European hydrogen auctions with a focus on Germany, UK, Denmark, and the Netherlands

Hydrogen auctions have emerged across the globe in recent years to subsidise and promote the production and use of renewable hydrogen as an alternative to fossil fuels. The EU, individual member states and the UK have all designed and held their own auction/subsidy schemes to bolster the green hydrogen markets in their respective countries.

Green hydrogen (i.e. hydrogen electrolysed from power generated from renewable sources) has a much lower greenhouse gas impact compared to conventional ways of producing hydrogen. As such, more cleanly produced hydrogen is expected to play a key role in the decarbonisation of hard to abate industries and various transport sectors. Green hydrogen however, costs almost 2-3 times more than conventional ways of producing hydrogen, with electricity input and the cost of the electrolysers accounting for much of the production costs.

The announcement by European Commission President, Ursula von der Leyen on 20 November 2023 that the second of the European hydrogen auctions will be held during 2024 is being watched with interest. Not least because non-European nations such as Japan are also launching hydrogen auctions, giving global investors the choice of where to pick as the most promising destination for their investment.

In this article, we consider the lessons learnt from the first European hydrogen auction (the results of which were announced on 30 April 2024) together with lessons emerging from four domestic renewable hydrogen schemes that are being advanced in Europe today (in the UK, Germany, the Netherlands and Denmark).

Each of the above has ambitious hydrogen production goals:

• The EU aims to produce 10 million tons of renewable hydrogen per year by 2030 (and to import the same amount).
• Both the UK and Germany have targets to achieve 10 gigawatts (GW) of renewable hydrogen electrolyser capacity by 2030.
• Denmark aims to build between 4 to 6GW of renewable hydrogen electrolyser capacity by 2030.
• The Netherlands aims to have the capacity to produce at least 4GW by 2030.

The success of the support schemes deployed by the above will be critical to incentivise the production and use of renewable hydrogen and to meeting the countries respective green hydrogen goals.

European Hydrogen Bank Pilot Auction

The European hydrogen auction administered by the European Hydrogen Bank (EHB)¹ and subsidy schemes, introduced by the European Commission and various individual countries, saw seven hydrogen production projects awarded €720 million in April 2024.

This was the result of the pilot auction launched in November 2023. Under the scheme, renewable hydrogen producers were invited to submit bids for EU support, with successful projects to be awarded a subsidy on top of the market revenues that they generate from hydrogen sales, for up to 10 years.

The pilot auction, which closed on 8 February 2024 attracted 132 bids from projects located in 17 European countries. The bids represented 8.5 GWs of electrolyser capacity capable of producing 8.8 million tonnes of hydrogen over a 10 year period. Annually, this output could cover almost 10% of the EU’s REPowerEU ambition for domestic renewable hydrogen production in 2030.

However very few projects were successful in the pilot auction which was stacked from lowest to highest price and within the limited auction budget. It is not yet clear if the selected projects have in fact signed their auction grant agreements.

In the pilot auction, applicants had to meet the following criteria:

• Projects must be based in the European Economic Area;
• Projects must have 5MW electrolyser capacity and be in the pre-construction phase;
• Hydrogen must be classified as a renewable fuel of non-biological origin (this means that the overall total volume of hydrogen produced must achieve as least 70% greenhouse gas savings compared to a fossil fuel comparator on average during the support period);
• Projects should be operational within five years of the grant agreement being signed; and
• Projects must be backed by a completion guarantee from a bank or financial institution, covering 4% of the maximum grant amount.

In line with European state aid requirements, projects already in receipt of alternative funding from other national or EU funds were not eligible for support. Projects with existing funding are only permitted to apply for the subsidy in certain cases, such as when financial support has been received for project and capacity development or for transport and storage infrastructure.

Germany's Participation in Hydrogen Auctions

Of the highlighted countries, Germany stands out for using the European hydrogen auctions to supplement its domestic efforts. Following the close of the European pilot auction, in April 2024, Germany, with the approval from the European Commission, launched its domestic renewable hydrogen subsidy scheme that aims to provide funding to projects that were unsuccessful in the European pilot auction.

