Is the European Hydrogen Bank a game-changer?

• The European Hydrogen Bank is due to hold its first tender in autumn 2023
• The 'bank' is looking to deploy €3bn to support green hydrogen projects
• Potential bidders want reassurances that bidding schemes will be viable

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Europe’s green hydrogen industry is under pressure. The Biden administration in the US came out with its $369bn Inflation Reduction Act last August, including generous incentives that Goldman Sachs said makes utility-scale green hydrogen profitable. In the seven months since, the European Union (EU) has been scrambling to respond.

We’ve seen a lot coming out of the EU in the last two months.

On 1^st February, it unveiled the EU Green Deal Industrial Plan, through which it aims to strengthen European incentives to support the rollout of low-carbon technologies, including green fuel production. Its plan includes the Net-Zero Industry Act and Critical Raw Materials Act. While the EU does not have the same ability to shape national policies as the White House in the US, it can still provide a supportive framework for its 27 EU member states.

The European Commission followed that announcement on 10^th February by finally adopting ‘additionality’ rules that specify the terms under which hydrogen and other related fuels can be classed as ‘green’. These are set to come into force in 2028 to ensure that green hydrogen projects use electricity from new renewable generation, which is meant to ensure that they are not harming the green electrification of grids by taking up existing capacity.

And last week, the EU and US announced new measures to improve cooperation in areas including raw materials for low-carbon projects, and ensure that incentives for low-carbon projects between the regions are “mutually reinforcing”.

But there is one part of the puzzle where information is still emerging: the EU’s plan for a European Hydrogen Bank, which was announced last September with a goal to invest €3bn to help green hydrogen projects in the EU reach financial close. The goal is to make green hydrogen bankable and help Europe respond to the IRA.

Bridging financial gaps

The European Hydrogen Bank isn’t really a bank. Rather, it is an EU financial support mechanism where a first bidding round is due this autumn. Johanna Schiele, policy officer at the European Commission’s Innovation Fund, shared more information at a webinar run by the Renewables Hydrogen Coalition last week. This happened before the Commission outlined further information last Thursday (16th March).

She said green hydrogen is the “only viable pathway at this point to deep decarbonisation” in sectors including steel-making, fertiliser production, and heavy transport. She said it was vital to accelerate growth in green hydrogen now to ensure that, for example, new steel factories can be built as environmentally-friendly as possible.

“If you build a new steel plant… this thing lives for 50-60 years, so we really have a long lock-in effect. That is the only reason why we are even considering bridging that cost gap which is, in effect, a subsidy. But we’re also very aware we can’t subsidise sectors forever,” she said, adding the EU needs to see green hydrogen technology costs to fall significantly too.

The European Commission is due to hold a consultation with the private sector on the proposed design of the first auction in May, ahead of bidding in autumn 2023. The ‘bank’ is looking to support two types of projects: those inside the EU and those outside that supply the EU. The first tender is set to focus on those based in the EU.

Schiele said that the EU plans to hold fixed-premium auctions, similar to the use of Contracts for Difference in renewables, where developers can bid for a fixed subsidy for green hydrogen created over ten years. She said cost would be the main factor in its decisions between projects, but added she expected firms with off-taker interest in their fuel would be able to bid lower as they would have more clarity on their costs.

The first auction will be a good indicator for how much interest there is from different industrial sectors in Europe to buy green hydrogen, and how much they are willing to pay. Schiele expected “a few dozen” projects to be at a stage where they could bid in this auction and said the EU wanted to be the “best accelerator possible”.

Pre-qualification rules

Other speakers in the webinar applauded the EU’s goal to quickly set up a tender under the European Hydrogen Bank initiative and to make sure developers find it simple to bid. But they also expressed concern that would-be bidders should have to meet pre-qualification criteria to show they have viable projects near financial close.

Rasmus Matthiessen, manager of regulatory affairs for power-to-X at Ørsted, said he backed the simple fixed-price mechanism, but said there were some criteria that the EU could use to prioritise projects that will be able to secure support.

He said these include financial guarantees in the form of performance bonds, so the bidders are financially liable if they fail to meet the terms of the subsidy contract. He also said bidders should be able to show a memorandum of understanding with off-takers for their fuel, including discussion of volume and price, to ensure that they are able to sell the fuel created; and that developers should be able to show they have permission to use sites, with vital utilities in place including water and electricity. If the project requires hydrogen pipelines, they could also show they are confident those pipelines will be in place at project completion.

Matthiessen said: “We want it to be relatively strict, so it is solid projects that will bid in, but not so strict that we limit competition, because that competitive pressure is really important to make sure there is an efficient award of funding here.”

The European Hydrogen Bank has the potential to help some developers in the EU to bridge financial gaps at their developments, but those in the industry need greater clarity over the rules. The EU's contortions over the meaning of ‘additionality’ shows how fraught these discussions can become. Developers also need clarity over what timescale that €3bn investment is due to be deployed.

But the 'bank' looks like an important initiative that could spark final investment decisions at a crucial time for Europe's green hydrogen sector.