The European Hydrogen Bank as an Element of Support for the EU Hydrogen Strategy

The global energy mix includes fewer and fewer fossil fuels and more and more renewable sources. The energy transition and the implementation of the so-called Green Deal are gaining momentum, new energy ecosystems are being created, and new technologies are emerging. These changes help develop renewable energy sources, develop new energy carriers, improve energy efficiency, reduce emissions and create new markets for coal and other by-products as part of a circular economy. At the same time, many of the decarbonisation measures being undertaken, such as increasing the share of electricity, the large-scale use of renewable energy and intensification of energy efficiency measures, constitute a unique challenge.

The European Union (EU) aims to achieve climate neutrality by 2050. The efforts towards a zero-emission net economy are the cornerstone of the European Green Deal and are in line with the EU’s commitment to global climate action under the Paris Agreement. The European Clean Hydrogen Alliance has identified 840 hydrogen projects in all parts of the value chain, referred to as the ‘project pipeline’.

Project pipeline of the European Clean Hydrogen Alliance <https://single-market-economy.ec.europa.eu/industry/strategy/industrial-alliances/european-clean-hydrogen-alliance/project-pipeline_en> accessed 10 April 2023.

The Commission is currently designing an auction system under the new competitive tendering mechanism. The first round is to take place in autumn 2023 with an initial budget of €800 million and is open for domestic producers and exporters outside the EU. The funds will be distributed as a fixed premium per kilogram of hydrogen produced for a maximum of 10 years. The new funds will be made available at a later stage. It is estimated that €1 billion will allow producing 50,000 tons of hydrogen from renewable sources, a fraction of what the Commission is seeking. The Commission’s preliminary estimates suggest that €90–115 billion is needed to offset the green hydrogen cost gap and to fund 20 million tons by 2030.

EU Hydrogen Bank could bring renewable hydrogen costs below 1 euro/Kg <https://fuelcellsworks.com/news/eu-hydrogen-bank-could-bring-renewable-hydrogen-costs-below-e1-kg/> accessed 10 April 2023.

The target of producing 10 million tons of hydrogen from renewable sources would require 80–100 GW of installed power in electrolysers (currently the figure is approx. 160 MW). This means that the EU market of green hydrogen is facing numerous investment challenges, including increasing the production capacity of electrolysers, increasing new hydrogen production capacity, opening up new sectors of demand for renewable and low-carbon hydrogen, and developing hydrogen infrastructure.

Europe currently is the location of more than 30% of the world’s hydrogen projects.

Hydrogen Insights Report, September 2022. Report authored by Hydrogen Council with McKinsey and Company, p. 5-8. Available at <https://hydrogencouncil.com/en/hydrogen-insights-2022/> accessed 15 April 2023.

In just a few decades, all energy needs (including electricity, industry, transport, buildings, agriculture) will have to be met using emission-free sources. This entails the necessity of enormous changes within little more than one generation and will require innovative solutions, technologies and policies. To achieve its climate goals and comply with the recommendations of the IPCC2, the EU has committed to transforming its electricity, transport, buildings and industry sectors to become fully or nearly carbon-neutral by 2050. Moreover, the pressure to decarbonise the European economy, including the use of green hydrogen, has been increased by Russia’s invasion of Ukraine and the ensuing energy crisis. In the medium and long term, the importance of renewable energy sources (RES) and their derivatives will continue to grow, offering not only the most competitive energy generation costs, but above all the much-desired energy independence. However, renewable and nuclear energy sources alone will never be able to meet all our energy needs, therefore hydrogen is likely to play a key complementary role. The hydrogen economy will probably become an integral part of the EU economy much sooner than expected.

Mainstreaming green hydrogen in Europe (2020) Material Economics 4 <https://materialeconomics.com/latest-updates/mainstreaming-green-hydrogen-in-europe> accessed 10 April 2023.

In the context of decarbonisation of the energy system, over the last 2 years there has been a very rapid increase in interest from industry, governments and other stakeholders in the potential of hydrogen.