For this, Germany has allocated €350m of funding (supplementing the €800m earmarked for European projects through the EU Innovation Fund) for supporting domestic hydrogen projects.

Price is also the key parameter in Germany, with projects ranked by their bid price. As such, Germany is able to support German projects where the European Innovation Fund budget is insufficient. Using the “auction-as-a-service” model, the scheme eliminates the need for Germany to conduct its own separate auction at a domestic level, avoiding replication of the assessment process already undertaken by the European Hydrogen Bank and reducing the administrative burden and costs for all parties.

Because Germany is ‘piggy-backing’ in the European pilot scheme, the projects must meet the same eligibility criteria required by the European Hydrogen Bank, and must also follow the state aid notification process to avoid distortion of competition and trade within the EU.

Denmark's Experience with Hydrogen Auctions

In contrast to Germany, Denmark chose not to wait and follow the European model. Instead, Denmark held Europe’s first national auction for green hydrogen in 2023. The Danish scheme pioneered a process under which the Danish Energy Agency selected six projects with a combined electrolyser capacity of 280MW for subsidies, allocating the tender's full budget of $176.9 million. Much like the EU pilot scheme discussed above, under the Danish process, the projects with the lowest requested subsidies won the round and were awarded support as a fixed subsidy price over the period of 10 years. These projects must start operating by late 2027.

Holding this auction has allowed for Denmark to gain an indication of the need for support in the renewable hydrogen space as well as allowing for price transparency between hydrogen producers.

Netherlands' Strategy for Hydrogen Auctions

The Dutch approach has been more supranational compared to the countries highlighted here. In November 2023, the German and Dutch governments announced plans to host a joint auction to import green hydrogen or its derivatives in early 2024. They plan to provide €300m each of subsidies with the aim of jointly procuring hydrogen from a single supplier.

The governments intend to utilise the double auction model used by the German foundation H2Global auction platform, which buys quantities of green hydrogen via auctions abroad and passes them on to customers in the EU in the same way, but at the lowest prices that the market can bear. The difference between the purchase price and the market price is offset by the €600m of subsidies.

Alongside the joint import auction scheme, the Netherlands has its own green hydrogen subsidy schemes, known as the OWE. This scheme subsidises companies producing electrolytic hydrogen and is made up of two parts:

1. A contribution to the costs of the electrolyser installation which is paid out during the development phase; and
2. A contribution to the operating costs paid out during the operating phase of the plant.

The subsidy can be used for the development and operation of renewable hydrogen plants with a minimum capacity of 0.5MW up to a maximum of 50MW and awards contracts ranging from 7-15 years in length.

The Dutch government allocated €245.6 million to the first subsidy round in 2023 and seven projects (totalling 101MW capacity) were awarded subsidies. A second OWE subsidy round is planned for 2024. Given that over €600m was applied for in the first round, the Dutch government has decided to increase the 2024 budget to €998.33m.

UK's Approach to Hydrogen Auctions

Unlike the auction schemes deployed by the EU, Denmark and Germany, the UK has opted for a contractual approach (a contract-for-difference) awarded currently through bilateral negotiations in what are known as the Hydrogen Allocation Rounds (HARs). The HARs are designed to support low carbon hydrogen production by covering the difference in operating costs between low carbon hydrogen and traditional fossil fuels (i.e. gas plant).

UK projects that meet the eligibility criteria of each allocation round can apply to receive support for hydrogen sold in a qualifying manner under the low carbon hydrogen agreement over a 15-year period.

The first HAR took place in July 2022, following which 11 successful projects were offered contacts totalling 125 MW capacity. Given that revenue support only starts to be paid to the successful projects once they become operational, with the first projects expected to be operational from 2025, no subsidies are expected to be paid yet. To meet the UK’s hydrogen targets, the second HAR allocation was launched on 14 December 2023 seeking 875MW of electrolyser capacity. The applications for HAR2 closed on 19 April 2024.

