Benefits and limitations of the European hydrogen bank

Read Plug Power Europe’s review of the European Hydrogen Bank, which examines its benefits and limitations in detail

Plug Power Europe is well positioned to appreciate the benefits and limitations of the European Hydrogen Bank (EHB) as we have deployed the largest installed base of electrolysers in Europe. Some of our clients have had success with EHB and we are happy with them. Most, however, needed more support to continue their project.

With a ceiling price set at €4.50 ($4.81) per kilogram, EHB provided the potential for subsidies in excess of the Inflation Reduction Act’s (IRA) maximum production tax credit of $3/kg. However, the winning bids revealed on April 30 revealed prices well below the maximum price, ranging from 0.37 to 0.48 euros per kilogram.

Public policymakers may at first glance be happy because they are maximizing the capacity of electrolyzers with limited subsidies, which should help maximize the amount of CO2 reductions per euro of subsidy. Unfortunately, there is no free lunch, and producing hydrogen for this industry comes at a cost. As TotalEnergys CEO Patrick Pouyanné revealed at a special meeting of the World Economic Forum in April, most of the offers he received were in the range of 8 to 9 euros/kg, which meant only a few cents for the winning bid.

European Hydrogen Bank: an admirable intention that lacks the resources to make a difference

We must highlight the innovative spirit of the European Commission, and more specifically its Directorate-General for Climate Action (DG CLIMA).

The initial funding envelope of EUR 800 million is to be complemented by an additional EUR 2.2 billion and aims to fill the price gap between green hydrogen produced from renewable sources and gray H2 produced from unchanged fossil gas.

The ambitious goal of the auction is to “unlock private investment in hydrogen value chains” by “connecting renewable hydrogen supplies with emerging demand from European consumers.” (1)

A budget of EUR 800 million seems small to achieve this, even taking into account the additional EUR 2.2 billion that will come later in 2024. It is too small to make a real difference in the perspective of the 10 million tonnes of domestic production that is being sought. European Union (EU). in 2030

It would be cruel to compare the EU envelope with the $260 billion IRA program and associated fixed hydrogen premium with a maximum production tax credit of $3/kg. Still, for $260 billion we would get 8.7 million tons of subsidized hydrogen at a price of $3 per kg. This will effectively make or break business models and enable:

1. It favors European investments.
2. It helps accelerate the plan to decarbonize existing sources of pollution.
3. Send a message to the world.

What are our European ambitions? More than a drop in the ocean.

Is the first auction a bad signal for the hydrogen sector?

As Patrick Pouyanné emphasized, the offers do not illustrate the real gap between renewable and gray hydrogen. It could be argued that recipients cover the gap in the green premium. This seems more likely. However, applicants made a strategic decision to underbid, focusing on obtaining the subsidy at all costs, believing that a low subsidy was better than no subsidy at all.

It is also worth remembering that the specificity of EHB is the lack of the cumulation rule. Winning projects will be prohibited if EHB support is combined with other mechanisms. With a bid of less than EUR 0.50/kg, projects apply for a lower level of subsidy than the level for which they would otherwise be eligible.

Therefore, the auction does not enable the construction of certain projects, and the auction result does not make or break the business case. What is the basic need for public financing of the project with a minimum financial gap? In these circumstances, it is hard to believe that the EHB auction changes the European renewable hydrogen project, enabling a mass and convenient final investment decision.

It is also striking that the winning bids are located in areas with abundant energy resources (Iberia and the Nordics), which lowers the costs of green hydrogen. However, most of our European industrial CO2 emissions occur in Germany, the Benelux countries and France, where our refineries, steel furnaces and ammonia units are essentially located. Will we wait ten years, if not longer, for a pipeline to solve Europe’s existing emissions?

Ironically, the Hydrogen Bank’s funding comes from the EU’s Emissions Trading Scheme (EU ETS), under which the largest donors are based elsewhere than the winning projects. We see that projects located in these countries are structurally unable to compete and therefore depend on national programs.

How to adapt European support?

The outcome of this first auction raises two main questions:

1. Is it worth bidding on projects located in countries that have not introduced the auction service (AaaS) at the next EHB auction?

We believe that this first auction sent a terrible signal to most entrepreneurs: regardless of the maturity of their project, a financing gap above EUR 50/kg has no chance of success in the hydrogen bank. So should they give up and stop investing sweat, tears and money into their project? In our opinion, the opportunities for hydrogen production in Europe are not equal.

To contribute to the EU’s decarbonization target, renewable hydrogen (as one of the solutions to achieving this target) must be available in sufficient quantity and at competitive costs to consumers where it is already needed to decarbonize existing emissions.

Until the EU has a working hydrogen backbone, it must encourage the production of hydrogen from renewable sources near areas where it will also be consumed. The beauty of an IRA is its simplicity. If a project ticks certain boxes, it is eligible for a grant of up to $3/kg. It is significant enough to enable specific projects and limited enough to kill non-competitive projects. The subsidy is awarded when the project is launched. If this is too difficult for the Commission to implement, it should at least consider a regional criterion, focusing on allocating funds where CO2 has already been emitted.

2. Should the EU continue to provide subsidies if the market gap between renewables and gray energy is so small?

The bids are more illustrative of bidders’ appetite for subsidies and fearless competition to obtain them than of the actual difference between gray hydrogen and renewable hydrogen. The sector’s demand for grants is so great that project developers are willing to underbid and abandon alternative support options to ensure minimal public support rather than risk not receiving a cent. This dynamic shows the desperate need for public support for renewable hydrogen producers.

The EU is ahead of the world by taking an important step in defining what sustainable hydrogen means. An additional step is the setting of mandatory targets for the industry and transport sectors set under the Fit for 55 Package. However, without penalties and significant subsidies, these are insufficient to convince recipients and create a market aligned with EU targets for hydrogen production.

The value of the renewable hydrogen molecule remains to be determined through appropriate carbon tax avoidance (EU ETS) and penalty avoidance for failing to meet mandatory targets (Renewable Energy Directives II and III). The latter still requires transposition into national law. But will the Commission pursue Member States for failing to implement the RED targets when it is widely expected that most of them will simply not achieve them and the tone of the European Parliament election campaign is leaning towards a pause on the European Green Deal?

As a result, as a first mover, the EU’s demand mobilization efforts may deteriorate while the United States and Japan move faster. The support focuses on the offer, not the demand, which is not effective enough. It is tempting to recommend taking inspiration from the other side of the pond and relying on the EU’s qualifying criteria to set an automatic bonus for renewable and low-carbon hydrogen.

However, EU funding remains limited without the possibility of broad mobilisation of Member States’ budgets, which clearly limits the EU’s ability to follow the US in this respect. This means that the EU must make the most of its tools, whether they are carrots to improve the EHB or sticks to ensure that Member States meet the hydrogen targets set out in its regulations. The hydrogen bank lacked realism. We can do better.

Reference

1. https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX%3A52023DC0156

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