The first European auction, worth some €800 million, is expected to take place this fall. Will the European Hydrogen Bank initiative set up by the European Commission with a budget of €3 billion really have an impact on the development of the hydrogen market and maintaining EU competitiveness?
There has been a lot of talk about the cost-effectiveness of producing renewable hydrogen and putting its price on a par with emission-intensive grey hydrogen and even traditional conventional fuels. So far, this has mainly concerned a long-term perspective. However, the target in the REPowerEU plan calls for at least 10 million tonnes of renewable hydrogen to be produced within the Union by the end of this decade. This makes it necessary to accelerate investment, which will be difficult to achieve without financial support from EU and national funds.
So when the President of the European Commission, Ursula von der Leyen, announced her intention to set up a European Hydrogen Bank during her State of the Union address in mid-September last year, many European stakeholders welcomed the project with undisguised enthusiasm.
Indeed, renewable and low-carbon hydrogen is set to become an essential tool for the EU’s transformation to a decarbonized energy system. To this end, the European Commission has set ambitious targets for increasing the production and use of hydrogen, intending to achieve a 55% reduction in emissions by 2030 and become the first continent in the world to achieve climate neutrality by the middle of the century.
A particular ambition of the European Commission is for Europe to remain a global leader in green transition, renewable energy, and hydrogen technologies. To this end, it is necessary to increase the competitiveness of the European hydrogen market, the level of investment, and the retention of generators in the EU region area, which has been overshadowed by the rising costs of doing business in Europe related to the transition and plans to support projects in other regions of the world, such as the IRA Inflation Reduction Act announced in August 2022.
To maintain and strengthen market advantages, it is, therefore, necessary not only to accelerate the creation of a full hydrogen value chain in Europe but also to mitigate the risks associated with the formation of a new market. Including, investment and legislative risks. The European Hydrogen Bank is intended to be one of the mechanisms to best support this process.
The inflation Reduction Act makes the US hydrogen market more competitive
The establishment of the European Hydrogen Bank was all the more significant given that only a month earlier, the US Congress had passed the IRA Inflation Reduction Act. This included a wide range of clean energy tax incentives and is particularly generous for renewable hydrogen producers[1] . The US is expected to spend $369 billion over the next decade to implement measures, including accelerating the deployment of clean hydrogen technologies.
Under the law, renewable electricity sources and power plants producing clean hydrogen can receive a tax credit of 2.6 cents per kWh and up to $3 for each kilogram of hydrogen received for the first 10 years of operation. This makes it possible for the price of a kilogram of green hydrogen to drop by about half compared to the current cost. It is worth noting that the tax reductions will only be in place until 2032, so projects that start while still in 2023 will be able to benefit from the full 10-year credits. All installations that begin operations after this time will receive relatively less[2] .
Given clear incentives, such as the fact that producers of green hydrogen, produced from renewable electricity, qualify for both tax credits, can claim a tax refund equal to the value of their tax credits for the first five years of operation, and can ‘pass on’ their tax credits after the first five years, the attractiveness of implementing hydrogen projects in the US and their potential for scaling up has increased significantly. This is pushing European policymakers to intensify their support for investment in the EU region and to put in place appropriate regulatory mechanisms.
EC: Maintain the leadership seat of the green transition
The realization of this undoubted ambition is to be ensured by the European Green Deal – ‘the most comprehensive transformation plan in the world’. Among its key elements were the European Hydrogen Strategy and the Fit for 55 climate regulation package, established in the summer of 2021. This initially comprised 13 initiatives aimed at aligning EU policies with the European Green Deal and EU climate law. In 2022, the initiatives were expanded to include further legislative proposals.
The original ambitions contained in the Fit for 55 and the Hydrogen Strategy were reinforced in June 2022 with the publication of the EU REPower Plan. It was a response to the new geopolitical reality and energy crisis in Europe caused by Russia’s invasion of Ukraine and the consequent sanctions and cut-off of Member States from Russian energy resources. REPowerEU was based on three foundations – saving energy by increasing energy efficiency, increasing clean energy production, and diversifying the energy supply. Under the plan, annual demand for renewable hydrogen would increase to 20 million tonnes, half of which would be produced within the EU and half imported. At the same time, the target for the share of RES in the EU’s energy mix was raised from 40 to 45% by 2030.
For the implementation of REPowerEU, Member States would use the remaining RRF loans (€225 billion) and new RRF grants financed by the auctioning of ETS allowances. Additional sources of funding include, among others, cohesion policy funds, the Connecting Europe Facility, the Innovation Fund or the European Investment Bank[3] .
The next step is the revised CO₂ Price Adjustment Mechanism at the border – CBAM.
It was ensuring market competitiveness and the pressing need to keep manufacturers in Europe that spurred the introduction of another important CBAM (Carbon Border Adjustment Mechanism) under the Fit for 55, a revised version of which was published last December. In addition to the industrial products previously covered by the CBAM, such as iron and steel, cement, fertilizers, or aluminum, the new rules will also cover hydrogen.
The main premise of CBAM is to reduce the risk of so-called carbon leakage. Due to the green transition, the gradually decreasing allowance pool, the withdrawal of free allowances, and the inevitable increase in their price under the EU-ETS, there is a growing concern about the possibility of production moving out of the EU region to countries where climate policy is less stringent and therefore production is cheaper.
