On the 30th of August, the European Directorate-General for Climate Action (DG CLIMA) surprised many of those concerned with the hydrogen sector in Europe during their summer holidays. After a thorough consultation process and workshops with all stakeholders, they published the Terms and Conditions of the pilot renewable hydrogen auction. Although it may still experience changes, this document lays the foundations, sets the objectives and defines the rules of this new financing mechanism, by which the European Commission launches a major challenge to the sector and shows a clear commitment to green hydrogen.
This experimental auction will have a budget of up to 800 million euros and represents a fundamental pillar in the European Commission’s strategy for development of renewable hydrogen. This production support action is part of the instrument known as the European Hydrogen Bank and will be complemented with other series of actions that are still in the process of being established, and which will aim to provide support, in this case, for the use of renewable hydrogen in the European Union.
It is clear that this mechanism represents a strong commitment to developing this technology and that, in addition to direct financial support for the development of these projects, it will provide specific market signals and serve as a tool for revealing the price of a product in a market that has not yet been determined and for which there is some considerable uncertainty about its real cost. Ultimately, the auction is expected to encourage competition and private investment in the sector and to mitigate, as far as possible, the risk associated with such projects.
The opening of this first round of low (or reverse) auctioning will take place on 23 November 2023, with an estimated deadline of 8 February 2024 for interested parties to submit their applications. During this period, participants will be able to submit their bids, which must in any case be equal to or less than €4.5/kg. This bid is nothing more than the remuneration they are expecting to receive in return for producing renewable hydrogen for ten years with new-build projects, in addition to their own revenues from the sales of this gas. Therefore, a quantity equal to or less than the amount required in €/kg for a planned average annual production over a decade will be bid. This mechanism will therefore seek to reduce the gap between grey and green hydrogen by indirectly subsidising the investment (CAPEX) and operating (OPEX) costs of new renewable hydrogen production assets.
Thanks to the suggested auction system and the fact that the only criteria for classification and resolution of bids will be price, the projects to be subsidised will be those that offer the highest profitability, are technologically mature and where it is possible to consider economies of scale. Thus, the call for proposals limits participation to projects with an installed electrolysis capacity of at least 5 MW. Moreover, for the admission and validation of bids, it must be demonstrated that the project is sufficiently mature and that it can be commissioned within a period of less than five years from the granting of the aid. In this regard, there must be consistency in the values of volume of H2 produced, installed electrolysis capacity and price, on the basis of which the bid is calculated.
While the hydrogen produced must be considered renewable, it is evident that the main determining factor in the cost of its production is the price of electricity used in the electrolysis process. Especially in view of the EU’s delegated acts on green H2, which will set requirements such as additionality and hourly correlation between hydrogen production and renewable electricity production for the years to come. In this regard, the bid to be submitted in this auction must be supported by an Electricity Supply Strategy. This consists of a credible plan that demonstrates that initial pre-contractual measures have been implemented to secure renewable electricity that, in volumes and hourly profile, matches the volumes of green hydrogen indicated in the bid.
However, this is not the only requirement for the presentation of applications; it will also be necessary to provide another set of documentation in order to validate the maturity of the project and, in the end, to ensure its implementation:
All of this brings into consideration a number of factors other than price, which, in some cases, may be beyond the producer’s control. The lack of supply of equipment and materials, the lack of regulation, the complexity of administrative processes and the excessive length of time it takes to obtain environmental permits are some of the indirect conditioning factors of the proposals submitted to this auction.
In the upcoming months it will be possible to validate the potential of this financing mechanism which, according to the European Commission, is here to stay. The recurrence with which these auctions will be held has not yet been determined, and it is also possible that adjustment mechanisms and corrections will be required in terms of the thresholds and limits defined, such as the maximum bid, the deadlines for the start-up of projects or the minimum electrolysis power to be installed.
On the other hand, the EC also reserved the possibility of applying sectoral restrictions in future auctions by limiting the final uses of the renewable hydrogen generated, encouraging the introduction of this energy vector in certain specific sectors of activity.
Lastly, considering the potential and versatility of this financing mechanism, the European Commission is proposing to the various Member States to divert their national budgets earmarked for promoting projects of this kind to the Innovation Fund in order to carry out a single auction, in which funds would be reserved exclusively for beneficiaries located in the country of origin of the funds transferred. This is the Auction as a Service (AaaS) service, which aims to be implemented in time for this first auction, and therefore hinder the fragmentation of the early stages of the development of the renewable hydrogen market in Europe.
Strategy Granter
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