The European Hydrogen Bank (EHB) concluded its second green hydrogen auction two weeks ago, selecting 15 renewable hydrogen production projects for public funding across the European Economic Area (EEA) and awarding €992 million in subsidies.
The selected projects secured feed-in premium tariffs ranging from €0.20/kg to €1.88/kg – levels some observers judged as very low, raising doubts about the viability of the projects. The tariff will be paid per kilogram of hydrogen produced. Developers must find offtakers independently, with the premium tariff added to the market price of hydrogen, which in Europe currently exceeds €5/kg.
European Commission figures show that the auction was four times oversubscribed, receiving 61 bids across 11 countries and requesting a total of €4.88 billion.
EU quotas
“The winning bids came in at about the level we were expecting. They were similar to the pilot auction last year, albeit with a slightly wider spread which is understandable given that this auction attracted less bidders than the pilot,” Wood Mackenzie hydrogen analyst Mark Thomton told pv magazine, referring to the first EHB auction in May 2024, which awarded nearly €720 million to seven projects across Finland, Norway, Portugal and Spain, with final bids ranging from €0.37/kg to €0.48/kg. “We were not surprised by this level across the winning bids. The auction was highly competitive and following the results of the pilot auction, developers will have been aware that the clearing price was likely to come in below €2/kg. One potential reason for the low prices may have been developers bidding at a level they feel gives them a chance of securing a subsidy instead of bidding at a level they need to guarantee project viability – which means something is better than nothing.”
According to BloombergNEF analyst Martin Tengler, the selected developers were able to submit very low bids because the European Union has binding quotas to use green hydrogen from 2030.
“The so-called RED III quotas make buyers willing to buy green hydrogen,” he told pv magazine. “They impose that 42% of Europe’s hydrogen is sourced from green hydrogen by 2030. This is incentivizing buyers in certain member states of the EU to look at these new projects, even though grey hydrogen is less expensive.”
However, member states must still implement these quotas at the national level.
“Although the deadline for doing it was May 21, only a minority of member states have done it so far,” Tengler explained. “The difference between the latest and the first auction is that we have three winning projects from these two countries, which have higher hydrogen production costs compared to Spain. This was made possible only by the RED III quotas, which in Germany and the Netherlands were passed between the first and the second auction and are being mulled in Germany.”
Tengler said the certainty that the selected projects will find buyers has increased, but they likely do not have any binding agreements yet.
“These buyers are going to be existing users of gray hydrogen such as fertilizer or ammonia producers, and refineries, as well as maritime and aviation companies,” he said.
Feasibility concerns
Thomton said the levelized cost of hydrogen (LCOH) for selected projects can vary widely depending on factors such as location, power sourcing strategies, optimization, and equipment sourcing.
“One unknown Spanish bid reported an LCOH of €3.1/kg which is highly competitive but achievable for very well-designed projects,” he noted. “But in general, these subsidy levels will not yield cost parity with grey hydrogen meaning developers will be dependent on securing off-takers that are willing to pay a premium for green hydrogen. The relatively low levels of funding awarded mean that securing the subsidy is by no means a home run for developers, and it is unlikely all of the awarded capacity from this round materializes by 2030.”
He added that although there is insufficient visibility to assess whether any specific technology underpinned the lowest bids, factors such as electrolyzer type influenced LCOH.
“However, no specific technology is likely to have had a greater impact on LCOH than the power sourcing strategy which remains the most important component of LCOH,” Thomton said. “So far, we have seen little evidence of economies of scale really impacting project costs. Most industry participants still lack project execution experience and supply chain immaturity means that we are yet to see significant cost savings unlocked at larger scales.”
Tengler noted that these developers cannot receive subsidies from any source other than the auction.
“There is no subsidy stacking allowed for them. Which is something that hydrogen lobby groups in Europe are seeking to change. Indeed, the incentive these projects won may not be enough to secure project financing,” he added. “There is a chance that some of them may not sign the financing agreements, as happened for one of the Spain-based projects selected in the first EU auction.”
Tengler added that several projects selected in the second auction had not been publicly announced by their developers.
“That is also why it is difficult to make any prediction about project feasibility at this stage,” he said. “We are not familiar enough with many of these projects. If the ratio is the same as in the first auction, where only one of the seven selected projects ended up pulling out, we may have a 10-20% failure rate. I currently assume that not all of these projects will go ahead.”
Hydrogen prices
Tengler said the auctions successfully incentivize hydrogen production and sales, even if they are not always designed to achieve the lowest prices under current market conditions.
“If the aim is to maximize hydrogen use, the auctions are a good answer,” he claimed. “If the aim is to reduce emissions at the lowest cost, then maybe there are cheaper options.”
Tengler said the energy sector must reduce both renewable energy and electrolyzer costs to lower hydrogen prices.
“When it comes to hydrogen costs and prices, however, we have to consider that there is no real market for green hydrogen right now,” he explained. “The only real reference we have currently is the LCOH that a project developer needs to receive per kg of hydrogen they produce over the lifetime of the asset.”
BloombergNEF estimates place the global LCOH between €4/kg in China and over €10/kg in Japan, with Germany at about €9/kg, indicating that final prices could be substantially higher.
“Hydrogen must be transported, stored, and other things must be done before you can start using hydrogen,” stated Tengler.
Thomton noted that hydrogen production costs in Germany and the Netherlands are higher than in Iberia and the Nordics, but said it is encouraging to see projects from these markets win awards in the latest EU tender.
“Furthermore, the average LCOH of German bids was notably lower than in the pilot auction, indicating that some developers are making progress on cost reductions,” he concluded.
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