Support Schemes and Subsidies for Green Hydrogen

In our previous post, "Building up the Hydrogen Infrastructure," we analyzed the current cost drivers that are making the production costs of green hydrogen more expensive than forecasted. We also explored how the critical hydrogen infrastructure is being developed to break the cycle of the chicken-and-egg problem, which plays a crucial role in the industry’s current situation. Besides infrastructural challenges, the lack of competitive prices compared to fossil fuel alternatives means that many projects struggle to make final investment decisions (FiD).projects also struggle to commit to investment decisions due to their non-cost-competitiveness against fossil fuel alternatives.

In this edition of our #HydrogenHorizon series, we will dive into the current financing instruments and support schemes being developed in the EU to aid the development and bankability of green hydrogen projects, aiming to reach FiID. This article will describe the following support mechanisms:

• EU Innovation Fund
• European Hydrogen Bank
• Carbon Contracts for Difference

EU Innovation Fund

The EU Innovation Fund aims to develop financial incentives to support the industrial implementation of innovative low-carbon technologies and does not focus on research and development. Projects must achieve the expected GHG emission savings within 3 to 10 years depending on their scale. The fund supports a wide range of innovative technologies in energy-intensive industries, renewables, energy storage, carbon capture, hydrogen, among others. Participants receiving support progress from, developing a proof of concept, then testing it on a small-scale, and finally increasing production and launching the technology commercially (Figure 1).

The Innovation Fund, backed by the EU Emissions Trading System (ETS), supports key climate and energy initiatives like REPowerEU and the Green Deal. It has launched three calls, funding 32 hydrogen projects to date. Theis fund supports up to 60% of clean hydrogen project costs that use innovative technologies (state-of-the-art) and which are financially and operationally mature financially and operationally.

European Hydrogen Bank

In 2022, the European Commission launched the European Hydrogen Bank, partly funded by the EU Innovation Fund. The Hydrogen Bank complements the aim of the Innovation Fund by aiming to create investment security and business opportunities for European and global renewable hydrogen production.

The Hydrogen Bank is a financial instrument operated by the European Commission with the objective of unlocking private investments in hydrogen value chains, connecting renewable energy supplies to EU demand, and addressing the initial investment challenges. The EU Hydrogen bank consists of two main pillars:

Domestic pillar – Hydrogen Bank Auctions

The domestic pillar aims to expand the hydrogen market in the European Economic Area (EEA) and link renewable hydrogen supply with demand, offering funding as a fixed premium in €/kg for produced renewable hydrogen (RFNBO).

In April 2024, the EU committed around €720 million to seven green hydrogen projects in Europe, selected from the first EU-wide pay-as-bid-auction for renewable hydrogen projects held between November 2023 and February 2024. Chosen from 132 bids across 17 countries, these projects are set to produce 1.58 million tons of green hydrogen over ten years, aiming to reduce CO2 emissions by over 10 million tons.

In the first auction, projects were chosen for their low bid prices, between €0.37 and €0.48 per kilogram of hydrogen, significantly under the €4.5 ceiling. With an €800 million budget, only €720 million was allocated, formed by multiplying the bid volume with its bid price over 10 years, leaving out surplus funds that could have not been given to the next bidder. Winning projects will receive between €8 million to €245 million to kickstart operations.

All selected projects are required to sign agreements with the European Commission by November 2024 and must produce green hydrogen within five-years. All selected projects are now working towards signing agreements with the European Commission by November 2024. They have a five-year deadline to start producing green hydrogen. If they don't meet this timeline, the projects might not go forward.

Looking ahead, the EU plans to reduce the maximum bid price for its next hydrogen project auction to €3.50/kg. This next auction, with a budget of €2.2 billion, is scheduled for autumn 2024. The EU hopes to learn from this first auction as it acted as a ‘litmus’ test for the market. It derived logical price signals which are essential to make the next auction process even more successful in promoting green hydrogen production.

International pillar – H2Global

The Commission is shaping the European Hydrogen Bank's international section to unify EU efforts in renewable hydrogen imports. Following a declaration by Energy Commissioner Simson and Minister Habeck in May 2023, it aims to use collective auctions and H2Global to enhance global hydrogen trade and develop clean hydrogen markets.