As a result, the actual reduction in pollution would be negligible, while the direct financial loss in terms of taking thousands of jobs and budget revenues out of Europe would become acute. CBAM aims to adjust the price of imported goods at borders by imposing an adequate tax related to potential emissions. All this is to keep manufacturers in Europe, despite the rising costs of running businesses as a result of the transformation effort.
According to the agreement, the CBAM will start operating in October 2023. Initially, it will be a simplified system and then, in parallel with the phasing out of free allowances, it will start to operate in full.
European Hydrogen Bank – a real game changer?
Undoubtedly, the initiative most likely to contribute to the development of the renewable hydrogen market in Europe and the goal of doubling hydrogen demand by 2030 is the aforementioned European Hydrogen Bank. In the originally proposed model, the European Commission is to invest €3 billion from an innovation fund with a total pool of more than €38 billion. As the EC President emphasized in her 2022 address, its role will primarily be to animate the hydrogen market to bring together future supply and demand for clean fuel.
In February, the European Commission presented the Green Deal Industrial Plan, the pillars of which also address hydrogen technologies and their applications. Under the plan, in autumn 2023. The EC is to launch a first auction – or competitive bidding – to support the production of hydrogen from renewable sources. The winners of this auction will receive a fixed premium for every kilogram of hydrogen produced from renewable sources over 10 years. This is expected to manifest a similar impact to the production tax credit in the US IRA. According to initial announcements, the budget for the first pilot auction is expected to be €800 million. Its terms will be announced in June 2023. It will be followed by further auctions or other forms of support for hydrogen production and use involving the EU’s internal part of the Hydrogen Bank, which will contribute to REPowerEU’s hydrogen goals[4].
Market stakeholders have welcomed the above announcements, with voices being raised about the need to revise some assumptions. Especially those related to the planned budget. In mid-March, Hydrogen Europe published a Position Paper proposing criteria and recommendations to be taken into account in the design of EHB support schemes. These recommendations, as previously announced by the European Commission, focus on two pillars – national and international.
European Hydrogen Bank – Hydrogen Europe recommendations
First, support should, among other things, prioritize renewable hydrogen, with low-carbon hydrogen also considered. The type of support should take the form of a simply fixed premium (EUR/kgH₂), which would cover the funding gap. However, in doing so, the organization points out the need to revise the originally adopted total budget of EUR 3 billion, as when analyzing the level of support of EUR 3/kgH₂ for 10-15 years, the budget envisaged would not be sufficient to cover the indicated need until 2030. It, therefore, proposes to establish a budget of €3 billion, but on an annual basis.
Within the international pillar, Hydrogen Europe proposes, among other things, that support should take place through a double auction process. On the supply side, it would take the form of a simple fixed premium (EUR/kgH₂) and on the demand side, it would take place through appropriate auctions. Another assumption is that support should target hydrogen and carriers produced outside the EEA and operated within the EEA[5].
(The full Hydrogen Europe recommendations can be found here).
What does this mean?
With an increase in the planned budget, the European Hydrogen Bank should become the driving force behind the European market and ensure its attractiveness to potential investors. The proposed mechanisms should stimulate demand in real terms and reduce the current investment gap and close the price gap between renewable green hydrogen and its fossil fuel equivalent. The indicated support at an exemplary level of €3/kgH₂ could contribute to these goals and ensure that demand for the new fuel is met in line with the European Commission’s ambitions.
What does this mean in practice?[6]
For an example investment such as a hydrogen hub, the cost of electrolyzing hydrogen using dedicated renewable energy sources depends on several factors. These include the structure of the energy sources, the overall efficiency of the electrolyzers, the purchase of grid energy or energy with a certificate of origin, and external funds allocated to cover investment costs.
An exemplary farm, consisting of photovoltaic and wind sources, allows the electrolyzer to be powered at its nominal capacity for a greater part of the day and year than if the electrolyzer were powered by a single source alone. At this point, the cost of electrolyzed hydrogen produced at the hub in this configuration could be around EUR 4.50-5.00, or about PLN 21.00-23.50. If the real fixed premium was EUR 3 for each kilogram of hydrogen produced, the production price of one kilogram would decrease to EUR 1.5-2.00, or about PLN 7.00-9.40. Which, at current prices, would increase the profitability of renewable hydrogen even compared to traditional conventional fuels. This is an optimal model, due to the combined use of PV and wind sources.
In comparison, if the hub’s investment was powered solely by a PV farm, the cost of producing a kilogram of hydrogen would be, depending on the scale of the project, about EUR 5.80-6.60 (about PLN 27.00-31.00). Assuming a fixed premium, this cost would drop to about 13-17 PLN per kilogram of hydrogen produced.
[1] Hydrogen produced by a process that results in a lifecycle greenhouse gas emission rate of no more than 4 kilograms of CO2 per kilogram of hydrogen.
[2] Yuanrong Zhou, Can the inflation reduction act unlock a green hydrogen economy? ICCT
[3] European Commission, REPower EU: affordable, secure and sustainable energy for Europe
[4] European Commission, A Green Deal Industrial Plan for the Net-Zero Age, 2023
[5] Based on: Hydrogen Europe position paper on the European Hydrogen Bank, 2023
[6] The data in the subsection is taken from SES Hydrogen’s analyses.
