The European Commission has announced that Europe’s first auction to support green hydrogen production, scheduled for the end of the year, will offer valuable insights into the supply and demand dynamics of the emerging EU market.
The auction is part of the Commission’s efforts to establish a Hydrogen Bank that aims to bridge the cost gap between clean hydrogen and conventional hydrogen produced from carbon-emitting fossil fuels.
Alexandre Paquot from the European Commission’s climate department spoke about the auction at a recent EURACTIV event, expressing hopes that it would provide clarity on the market and its pricing. The production of renewable hydrogen through water electrolysis is considered a promising low-carbon feedstock for industries, a fuel for hard-to-electrify sectors, and an energy storage solution.
The EU has set a target of reaching 20 million tonnes of renewable hydrogen production by 2030, with half of it coming from domestic sources. However, the cost of production for renewable hydrogen is still higher than that of fossil hydrogen processes, and there is a significant disparity between the current electrolyser capacity (40 gigawatts) and the required capacity (160 gigawatts) across the EU.
To address these challenges, the European Commission plans to subsidize hydrogen production, aiming to lower prices by sharing the cost burden of every kilogram of hydrogen produced. The auction will allocate funds to scale up Europe’s hydrogen industry and incentivize renewable hydrogen production through a fixed premium per kilogram produced over a maximum of 10 years. The simplicity of the conditions set for the auction so far and the focus on operational costs, which constitute 70% of the levelized cost of hydrogen production, have been praised by the industry.
The European Commission aims to conduct a transparent auction without a fixed ceiling, allowing market forces to determine the price. This competitive bidding mechanism is expected to drive cost-effectiveness in the hydrogen sector. However, stakeholders in the hydrogen industry advocate for a broader scope of auctions to attract participants from various sectors considering green hydrogen for decarbonization. They argue that sectoral auction calls would promote fair competition and prevent the bank from being exclusive to specific industries.
While the initial funding for the pilot auction comes from €800 million drawn from the EU’s Innovation Fund, industry experts caution that this amount is insufficient to support the required growth in green hydrogen production. They suggest that the EU should match the subsidies offered by the United States to remain competitive in attracting investments in clean hydrogen projects. However, the European Commission is wary of entering a subsidy race and prefers to let the market determine the most cost-effective way of producing hydrogen while supporting the best projects through the auction.
The establishment of the Hydrogen Bank and the upcoming auction mark significant steps in the EU’s efforts to promote the production and use of green hydrogen. However, challenges remain, including the need for additional funding to accelerate the growth of green hydrogen production and the importance of ensuring the efficient use of public funds to support renewable energy and energy-saving technologies. By directing hydrogen towards industries that have the greatest need and difficulty in electrification, the EU aims to optimize its use and contribute to the long-term decarbonization of the economy.
