied technology, with 31 utilising non-EU electrolysers and 30 a mix of EU and non-EU.

Offtake

Hydrogen projects targeting offtakers in the mobility sectors showed a higher expected offtake price compared with industrial users, with the median price standing at €8.34/kg and €5.67/kg respectively.

Surprisingly, projects targeting industrial offtakers bid for lower subsidies. The median bid prices were €1.8/kg for industry offtaker projects and €2/kg for mobility offtake. This may have been the result of some projects bidding strategically to get their first projects over the line, and a readiness to accept a balance sheet loss in order to beat rival projects, Schiele said.

As many as 82 bids had a proposed industrial offtaker, against 37 in the mobility sector, with 11 bids having no disclosed offtaker.

EU and UK

The outcome of the auction also highlights the different approach taken by regulators in the EU compared with the UK, where the first hydrogen auction settled at a much higher clearing price of around €8/kg, said Matthias Janssen, associate director at consultancy Frontier Economics.

This is due to a number of factors, including the different award scheme and size of the projects, he said.

The UK auction awarded around €2.3b through a contract-for-difference scheme to 11 projects for total electrolyser capacity of 125MW, much lower than the European auction.

The capacity range of the projects is 5.2–24.5 MW, indicating pilot type projects that are typically less cost-competitive than larger ones, which can benefit from economies of scale, he said.

European projects are also advantaged by a lower levelised cost of hydrogen production (LCOH), driven by better climate conditions, such as combining wind and solar in Spain and Portugal, he said.

In addition, the European auction had less stringent rules on temporal correlation and additionally compared to the UK one, he said.

---

Author: Beatrice Bedeschi