Ref. Ares(2023)2585819 - 12/04/2023
Non-paper, 11 April 2023
Competitive bidding under the EU’s hydrogen bank:
How to make it work for the climate
Ensuring access to hydrogen for hard-to-abate industries
with the highest GHG abatement potential
1. The context
The European Commission has started to set up the Hydrogen Bank. Its primary aim is to spur
investments in Europe’s hydrogen economy to achieve the EU’s 2030 hydrogen production and
consumption targets.
Two new financing mechanisms will be set up: one granting support for hydrogen production in the EU
and another one supporting hydrogen production in third countries. The Commission has decided to
focus first on supporting European renewable hydrogen production. The aid wil be granted under the
umbrel a of the Innovation Fund through the newly foreseen competitive bidding scheme. A pilot
auction is planned for autumn 2023 with a tentative budget of 800 mil ion euros. The aid is expected
to be granted as a fixed premium (a fixed subsidy to be received by the producer per ton of hydrogen
produced).
2. The challenge
The European Commission gave initial indications on the envisaged auction design over the last
months, notably through its communication from 16 March 2023 on the European Hydrogen Bank. In
addition, the draft economic Terms and Conditions (T&C) of the 2023 Innovation Fund pilot auction
published on 31 March provide further detail.
While some fundamental decisions, such as striving for a simple and lean support scheme, go in the
right direction, an important question remains unanswered: Given that green hydrogen wil remain a
scarce commodity for the foreseeable future,
how to ensure that the aided hydrogen production
will deliver the highest impact in the fight against climate change?
Sectors such as the steel industry rely on the availability of large quantities of affordable renewable
and low-carbon hydrogen to decarbonise by switching from coal-based primary steel production to
hydrogen-based production. At the same time, they offer the highest greenhouse gas abatement
potential per ton of hydrogen used (for steel, more than 25 tons of CO2 abatement per ton of hydrogen
used). Consequently, policymakers should prioritise the use of hydrogen in these sectors. From a
climate policy perspective, relying simply on each sector’s capacity to pay could lead to an inefficient
al ocation of scarce resources.
Source: Rocky Mountain Institute, January 2020, Hydrogen’s Decarbonization Impact for
Industry Near-term chal enges and long-term potential
. Link.
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Non-paper, 11 April 2023
3. The way forward
To ensure that supported hydrogen delivers the highest impact in the fight against climate change, the
European Commission should implement prioritisation in the auction design of the competitive bidding
scheme – at least during the initial development phase of the hydrogen market.
Therefore, aid should only be granted to projects delivering hydrogen to the hard-to-abate
sectors with the highest greenhouse gas abatement potential per ton of hydrogen used and
with no commercially and technically viable alternative options to decarbonise, such as steel.
Such an obligation should be enshrined in the
prequalification requirements. Concretely, project
developers should have to provide proof of an offtake agreement (MoU, LoI) with one or several off-
takers from a prioritised hard-to-abate sector. The European Commission should define the list of
prioritised sectors based on the best available scientific evidence and enshrine them in the
Terms and
Conditions of the Innovation Fund pilot auction for renewable hydrogen production (as an
offtaker restriction). The Terms and Conditions shal also foresee sanction for aided projects final y not
delivering the hydrogen to offtakers from the defined priority sectors. Currently, the draft Terms and
Conditions1 foresee no offtaker restrictions while acknowledging the risk that the subsidised hydrogen
might end up outside hard-to-abate sectors.
Prioritisation aligns with the EU’s hydrogen strategy that foresees a step-wise approach to developing
the hydrogen market, focusing on a few hard-to-abate sectors before wider deployment after 2030. It
also contributes to the REPowerEU plan of prioritising hydrogen use in industrial applications to reduce
Europe’s dependency on fossil fuel imports from Russia.
Introducing prioritisation in the auction design would also be in line with the recommendation by the
research consortium advising the European Commission on the set-up of the competitive bidding
scheme:
“At least in the short- to medium-term, green or low-carbon hydrogen wil be a scarce energy carrier.
Therefore, its use should ideal y be restricted to hard-to-abate sectors where no other more efficient
and competitive options exist for reaching climate neutrality. This implies that green or low-carbon
hydrogen should mainly be directed at basic industries and long haul-transport.”2
1
https://climate.ec.europa.eu/system/files/2023-
03/policy_funding_innovation_draft_term_conditions_pilot_auction_en.pdf 2 Frauenhofer ISI, Guidehouse (2022): Options for a competitive bidding mechanism under the Innovation Fund - general
assessment and two specific options.
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