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2023 Innovation Fund Pilot Auction: Economic Terms and Conditions for renewable hydrogen production

by Sam Williams

The European Commission's Innovation Fund is one of the world's largest funding programs for low-carbon energy technologies. In addition to the current grants program, the European Commission is developing a new way to support green hydrogen projects: Competitive bidding (aka auctioning).

In line with Innovation Fund's objectives, competitive bidding will support electrolysers, whose market penetration is held back by lower costs of incumbent fossil-based technologies and high-risk perception by financial markets. The scheme will seek cost-efficiency in awarding the support to green hydrogen producers, thus minimizing production costs and maximizing the leverage of private capital.

On 31 March 2023, the European Commission published the draft of economic terms and conditions of this year's Innovation Fund pilot auction for hydrogen production. This pilot for hydrogen production forms a key pillar of the European Hydrogen Bank (EHB), focused on EU-domestic market creation.

Overall , the instrument has a well-designed market orientation, and it is potentially effective in securing sufficient hydrogen (or derivatives) volumes by closing the funding gap between the cost of producing green hydrogen, on the one hand, and the price off-takers are willing to pay, on the other hand. Supply-side auctions broadly provide incentives for expanding electrolysis capacity.

Following our Policy Report “Design Options for a European Hydrogen Bank” we went further in depth on how to maximize the efficacy of supply-side premiums through our feedback towards DG CLIMA's stakeholder consultation: 

  • Matchmaking : The role of the domestic pillar of the European Hydrogen Bank should support matchmaking between hydrogen suppliers and demand side, prioritizing sectors that cannot benefit from electrification. To steer initially limited hydrogen volumes to hard-to-abate demand sectors, bilateral agreements between producers and off-takers (EG MoUs) should be clearly incentivized, and should have a more explicit role in the auction. 
  • Contribution to the decarbonization of hard-to-abate sectors: Given the limited budget of the EHB, high production costs, uncertain technology uptake, intrinsic inefficiencies of hydrogen as an energy vector, and the need to develop a sound strategy, suppliers' contribution to decarbonizing key hard-to-abate sectors should be reflected in the suggested ranking of bids.  
  • Sustainability : Transport methods and proximity between suppliers and off-takers (measured through company-level MoUs) should be considered in the ranking, and in the tiebreaker rules at the least, to reduce the risk of leakage, disincentivise eg, fossil-fuel- run ships, and reduce overall costs. Use of water and its availability where electrolysers are located should also be considered. While there is no significant threat of lack of freshwater availability in Europe, there should be, at the least, a comprehensive understanding of what kind freshwater sources are best suited for electrolysis,and baring fewer negative consequences on local communities. 

Considering the potential of member states to increase the funding of the EHB for domestic projects, potential future higher decarbonization targets, and the future increase of funding for such auctions, including these measures in the bidding rules would bare important positive consequences in the long run. 

We're happy to attend the workshop organized by DG Clima on May 16, 2023 to discuss the feedback and next steps.