Hydrogen bank fails its mandate to decarbonise European industry

Publish date: September 7, 2023

The Commission published the final Terms & Conditions for the pilot auction to assign the first 800 million euros under the innovation fund via the Hydrogen Bank to support the scale up of European Hydrogen Production. Bellona had commented on the draft earlier this year, asking to align the rules of the Hydrogen Bank with the objectives of the Innovation Fund: decarbonising European industry. 

A huge missed opportunity to directly fund hard-to-abate sectors 

Given the enormous amount of electricity it takes to produce hydrogen, and the consequent high inefficiency of hydrogen to decarbonise most energy sectors, its use must be reserved for those sectors with no other decarbonisation pathways. However, despite the fact that the funding for the Hydrogen Bank come from the Innovation Fund which serves to finance the decarbonisation of the ETS sectors, under this auction no restriction on off-takers was included (condition 2.4). This was not even included as a ranking principle (1.7) which remains exclusively on pricing, and not even as a tiebreaker rule (3.9). 

The results of these pilot projects will most likely show that in absence of clear rules, the sectors that will receive the hydrogen are those most likely to be able to pay for it, rather than those that actually need it. It is of utmost importance to rectify this for the external leg of the Bank (or the financing of imports) and the upcoming auctions. 

A lot of public money in the hands of a few big producers, with hardly any obligations 

The maximum grant that can be awarded corresponds to 1/3rd of the total available funding (1.9 & 2.3). This will likely result in a couple of big producers  able to bid at a lower price thanks to economies of scale, receiving most of the money. This is another lost opportunity to decarbonise the distributed small scale hydrogen production that happens on industrial sites, which will continue to rely on unabated fossil-based hydrogen. 

Moreover, as the price ceiling was increased to 4.5 €/kg of hydrogen produced (3.7), the total amount of hydrogen financed through this scheme will be lower, concentrating even more subsidies for lower quantities of hydrogen. 

Finally, the claw-back mechanism remains missing (1.6). Thus, no matter the evolution of the level of cumulative return of the fixed premium and the strike price with off-takers, the producer will continue to receive the subsidy. As only a five-year precontractual agreement is required to apply for the funding, there is a high likelihood that after a certain period of time the strike price with off-takers will evolve, especially driven by the targets across legislation (RED, RefuelEU, FuelEU). This might result in inflated profits sponsored by public funding. Consequently, the subsidies provided by the Hydrogen Bank should be discontinued when the hydrogen producers can be profitable independently of it.  

Rules on renewables watered down 

Last but not least, the original qualification requirements (2.1) required a signed PPA with a renewable producer to cover 100% of the electricity used by the electrolyser. This was substituted by having to provide broader information on the business cases and electricity procurement strategy for at least 60% of the expected production volumes. Only hydrogen complying with the “additionality” delegated act will be able to be financed via the Bank, however, the current terms & conditions allow to finance a producer that also runs their electrolysers on carbon intensive electricity alongside its clean production. 

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