The European Hydrogen Bank: Will the EU finance the hydrogen revolution?
Hydrogen has long been mentioned in EU strategies as a key resource for the energy transition. But so far a major obstacle has been the high cost of producing renewable hydrogen. This is likely to change with Ursula von der Leyen’s initiative to establish a European Hydrogen Bank, announced on 14 September 2022 during the 2022 State of the Union address and outlined in concrete plans in March 2023.
Ambitious plans of the European Union
The hydrogen strategy of the European Union from 2020 provides that by 2030, electrolysers with a capacity of up to 40 GW are to operate in the European Union, enabling production of up to 10 million tonnes of renewable hydrogen per year.
Additionally, the REPowerEU programme, announced as an EU response to Russia’s invasion of Ukraine, foresees importing 10 million tonnes of renewable hydrogen per year.
However, these ambitious plans are hindered by the cost of producing this type of hydrogen, still two to three times higher than the cost of producing hydrogen using fossil fuels.
Announcement of the European Hydrogen Bank
On 16 March 2023, a detailed communication on the European Hydrogen Bank was published on the European Commission’s website. In it, the Commission pointed out that Europe is already a world leader in the hydrogen value chain. There are 840 entities operating in the hydrogen sector, and member states have already announced initiatives under which electrolysers with a total capacity of 40 GW are to be in operation by 2030.
In line with the Commission’s goals, the European Hydrogen Bank will provide transparency on hydrogen demand, supply, flows and prices, as well as play a coordinating role and facilitate linkages with existing financial instruments supporting hydrogen projects.
Anticipated financial needs
According to the Commission’s communication, to produce 10 million tonnes of renewable hydrogen per year in the EU, new renewable energy sources with a total capacity of 150 to 210 GW will need to be built. This will require an outlay of EUR 335–471 billion, including:
- EUR 200–300 billion to build additional renewable capacity
- EUR 50–75 billion to build electrolysers
- EUR 28–38 billion for construction of dedicated gas pipelines
- EUR 6–11 billion to build additional storage capacity.
In turn, the cost of building a value chain enabling the import of 10 million tonnes of renewable hydrogen into the European Union is estimated at EUR 500 billion.
The vast majority of these expenses are to be borne by private investors. EU funds to support these ambitions will come from Horizon 2000, the Clean Hydrogen Joint Undertaking, the Innovation Fund, the IPCEI mechanism, national recovery and resilience plans prepared by member states, and the Connecting Europe Facility.
To ensure the profitability of renewable hydrogen production in the coming years, the subsidy for its production is expected to be around EUR 3–5 per kilogramme, which will decrease as costs are optimised. The Commission assumes that the total amount of subsidies from EU funds for the 20 million tonnes of renewable hydrogen that the EU plans to procure by 2030 will be EUR 90–115 billion.
Structure and tasks of the European Hydrogen Bank
The main goal of the European Hydrogen Bank will be to guarantee financing to cover the difference between the costs of renewable hydrogen and its emission-based counterparts. In carrying out this task, the bank will rely on four pillars:
- Auctions to subsidise the production of renewable hydrogen
- Imports of renewable hydrogen to the European Union
- Hydrogen market coordination
- Coordination of existing European and international funding sources.
Pillar 1: Auctions to subsidise the production of renewable hydrogen
Financed by the Innovation Fund, these auctions will be launched in the fall of 2023. Their goal is to match demand and supply in the EU internal market, support the reduction of costs of renewable hydrogen production in the most cost-effective way, remove administrative barriers, and reduce risks for investors, and as a result, reduce the cost of capital.
To enable the widest possible participation in the auctions starting as early as 2023, workshops aimed at potential participants will be held this May.
The object of the auction will be support for the production of renewable hydrogen in the form of a fixed subsidy for each kilogramme of hydrogen produced over a period of 10 years. The budget for the first auction is to be EUR 800 million. The auction will be conducted by the European Climate, Infrastructure and Environment Executive Agency.
Additionally, the Commission has proposed a mechanism to harmonise the rules for auctions conducted by member states on an auction-as-a-service basis. The member states will be able to grant support to national entities that participated in the bank’s auction but did not receive support in the auction. Paid by the member state, this support will be subject to notification of state aid.
Pillar 2: Support for the import of renewable hydrogen to the European Union
Imports of renewable hydrogen to the EU are expected to take place mainly by sea at first. This requires ports to be equipped with infrastructure to accommodate suitable vessels. Also, the communication indicates the need to include hydrogen imports under the CBAM system from 2026.
The Commission envisages the use of a financial support system for renewable hydrogen imports analogous to the auctions for support of renewable hydrogen production in the EU. In preparing the support mechanism, the Commission will take into account the need to minimise the risk of dependence on imports of renewable hydrogen from third countries, as well as the need for sustainable use of water resources.
Pillar 3: Coordination of the hydrogen market
It will be the bank’s task to collect information on the hydrogen market from its participants, clustered around industry agreements, to facilitate access to them and create appropriate price benchmarks. The bank will also collect and make available to market participants information on hydrogen flows in the EU and information on letters of intent, to provide the fullest possible access to an up-to-date knowledge base on the hydrogen economy in the EU.
Pillar 4: Coordination of existing funding sources
Another task of the European Hydrogen Bank is to support the cross-sectoral exchange of knowledge on hydrogen and to improve awareness of support measures under various aid and financial instruments of the European Union and member states. Using the accumulated knowledge and expertise, the bank is expected to support member states in combining the measures they have prepared to support the hydrogen economy with EU funding.
All four pillars of the European Hydrogen Bank are expected to be fully operational by the end of this year, but the rules for the bank’s operation will be the subject of further work and possible amendments.
Hopefully the foregoing mechanisms, particularly support for hydrogen production in the form of competitive auctions, will become a permanent feature of the European market. Indeed, as the experience of auctions for renewable generation shows, they can contribute enormously to a rapid decline in the cost of supported technologies.
Igor Hanas, adwokat, Rafał Pytko, Energy practice, Wardyński & Partners