Larger EU H2 bank auction could still clear below €1/kg

The EU will launch a second European hydrogen bank auction later this year, ramping up the budget from a pilot for which results were published on 30 April. A bigger budget will allow more projects to win subsidies, but developers might still have to bid at or below €1/kg to stand a chance of being successful.

As a result of the pilot, the EU will subsidise seven renewable hydrogen projects in Spain, Portugal, Norway and Finland with a total €720mn ($768mn), to be disbursed as a fixed premium per kg produced over a 10-year period. The European Commission picked the projects that requested the least support and the auction cleared at €0.48/kg, far below the bid ceiling of €4.50/kg.

A second auction later this year is slated to have a much larger budget of around €2.2bn. This could open the door for projects with less competitive bids, but developers may still have to bid for less than €1/kg, data released by the commission suggest.

If another €2.2bn had been available to the "next best projects" in the pilot, bringing the total budget to nearly €3bn, the auction would have cleared at around €1/kg, the data indicate.

Spanish projects would have been the main beneficiaries of the larger budget. But it would have also unlocked subsidies for projects that did not field any winners in the pilot, including Germany, France, Austria and the Netherlands. This suggests that projects in these countries might be able to get subsidies in the second auction. That said, some German projects that participated in the pilot are bound to get funds from a separate €350mn budget set aside by Berlin, meaning they could not take part in the next round.

In any case, the second round could clear even far below €1/kg, if developers revise their bidding strategies now they have indications from the pilot on how low they might have to go. Such signposts were not available for the first round, other than from a Danish auction last year with similar parameters — which had indicated that winning bids in the hydrogen bank pilot were likely to stay well below €1/kg.

The commission plans to tighten some of the eligibility criteria for the second round, which might prevent some projects from participating again. A draft document suggests winners of the second round would have to commission their plants within three years, down from five in the pilot. And developers would have to provide a completion guarantee equivalent to 10pc of the requested subsidies, up from 4pc. The second auction will also have a lower bid ceiling of €3.50/kg based on the draft, although this is highly unlikely to be tested by the successful submissions.

Budget uncertainties

While previous commission comments suggested a budget of around €2.2bn for the second round, the draft rules leave the exact funds open.

The commission initially earmarked €800mn for the pilot and might top up the second round with the unused €80mn.

It plans to set an unspecified slice of the budget aside exclusively for projects targeting offtake for maritime transport, adding a degree of complexity.

Austria is planning to top up the second auction with €400mn, while others, such as Belgium, could follow suit.

Moving the needle?

While bids in the pilot auction came in well below the ceiling — and are bound to do so again in the second round — the funds will only be enough to support a fraction of the EU's 10mn t/yr renewable hydrogen production target by 2030.

The pilot auction will subsidise 1.58mn t, or 158,000 t/yr, of production from the seven selected projects — assuming the support they secured will be enough to get them built as planned.

If the next best projects from the pilot were to repeat their bids in a €2.2bn second round successfully, the round could support close to 300,000 t/yr.

While this would lift subsidised output across both auctions to nearly 460,000 t/yr, it would still be less than 5pc of the 10mn t/yr target.

Assuming developers that missed out in the first round shoot lower in the second and the volume-weighted average of successful bids is in line with the pilot's €0.45/kg, 480,000 t/yr could be subsidised. Together with the pilot, this would yield 640,000 t/yr, or just over 6pc of the EU's target, although extra funds from Germany, Austria and potentially others could lift this further.

The EU hopes this initial operating support, combined with subsidies for capital expenses, infrastructure developments and demand-side initiatives, will be enough to kickstart the sector and other projects will follow even without hydrogen bank support.

By Stefan Krumpelmann