The results of the EU’s first European Hydrogen Bank (EHB) subsidy auction were both surprising and unsurprising.

The level of clearing prices was unexpectedly low. The winning bids ranged from €0.37–0.48/kg ($0.40–0.52/kg) of hydrogen produced, far below the auction’s upper limit of €4.50/kg. This may imply some strategic bidding by projects willing to take a financial hit in return for first-mover advantage, one EU official suggested.

However, the geographical spread of the winning bids—five in Spain and Portugal, and two in Scandinavia—appeared to confirm what we already knew: Europe-based competitive green hydrogen production, in a post-subsidy market, is going to be based for the most part on Iberia’s solar and wind, and Scandinavia’s hydropower.

Where does this leave merchant green hydrogen producers in northwest Europe? Analysis of the EHB results implied significantly higher levelised cost of hydrogen in Germany than in southern Europe. For offtakers, it will of course be all about the final cost of hydrogen delivered to the factory gate, possibly offering producers sited near German demand centres an advantage. But southern European producers seem confident they can deliver at highly competitive rates, assuming the availability of a pan-European distribution network.

Spanish energy firm Cepsa says green hydrogen can be produced at below €2.8/kg—nearly half the cost in northern Europe—thanks to a unique combination of abundant sun, wind and space in Spain’s Andalusia region.

Direct cost comparisons between regions can be tricky. The role of surplus ‘spillover’ power, often at negative prices, will play a role in all European markets. This will offer electrolysers opportunities to mop up cheap power, but also challenges in reconciling massive fluctuations in the cost and availability of power inputs with the need for baseload hydrogen output for industrial offtakers.

Import dependence?

Despite the challenging economics and regional dynamics, all European governments have ploughed ahead with subsidy regimes aimed at delivering green hydrogen production at scale. The pressure to contribute to the net-zero project and to create green jobs, as well as being seen to protect future energy security, will shape government thinking for some time to come.

However, Europe will ultimately have to confront the global market forces surrounding green hydrogen. Its overall import dependence could be as high 80% as its own installed capacity of renewable fails to keep pace with demand from wider electrification, let alone green hydrogen production.

About 166GW of additional renewable capacity could be needed in Europe by 2030, just to power electrolysers, according to one speaker at the recent World Hydrogen 2024 Summit in Rotterdam. That sounds like a stretch given the ongoing challenges in areas such as planning, available space and grid capacity. European governments will ultimately have to set aside some their supply security anxiety and put their trust in wind and solar rich suppliers in regions such as the Middle East and North Africa.

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Author: Stuart Penson