European hydrogen industry digests failure of second EU auction

The bulk of renewable hydrogen projects that were offered subsidies under the second European Hydrogen Bank auction failed to sign final grant agreements, leaving most of the European Commission funds unallocated and the EU far short of the electrolysis capacity it had hoped to deliver under its flagship funding mechanism.

The second auction secured just 380 MW of electrolysis capacity, compared with the 2.3 GW initially awarded, and the final grant from the European Commission's Innovation Fund amounted to less than a quarter of the original budget. The EC signed contracts worth Eur271 million, far below the Eur1.2 billion initial budget, and the almost Eur1 billion initially allocated to winners.

Only six projects signed grant agreements, the EC said on Jan. 20, down from the original 15 awarded last May. And the final list includes just two of the 10 reserve projects invited for funding after seven of the original winners withdrew ahead of a deadline to commit a bank completion guarantee.

Companies that have withdrawn from the process cited the inflexibility of the auction mechanism and the uncertain market outlook as major drivers.

"It's a big disappointment," Ernst & Young Partner Irene Larroy told Platts, part of S&P Global Energy.

"It's not good news for the sector," Larroy, who works in EY's Grants for Innovation and Sustainability division, said.

Other issues included potential regret over bidding low. After the first auction cleared at below 50 euro cent/kg, winning bids rose to over Eur1/kg in the second auction, and future rounds could see higher winning prices.

The final project list of six projects secured fixed premium bid prices of 33-85 euro cent/kg (38-99 cents/kg) for the general category and Eur0.45-1.88/kg in the maritime category.

Winners receive a fixed premium per kilogram of Renewable Fuel of Non-Biological Origin hydrogen produced, over a period of 10 years.

Platts assessed the cost of EU-compliant green hydrogen production via alkaline electrolysis in Spain, backed by renewable power purchase agreements, at Eur8.66/kg on Jan. 21.

Rigid contracts

Larroy said contract inflexibility had put many project developers off.

The plant capacity cannot be altered after securing a grant, she said. For example, a company would not be able to amend a design to make it more efficient and still deliver the same volume of hydrogen, for instance, by adding batteries and running an electrolyzer at a higher capacity.

And a strict rule requiring operations to begin within five years of signing a grant agreement left companies with little flexibility to accommodate changes to development schedules.

Industry body Hydrogen Europe "has urged the EC to relax timelines for entry into operation in the third auction, yet this recommendation was not adopted," the group's R&D Manager Marco Molica Colella told Platts.

Another clause stipulating the need for approval for transfer of facility ownership had also raised concerns for project developers potentially looking to sell assets, Larroy said.

A further obstacle was the uncertain status of the EU's updated Renewable Energy Directive's adoption into national law.

In Spain, where several projects on the auction list are based, the government has a second draft law out for public consultation, leaving several developers uncertain of the regulatory framework and demand outlook.

Finally, the US' scuppering of the International Maritime Organization's vote to tighten shipping emissions rules had damaged the business case for some developers who were targeting the marine fuel sector, sources told Platts.

In mid-October, the UN agency's member states voted to delay the adoption of Net-Zero Framework by a year amid fierce US opposition, prompting doubts over the decarbonization regulation's future.

The move came after the Hydrogen Bank auction bids were submitted.

Hydrogen Europe said the maritime sector auction performed relatively well, with the ring-fenced funds allowing for higher bids to succeed.

The sector association also pointed to the oversubscribed auction, which drew 61 applications, highlighting strong interest in the mechanism.

The European Commission said the auction mechanism was working well.

"The auction is a cost-effective way of selecting mature projects producing renewable fuel of non-biological origin (RFNBO) hydrogen," the Commission said in an FAQ document published Jan. 20.

"The fact that some projects selected under the auction decide not to proceed with their grant agreement preparation demonstrates that the due diligence mechanisms in place effectively prevent public funds from being tied up in insufficiently mature projects that would not deliver the promised quantity of RFNBO hydrogen in the relevant timeframe."

Future auctions in doubt

The unallocated funds from the second auction will be returned to the EU's Innovation Fund, to be allocated to future funding calls across technologies.

There is no guarantee that funding will go to hydrogen projects, and the funds will not be added to the third auction.

Sources expressed concern that there could be no further EU auctions after the current third round, which closes to applications on Feb. 19, with a budget of Eur1.3 billion. The European Commission is yet to commit to auctions beyond the current round.

European Hydrogen Bank 2 final project list

*Calculated based on the 2021-2025 ETS benchmark of 6.84 mtCO2e/mtH2, not taking into account additional carbon abatement due to substitution effects in the hydrogen end-use application

Source: European Commission