The European Commission has proposed an upper limit of €4/kg ($4.4/kg) for the fixed premium or contract for difference (CfD) potentially available to green hydrogen project developers bidding for subsidies via competitive pilot auctions due to launch in the autumn.

Project developers must plan to produce the bid volume of hydrogen over a minimum of ten years, the Commission proposes in a consultation on the details of the auction.

Projects must have a minimum 5MW of electrolyser capacity but are capped at bidding for 33pc of the auction round’s €800mn budget, according to the consultation.

“Agreements with the power producer, offtaker and financer essentially need to be in place before projects can bid, and auctions take place this autumn” Ganbold, Aurora

The Commission also proposes that bidding developers must have in place pre-contractual arrangements—such as a memorandums of understanding or letters of intent—with an offtaker, an equipment manufacturer, a lender to issue the completion bond requested at grant signature, and a renewables project willing to supply a ten-year power-purchase agreement (PPA) covering 90pc of planned electricity usage.

However, given competition for PPAs and the reluctance of potential offtake markets to sign hydrogen purchase agreements, this could herald a scramble for developers to get contracts in place over the coming months, analysts says.

“The main challenge I see is that agreements with the power producer, offtaker and financer essentially need to be in place before projects can bid and auctions take place this autumn,” says Anise Ganbold, head of research for global energy markets and hydrogen at consultancy Aurora Energy Research.

“As it is a pilot, the volumes are small,” Ganbold adds. The auction round’s budget could “support roughly 200MW of electrolyser capacity, though the range varies widely—as low as 180MW if all projects received the full €4/kg and 700MW or more if €1/kg is paid out on average”, she says. The expected 200MW capacity would be similar to the UK’s current round for electrolytic hydrogen projects, which is capped at 250MW.

The EU will also only support projects for a maximum of ten years after entry into operation, which must take place up to 3.5 years after the auction. Projects will also be unable to ‘stack’ subsidies, such as state aid through Important Projects of Common European Interest status or other EU funding programmes. Similarly, offtakers will be excluded if they access operational support for buying the hydrogen, although infrastructure or capex support—as long as it is not used for construction of dedicated infrastructure—will be allowed.

However, the EU is still mulling the exact mechanism of support between a CfD—as used by the UK for its hydrogen business model—a fixed premium contract in the vein of the US $3/kg tax credit, and a carbon CfD. The last option would cover the difference between the strike price and a reference price as derived from an average price of EU ETS allowances. The consultation runs until 11 May, followed by discussion workshop on 16 May.

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Author: Polly Martin