Hydrogen Auctions – Future Outlook and the Innovation Fund 2024 Auction

The European Commission plans to release its own information about the successful bids, expected costs of hydrogen production and the lessons learned from the pilot auction. Thus far both the European Commission and the industry have been supportive about the scheme and the design chosen. That said, some commentators have suggested the inclusion of provisions promoting regional balance in the second auction could ensure that all EU regions have equal access to the funding support and opportunities for growth. Given the varying starting points and different EU directives specific industries must comply with, commentators have also suggested that implementing sector-specific bids in the second auction round would allow projects in different sectors, competing with similar projects in their own sector to win a portion of the funding.

Therefore when the 2024 round is launched by the Innovation Fund, a key funding instrument for delivering the EU’s economy-wide commitments under the European Hydrogen Bank, it is widely expected that the auction terms will include a number of modifications. Some of the revised elements are likely to include:

• The auction ceiling price being reduced from 4.5 to 3.5 EUR/kg.
• The entry into operation time being reduced from five to three years.
• The requested amount of the completion guarantee being increased from 4% to 10% of the requested grant amount.
• More detailed information, particularly on the electrolyser’s origin and value chain, being requested as part of the electrolyser procurement strategy.
• Projects ensuring that they have off-take secured for at least 60% of the proposed hydrogen production volume.

Comparative Analysis

Commentary and Conclusion

Hydrogen production subsidies continue to be exceedingly sought after - all five schemes discussed here have been oversubscribed. What is clear too is the limitation of the subsidy focusing on production and not enough on ensuring there is infrastructure investment for a hydrogen network to develop.

The importance of investment in supportive infrastructure cannot be understated in creating a viable green hydrogen market. Taking Denmark as an example, the country is expecting its hydrogen pipeline project ‘the Hydrogen Backbone’ to be completed by 2028 (when the winning auction projects will be operational). The Hydrogen Backbone is expected to connect the auction winning projects to Germany, where end users can purchase the hydrogen.

In general, the long term success of such schemes lies not only in the underpinning infrastructure, but also in whether demand from hard-to abate industry sectors (such as steel, glass, transport and chemicals) can be boosted in subsequent auctions. These sectors will be the largest potential consumers of renewable hydrogen and increased demand from them will be critical in enabling the market to achieve an effective critical mass.

In terms of the design of the auctions, industry members have raised concerns over the long term profitability of the selected projects under the EU and German auction schemes. As the main purpose of the auctions is to fill the cost gap between green hydrogen and fossil fuels, an absence of inflation indexing at the application and award stage may mean that developers could win low bids but once producing, projects may struggle to compete against cheaper fossil fuelled alternatives. Furthermore, current experience shows that buyers are reluctant to lock in long-term green hydrogen purchase agreements at high prices if they believe future volumes may be significantly cheaper.

As winning the bid in the auction will not guarantee the project can produce competitively priced hydrogen, developers may see the US (which in short, can provide up to a $3/kg hydrogen production tax credit, to reduce the expected cost of hydrogen production) as a more attractive subsidy market as developers can be guaranteed a tax credit if they meet the lifecycle emissions criteria.

Interestingly, the scope of cross-border openness varies from scheme to scheme. Whilst the UK’s support focuses on domestic projects, other EU member states, (Germany and the Netherlands in particular) are pioneering schemes to develop partnerships, infrastructure and supply routes to promote an interconnected international hydrogen supply network. The double auction procurement system H2Global, which other countries such as Australia look to join for the import of foreign hydrogen into Germany, offers long term take off contracts with renewable hydrogen producers globally and is shaping up to be a key tool in forging a global hydrogen import/export market.

As Europe gets set for the next hydrogen auction, it is key that industry lends its voice to the process. For example, the European Commission invites feedback to the European Climate, Infrastructure and Environment Executive Agency by 6 June 2024 and on 12 June 2024, a stakeholder consultation event is planned to discuss the draft terms and conditions. If future schemes are met with the same levels of industry participation and governmental investment in associated infrastructure, the auction schemes will put these countries on the right path to achieving their ambitious green hydrogen goals.

¹ The EHB was an initiative launched by the European Commission to facilitate the EU's domestic production and imports of renewable hydrogen.

With thanks to Faduma Mohamud for assistance with this article.