See e.g. Martin Lambert, ‘Hydrogen and decarbonisation of gas: false dawn or silver bullet?’ (2020) 66 The Oxford Institute for Energy Studies. Energy Insight 5 et seq; Ralf Dickel, ‘Blue hydrogen as an enabler of green hydrogen: the case of Germany’ (2020) 159 The Oxford Institute for Energy Studies. OIES Paper 3 et seq.

On 8 July 2020, the European Commission published the EU’s Hydrogen Strategy,

Communication of 8.7.2020 from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. A hydrogen strategy for a climate-neutral Europe, COM (2020) 301 final.

The publication of the EU’s Hydrogen Strategy has become an important step towards decarbonising the energy system, and provides a framework for further, more detailed work on implementation plans. It clearly demonstrates the enormous extent of the challenge and, if the ambition is to be realised, the urgent need for government action to support individual large-scale renewable hydrogen production projects. It is worth noting that, unlike certain previous documents, the strategy recognises the potential role of low-carbon fossil fuel–derived hydrogen, at least in the period of transition towards the end goal of renewable hydrogen. While the strategy provides for an open, competitive and liquid hydrogen market with unrestricted cross-border trade in the long term, it is not yet certain how this will be achieved after the period of subsidies and incentives needed to justify the very significant investment to build the infrastructure as needed.

Martin Lambert, ‘The EU Hydrogen Strategy. A case for urgent action towards implementation’ (2020) The Oxford Institute of Energy Studies. Oxford Energy Comment 5 et seq.

As made clear by the provisions of the PEPowerEU plan,

Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions of 18.05.2022 rePowerEU Plan, COM (2018) 230 final.

The documents published by the EU bodies clearly show that one of the priorities has become the implementation of hydrogen infrastructure for the production, import and transport of 20 million tonnes of hydrogen by 2030. The cross-border hydrogen infrastructure is still underdeveloped, but the basis for planning and development has already been laid by integrating hydrogen infrastructure into modernised trans-European energy networks. It is estimated that total investment needs for the main categories of hydrogen infrastructure range between €28 billion and €38 billion for EU internal pipelines and between €6 and €11 billion for storage. Furthermore, to facilitate the import of up to 10 million tonnes of renewable hydrogen, the Commission plans to support three main hydrogen transport corridors across the Mediterranean, the North Sea area and, as soon as conditions allow, from Ukraine.

By publishing the REPowerEU plan, the European Commission has completed the hydrogen strategy, which affirms Europe’s growing ambitions concerning renewable hydrogen as an important energy carrier with the aim of abandoning imports of fossil fuels from Russia. In the Commission staff working document accompanying the plan,

Commission staff working document implementing the RePower EU Action Plan: Investment needs, hydrogen accelerator and achieving the bio-methane targets, accompanying the document Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and the Social Committee and the Committee of the Regions REPowerEU Plan, 18.5.2022, (SWD/2022/230).

Activities planned as part of the accelerator focus on speeding up the introduction of renewable hydrogen, ammonia, and other derivatives in sectors where emission reduction is difficult (such as transport) and in energy-intensive industrial processes. Increasing the development of hydrogen infrastructure and supporting investment in hydrogen have been identified as key areas to support the promotion of hydrogen in the EU.

One of the measures for accelerating hydrogen technologies is to create a global European Hydrogen Bank as a guarantor of investment security and business opportunities for European and global production of hydrogen from renewable sources.

The European Hydrogen Bank. Kickstarting the European hydrogen market. Hydrogen Europe Position Paper, March 2023 <https://hydrogeneurope.eu/wp-content/uploads/2023/03/2023.03_Hydrogen-Bank_H2Europe_paper.pdf> accessed: 29 March 2023.

