EHB confirms ten-figure budget for second hydrogen auction

The European Hydrogen Bank (EHB) second round will allocate EUR 1.2 billion to supporting renewable hydrogen projects in the European Economic Area (EEA), the European executive announced according to participants at a DG Clima workshop on 12 June.

The auction amount would represent an increase of 50% on the EUR 800 million allocated to the first round, of which a total of EUR 720 million was awarded on 30 April to seven hydrogen projects in Nordic and Iberian countries.

As indicated in April, the second auction will ring-fence an amount for the maritime sector, defined as hydrogen or its derivatives earmarked for offtake at bunkering at ports within the EEA. This basket has been set as EUR 200m of the total, with maximum bids restricted to EUR 100 million. The remaining EUR 1 billion will be split between a minimum of three renewable hydrogen projects which are unrestricted by offtake sector.

The number falls short of the EUR 2.2 billion for the second Hydrogen Bank round which the market had been led to expect by a November 2023 statement by Commission president Ursula von der Leyen, citing EUR 3 billion for the first two rounds.

In a statement on 12 June, Jorgo Chatzimarkakis, CEO of industry body Hydrogen Europe, cited the EUR 1 billion shortfall, claiming this would be required in a further auction round to ‘ensure projects continue to receive this much-needed support to be operational by 2030 and help reach 2030 climate and energy targets’.

The remaining EUR 1 billion provided through the European Innovation Fund will fund the international leg of the European Hydrogen Bank’s programme, political news agency Contexte reported citing official sources. Facilitating imports was part of the EHB’s founding remit, although unlike the domestic tranche, the source of funding was not initially confirmed. While details of the international leg remain to be confirmed, EU energy commissioner Kadri Simson has mooted deploying funds through joint hydrogen import auctions through the H2Global initiative.

EHB tightens criteria on price, timing and equipment origin

As confirmed after the first bidding round in April, participants in the second auction will face tougher conditions around equipment sourcing, timing and supporting infrastructure (see Figure 1).

The most substantive change in terms of project delivery is the introduction of a three-year deadline for delivery of the project from the signing of the grant agreement, reduced from five years in the initial auction.

Additionally, projects must now provide confirmation that supporting infrastructure at both the electricity supply and offtake. The latter term would affect first-round winners including the Copenhagen Infrastructure Partners-led Catalina, which hinges on completion of a 221 km hydrogen pipeline from its electrolyser in Aragon to its anchor buyer Fertiberia at the port of Sagunto.

The second auction also adds resilience criteria under which bidders are now required to demonstrate their electrolyser’s compliance with European safety standards, declare any subsidies and provide strategies on recycling.

The standards reflect the Commission’s strategic priority under the Net Zero Industry Act (NZIA) to privilege local manufacturers which are more likely to satisfy the criteria. In particular, the move may temporarily exclude some of China’s electrolyser manufacturers, which are one or two years away from meeting these standards according to Dutch applied science agency TNO.

The new bid criteria also lowers the maximum bid threshold to EUR 3.50 per kilogram, although this remains substantially above the winning bid level of EUR 0.48 per kilogram in the first auction.

In its response to the new auction terms, Hydrogen Europe has called for reinstatement of the five-year commissioning period, branding the shorter limit a ‘red flag for the hydrogen sector’. The industry body has also called for restrictions on winning bidders applying for other subsidies to be lifted. However, it welcomed the equipment resilience criteria as promoting a European supply chain.

Market Impact – Second auction to put price on expanded policy wishlist

European Commission officials lauded the success of the first EHB auction which secured 132 bids and the seven winners at the lowest reasonable end of pricing expectations. Emboldened by this result, the new conditions reflect an expansion policy of priorities to include supply chain security, an increased urgency on delivery and higher burden of proof on project viability.

The stricter terms are likely to winnow the successful projects down to the most competitive schemes on the Continent. First round winners have been able to contemplate not only delaying electrolyser procurement until competition drives costs down but also procuring lower-priced international units.

Both these strategies would be constrained by the second phase limitations on commissioning date and electrolyser procurement, which in practice imposes a higher administrative burden on procuring from Chinese and Indian manufacturers.

The three-year commissioning limit also exposes projects to significant risk of losing out on funding if supporting infrastructure suffers delays, a point made by Hydrogen Europe in its consultation response. This may be partially compensated by the chance for fast-moving projects to avoid stricter additionality requirements starting in 2028.

The second round comes amid reports of challenging conditions for projects in northwestern Europe’s industrial regions, which missed out on first round awards.

In the Netherlands, projected costs of pioneering green hydrogen projects have been driven beyond initial expectations by a complex of factors including equipment price inflation, higher interest rates and electricity grid costs. Overall cost expectations had risen 36% against 2022 benchmarks to a levelized cost of hydrogen (LCOH) of EUR 13.69 per kilogram, according to a survey-based study by TNO released in early June (See Figure 2).

While the study’s findings reveal the effects of cyclical cost inflation, they imply a broad-based challenge, which appears to exceed the scale of the second-round funding. Even the highest winning bids in the first round at EUR 0.48 per kilogram, constitute less than a quarter of the assumed grid tariff charged by Dutch TSO TenneT.

Despite these headwinds, the first-round auction itself demonstrated the existence of more competitive projects in the Netherlands, attracting seven bids from projects totalling 770MWel with an average reported LCOH of EUR 9.80 per kilogram.

The wide implied discrepancy illustrates the requirement for a broad range of support mechanisms. Hydrogen projects will also be among the technologies eligible for a further EUR 2.6bn of conventional grants under the Innovation Fund’s 2024 budget round, according to Hydrogen Europe. Support is available as State Aid under the Projects of Common European Interest programme.

Regardless of the original intention, the confirmation that the Innovation Fund will be the source of EUR 1 billion funding for international projects widens the options for offtakers in less competitive regions access hydrogen via imported derivatives.

At their current scale, the EHB auctions arguably act as much a discovery mechanism to uncover project business models as a support scheme for the most competitive schemes. The first round supported 158 thousand tonnes/year of capacity (1.6% of Repower EU 2030 target) but provided a wealth of important data on bidding projects.

The second round is unlikely to go much further to meeting the Commission’s targets on volume but may convey important information on cost inflation and the price of policies on the acceleration of delivery and supply chain resilience.