H2Global is designed to fast-track the widespread use of hydrogen. It operates through the Hydrogen Intermediary Company GmbH (Hintco), securing long-term hydrogen supplies with 10-year Hydrogen Purchase Agreements (HPA) and managing demand with short-term Hydrogen Service Agreements (HSA). As both a buyer and seller, H2Global has been granted €3.5 billion by the German government to support its activities.

This structure provides investment security for producers through long-term contracts awarded to the lowest-priced offers, while also facilitating short-term sales to the highest bidders in separate tenders.

H2Global sells HAS under an electronic auction process by utilizing a web-based trading platform for hydrogen products, a platform which is currently under development in cooperation with EEX. The first H2Global tenders for the purchase of green ammonia (lot 1), green methanol (lot 2), and e-SAF (sustainable aviation fuel) (lot 3) are still ongoing.

Carbon Contracts for Difference (CCfD)

Contracts for Difference (CfD) originated in the financial world and are essentially, are designed to (as an element to hedge) arrange prices for financial derivatives between two counterparties. In CfD, the seller and buyer set a price for a product at a specific time. If the agreed price is below the market price, the buyer pays the seller the difference. If the market price is above the agreed price, the seller pays the buyer the difference.

The European Commission is considering introducing EU-wide Carbon Contracts for Difference (CCfD). This mechanism, different from common CfD, aims to promote climate-friendly processes in energy-intensive sectors where environmentally friendly production methods are not yet competitive, especially in the steel and chemical industries, promoting the use of green hydrogen usage in theose sectors.

CCfD differ from traditional CfD by focusing on carbon pricing instead of wholesale market prices. This approach covers the extra costs of low-carbon processes compared to conventional methods over 15 years, including both CAPEX and OPEX. The government compensates for any price gap between the agreed price and the actual Emissions Trading SystemETS European Emission Allowance (EUA) price, making green hydrogen cost-competitive against traditional grey hydrogen.

Germany initiated CCfD funding on March 12th, 2024, inviting applications for decarbonization project co-financing. Companies will bid for subsidies based on CO2e reduction, transitioning towards greener technologies with goals of 60% reduction in three years and 90% in 15 years. As the cost-effectiveness of green technologies surpasses that of traditional technologies in cost-effectiveness, firms must repay any funding surplus.

The first auction (out of four) will distribute €4 billion in subsidies, with a €1 billion cap per company, targeting those emitting over 10,000 tons of CO2e. The second auction, offering €19 billion, is scheduled for autumn 2024, with two additional auctions in 2025. These efforts, funded by the German government, aim to cut 350 million tons of CO2e emissions by 2045.

Critique from the Industry and Conclusion

Green hydrogen initiatives have faced challenges in achieving FiID due to insufficient financial backing and unclear subsidies. Nonetheless, the European green hydrogen sector is seeing a growth in support programs aimed at making these projects financially viable.

The EU Innovation Fund, known for its strict criteria on cutting-edge technology, supports advanced hydrogen projects. However, its high standards have made it difficult for applicants to demonstrate their project's uniqueness, leading to lower application scores and deterring potential applicants from seeking funding.

Hydrogen Bank auctions have faced criticism for their limited budget, bureaucratic challenges, and lack of transparency, failing to address the cost gap with grey hydrogen with winning bids significantly lower than the gap. Despite mixed reactions to the first round, with concerns over low bid prices impacting consumer costs, there's anticipation for improvements in future auctions.

H2Global, operating under the Hydrogen Bank's international umbrella, secures the financial sustainability of green hydrogen initiatives by acquiring hydrogen through Hydrogen Purchase Agreements (HPAs) and distributing it in short-term markets via Hydrogen Service Agreements (HSAs). The results from its inaugural tender process remain pending.

CCfD face criticism for their high cost and uncertain benefits for Germany, with the potential for delayed repayments due to high green hydrogen production costs. Despite this, they offer a new way for green hydrogen to compete with fossil fuels alternatives, with Germany's first implementation serving as a key test of their effectiveness in advancing projects into FiD.