The EHB will offer financial support for hydrogen projects, attenuating one of the fundamental barriers to economic development, and can indeed become a catalyst for private sector investment in hydrogen production, infrastructure and end uses. In the initial period of market development, support is also necessary to eliminate significant differences in financing between the production costs and the willingness to pay among green hydrogen recipients.

Mateusz Kubiak, ‘Europejski Bank Wodoru. Warto uzupełnić go również polskim mechanizmem wsparcia’ (22 March 2023) BiznesAlert <https://biznesalert.pl/europejski-bank-wodoru-mechanizm-gaz-wodor-energetyka/> accessed 5 April 2023.

By supporting innovation and technological progress, the Bank may contribute to reducing the costs related to the production and use of hydrogen. But it should be noted that the initial funding granted to EHB may prove insufficient to support investments that will stabilise the EU’s green hydrogen economy. To maximise its impact, the EHB may need additional funding from EU Member States. Extending the support to a minimum of 15 years should also be considered, which would ensure sufficient financial visibility and depreciation for production assets. Therefore, taking into account the level of support of €3 Kg for 15 years, the sum of €3 billion would be enough to support the annual production of only 66,667 tonnes of hydrogen.

Calculations by Hydrogen Europe (March 2023), available at https://hydrogeneurope.eu/> accessed 10 April 2023. Hydrogen Europe is the European association representing the interest of the hydrogen industry and its stakeholders and promoting hydrogen as an enabler of a zero-emission society.

Moreover, the EHB may face challenges in selecting the most promising projects for financial support, which may lead to the allocation of resources to less efficient or unsustainable projects. The only criterion during internal auctions will be the price, which may lead to the concentration of support in regions where, thanks to geographical conditions favourable to RES, hydrogen production is the cheapest. Moreover, the mechanism as announced does not provide for the indexing of premiums, which may expose the beneficiaries to price risk. It should also be noted that the EHB’s focus on large projects and cross-border cooperation may unintentionally exclude smaller players, such as local hydrogen producers and start-ups, who could also benefit from financial support. The EHB should consider implementing mechanisms to support smaller-scale projects and promote a more diverse hydrogen ecosystem.

Bartłomiej Kupiec, Europejski Bank Wodoru to game changer czy utracona szansa?’ (6 April 2023) BiznesAlert <https://biznesalert.pl/europejski-bank-wodoru-zeop-energetyka-gaz-wodor/> accessed 7 April 2023.

Over time, the original concept of green premium auctions could be extended to further reduce the risks arising from the uncertainty of reception agreements by establishing an intermediary to hold bilateral auctions. Such an intermediary would sign contracts with both the producer and the recipient. This approach is already being pursued by a German foundation, H2Global.

The stability, predictability and reliability of the framework for additional renewable energy and hydrogen projects in a potential supplier country is a key factor for future hydrogen recipients who make large-scale investment decisions and provide long-term financing.

The main objective behind the establishment of the European Hydrogen Bank is to support private investment in the hydrogen value chain, both in EU countries and in third countries, by linking the supply of renewable energy with demand in the EU and by addressing the initial investment problems – the sum of €3 billion has been assigned for this. The Bank is intended to establish an initial market for renewable hydrogen, which will open up new opportunities for development and generate jobs. In February 2023, the EC announced that the Bank would support production of green hydrogen under the model of contract for difference, offering to projects competing in the auction a fixed premium for every kilogram of hydrogen produced in the period of 10 years.

The European Hydrogen Bank and the support provided by it in the form of competitive auctions may become a central axis for the development of the EU hydrogen market. The experience with auctions for renewable energy generation shows that they can significantly contribute to a rapid reduction in the costs of technologies being supported. The proposed system may facilitate the development of hydrogen technologies by providing a clear and transparent mechanism of funding, and this in turn could help build a more diversified energy system in which hydrogen plays a complementary role to other low-carbon energy sources.

The EU will support partner countries in accelerating their transition towards green energy by, inter alia, technical assistance and support in creating a favourable governance, legal and business environment, as well as mobilising the investments needed in renewable energy and energy efficiency.