LONDON (ICIS)–ICIS data shows that renewable
hydrogen could be sold for below €1/kg if a
producer obtains the maximum support provided
by the European Hydrogen Bank, according to the
heads of terms for the bank published by the
European Commission on 31 March.
The bank, which was announced in September
2022, aims to support hydrogen producers using
an auction bidding system, which ranks bidders
according to price per kilo of hydrogen.
Utilising the Innovation Fund, the commission
will allocate €800m for the first auction for
support from the bank, with subsidies capped at
€4/kg of hydrogen. The hydrogen has to be
aligned with the delegated act for renewable
fuels of non-biological origin (RFNBO), also
known as renewable hydrogen, and projects must
reach full capacity within three-and-a-half
years of being awarded funding. Funding is
granted once hydrogen production starts.
Successful bidders will then be granted a fixed
sum according to the volume bid, over the
course of ten years. Bidders cannot win more
than 33% of the available budget, and must have
a project size of at least 5MW.
€1/KG HYDROGEN
ICIS assessment data from 4 April shows that
renewable hydrogen produced using a 10-year
renewable power purchase agreement (PPA)
starting in 2026 in the Netherlands would cost
€4.58/kg on a project breakeven basis. For
10-year PPA renewable hydrogen, ICIS accounts
for the recovery of the capital investment for
the electrolyser over the duration of the PPA,
meaning by the end of the subsidised period,
costs would be recovered.
Given a hydrogen producer could receive the
full subsidy of €4/kg, this would mean just
€0.58/kg of hydrogen would be needed to achieve
capital cost recovery, meaning the producer
would need to charge buyers less than €1/kg to
ensure project breakeven.
Comparatively, renewable hydrogen production in
Germany commencing in 2026 and utilising
offshore was assessed at €5.96/kg on 4 April,
meaning post-subsidy hydrogen would be just
under €2/kg.
However, given the competitive nature of the
bid, namely that ordering is a result of
lowest-bid first, there is potential that the
full subsidy will not be awarded.
Further, the auction limit depends on volume
and bid amount, meaning once the €800m is
allocated, there will be no further subsidy for
this round.
ICIS data shows that European hydrogen demand
by 2030 is forecast to reach 10.3 million
tonnes (mt) by 2030. If full subsidy was
distributed to all bidders, it would cover just
200,000 tonnes of renewable hydrogen, just
under 2% of projected demand by the end of the
decade.
The commission is aiming to hold further
auctions however, meaning that the €800m is an
initial starting point, not the limit, for the
European Hydrogen Bank.
MARKET DEVELOPMENT
Alongside the development of hydrogen support
and therefore expansion of hydrogen supply, the
bank mechanism indicated the benefit of the
auction system for driving competition. By
awarding hydrogen to the lowest bidder, and by
maintaining an auction limit of €800m,
participants are encouraged to reduce costs of
production where possible.
The heads of terms document for the European
Hydrogen Bank notes that a fixed premium,
namely a single subsidy figure provided over
the course of 10 years for every unit of
hydrogen produced, was opted for due to the
absence of price transparency in the current
hydrogen market.
By utilising a fixed premium, there is no need
for a market reference price, the document
outlined.
During the pilot for the European Hydrogen
Bank, just renewable hydrogen is being
targeted. However, low-carbon hydrogen could be
included in future iterations.
On the basis of price discovery, the heads of
terms noted that the auction type was referring
to as “static”, meaning bidders bid a single
price that is not changed. The alternative was
noted as “dynamic” whereby bidders could
receive some information on the activity of
other auction participants, providing a
component of price discovery.
The first auction will be held in autumn of
2023.
