The terms and conditions of the first pilot auction for renewable hydrogen production are published as a key element in the development of the European Hydrogen Bank

The European Hydrogen Bank: objectives and financing challenges

The European Commission published in March 2023 a Communication on the establishment of the European Hydrogen Bank. This is a European Commission initiative that aims to reduce the gap between the costs of renewable hydrogen and the costs of fossil fuels. The hydrogen market is considered to have four investment challenges: (i) increasing electrolyzer manufacturing capacities, (ii) expanding new hydrogen production capacities, (iii) opening up new hydrogen demand sectors and (iv) developing specific low-carbon hydrogen infrastructures. Most of this investment is expected to come from private capital, but at the same time European funds are being mobilized to support an accelerated expansion of hydrogen in Europe.

Among the measures promoted by the European Union that offer a very promising and cost-effective way to support the expansion of hydrogen production and deployment, the Innovation Fund (a European initiative to finance projects that contribute to the reduction of greenhouse gas emissions), and in particular the competitive auctions at European level, stand out.

The Innovation Fund: the origin of the main funds for the promoting renewable hydrogen projects

The Innovation Fund is one of the world's largest funding programs for the commercialization and deployment of low-carbon energy technologies. It offers support through grants, project development assistance and financial instruments such as Invest EU.

The Innovation Fund will start allocating funds through a pilot auction with a fixed premium (€/kg of renewable hydrogen produced). Interested developers will be able to participate and submit a fixed premium bid to receive support for their production. The bids submitted are ranked from lowest to highest and will be granted the corresponding support, in that order, until the auction budget (€800 million for this first call) is exhausted.

First pilot auction: terms and conditions to become a beneficiary of these auctions

The terms and conditions of this first pilot auction were published on 30 August 2023. Under this first iniciative, only projects located within the European Economic Area are eligible to receive support. There are specific eligibility and pre-qualification requirements that bidders must meet in order to participate in the auction, ultimately ensuring that projects have a certain viability and thus ensuring that they can be brought to completion and avoiding speculative projects.

The main features that make up this grant would be the following:

• Calculation of the amount to be received by each tenderer: the maximum amount to be received will be calculated by multiplying the bid price submitted by the projected average annual volume over the next ten years.
• Maximum amount allocated to each project: limited to one third of the total budget available (i.e. for this first auction it is limited to €266.7 million euros). A price of €4.50/kg of hydrogen produced is also foreseen as the maximum bid (this amount will be revised for future calls).
• Technical characteristics (minimum to be met by each project): new electrolyzes must have a capacity of at least 5MW.
• Price allocation: bids will be awarded on the basis of the price submitted for tender until the total budget available for each auction is allocated. The last of the bids exceeding the available budget will be placed on a reserve list (in case of a tie between several bids, different tie-breaking formulas are developed). First, the budget of the Innovation Fund will be released to cover the supply of the lowest priced projects. Once this budget is exhausted, Member States could support the remaining projects, following the ranking of the EU auction platform, until the corresponding Member State budget is exhausted.
• Guarantees: a guarantee covering 4% of the maximum amount of the grant must be lodged.
• Time limit for implementation: A period of five years is established from the signing of the grant agreement to the commissioning of the project. The grant will be granted for a period of ten years from commissioning of the project by means of half-yearly payments.

In addition to these issues, the terms and conditions published by the European Commission set out in greater detail other eligibility and qualification requirements, as well as the rules on the compatibility of this grant with other public aids.

This pilot auction is expected to open on 23 November 2023 and will remain open until February 2024. The European Commission encourages interested bidders to consider this first pilot auction and to prepare their bids before the opening of the call. In fact, given the fast implementation schedule of this program, these terms and conditions have been published even before the opening of the auction in order to facilitate the participation of as many bidders as possible.

Should you wish to find out more about this first auction or any other industry issues, please do not hesitate to contact one of our experts listed below or your usual contact at Osborne Clarke.