The EU has put billions of euros in public funding on the table for green hydrogen projects, and now has regulations in place defining exactly what it considers “renewable” H2.

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But developers are disgruntled by the long, arduous process of accessing these subsidies, which they say holds them back from taking final investment decision (FID) on projects.

“In Europe, the process is too long, it is not really clear,” Valerie Ruiz-Domingo, vice president of hydrogen at French utility Engie, told the Connecting Hydrogen Europe conference in Madrid on Wednesday.

In order to receive aid directly from the EU via the Innovation Fund or from national governments by receiving IPCEI (Important Project of Common European Interest) status, “it takes more or less two years between when you put [in] the application and [when] maybe you will be selected — or not, you don’t know”, she added.

While billions of euros in state aid have supposedly been unlocked by the two IPCEIs announced to date, some member states have been slow to hand out subsidies promised months ago to projects.

“We have to wait for months until the response comes, so we don’t know what the response is going to be, and even if it’s positive, we know it’s not going to be enough,” said Ana Quelhas, managing director of hydrogen at Portuguese utility EDP.

The company received IPCEI status for three Spanish hydrogen projects in September 2022, but has still not received any finance from the national government. Quelhas added that the upcoming elections and a potential change in administration present “another question mark” on when and how these projects will get funding.

“It’s really difficult for us as a renewables developer and as a developer in green hydrogen to come to final investment decision,” Quelhas said. “If you asked me a year ago where we would be today, I would have answered that we are much more advanced than we are now when it comes to the development of projects.”

And in order to comply with the Delegated Acts for the EU’s updated Renewable Energy Directive, “it will increase the cost” of producing green H2, Ruiz-Domingo said.

She added that this has led to greater interest in developing projects in Latin America because “because you know the renewable sourcing is more affordable” and “you don’t have a lot of overregulation”.

Ruiz-Domingo praised the clean hydrogen production tax credit in the US as “simple” compared to what is on offer in Europe, since it automatically kicks in once a project application is approved.

“We don’t need to prepare all those hundreds of pages… we just need to have a project that makes sense,” agreed Quelhas, noting that tax credits are “cheaper” for developers to process and “much better understood by the financial community”.

However, she added that the US is currently undergoing a “heated debate” on what criteria projects will have to meet to receive the full $3/kg tax credit, and may ultimately implement similar rules to Europe on only allowing the use of “additional” renewables projects, rather than pre-existing ones.

But despite calls from industry, an EU-wide fiscal instrument such as the US production tax credit may be impossible to put in place.

“We’re not the United States, we don’t have a federal government that can make a tax plan that applies a different tax threshold and a different tax regime to the whole of Europe,” said Alan Haigh, policy advisor at the European Commission’s directorate-general for research and innovation.

“Tax is not a competence of the EU, tax is a member state competence,” he added, noting that a tax credit similar to what is offered in the US would need to be organised by a coalition of member states.

However, although Haigh argued that “the European Union is not giving nothing in terms of moving projects from research to innovation to deployment”, he also conceded that the funding instruments for large-scale projects, such as the Innovation Fund, are necessarily much more time-intensive.

While the EU’s €95.5bn Horizon Europe fund — which is focused on R&D rather than deployment — has a 90-day limit between a proposal being submitted and a result being signed off, the €10bn Innovation Fund, which provides cash for commercial demonstration of innovative low-carbon technologies, takes longer to decide on awards since projects have to demonstrate “financial maturity”.

It also only gives 40% of an awarded grant before the plant is up and running, with the remaining payments only unlocked once the project proves it has successfully abated emissions.

“It is public funding, and it’s not something that the auditor is just going to let go when we’re [spending]… taxpayer’s money,” Haigh noted.

Meanwhile, the EU’s lending arm, the European Investment Bank, is “eager to support projects”, according to Ana-Maria Vidaurre, head of renewable hydrogen structuring and strategic partnerships at Spanish oil company Cepsa.

But “these projects need to be bankable because they can only support part of the financing and the rest must… come from commercial banks”.

This could be difficult for hydrogen project developers, since private lenders are reluctant to back a high-risk, nascent sector without a clear source of revenue — and prospective buyers are often unwilling to contract volumes in the short term due to the huge cost gap between renewable H2 and “grey” molecules produced from unabated steam methane reforming.

Opex support

While a production tax credit may not be feasible in the EU, the industry is calling for more subsidies to support projects once they are up and running.

“Most of the subsidies we see right now are capex-oriented subsidies, which is nice in an early development phase, but I think we’re looking at a technology that rapidly needs to scale up. And that will require a completely different funding mechanism,” said Marcel Galjee, managing director at Dutch project developer HyCC.

While this focus on capex [capital expenditure] is “great for innovation”, he anticipates that the EU will have to adopt “an opex-style [operational expenditure] support mechanism” similar to the feed-in-tariff for renewables in order to accelerate projects.

The European Commission plans to award hydrogen producers a fixed payment of up to €4/kg through an upcoming auction system — via the yet-to-be-finalised European Hydrogen Bank — in order to plug the cost gap between renewable and grey H2.

But delegates at the conference are cautious about pinning too much hope on this set-up.

The biggest problem is that the rules for the auction have not yet been published and the first one is not due to be held until December.

The European Hydrogen Bank is “too uncertain” to plan around, Quelhas told Hydrogen Insight on the sidelines of the conference.

However, the H2Global double-sided auction, in which a German government-owned company buys green H2 from countries outside the EU and then sells it on to buyers, was highlighted by Ruiz-Domingo to Hydrogen Insight as a “great” initiative.

The H2Global scheme was recently adopted by the Netherlands, and the EU would like to roll it out across the bloc.

‘Laws can be changed’

The matter of whether a regulatory framework has even been set in stone, and therefore provide developers with enough certainty to take FID, is also contested by the industry.

“Laws can be changed, regulation can be changed. And if you look at the lead times of the project, and then the construction time, and then the payback time, you have to have security and certainty of regulation before you take FID until the end of the project,” said Gabriel Clemens, CEO of utility EON’s green gas division.

While the panel’s moderator, Samuel Ogunlaja, a partner at law firm Gisbon, Dunn & Crutcher, pointed out that potential for legal frameworks to change after FID is taken is the case for any project in any sector, Clemens argued that even in newer energy sectors such as liquefied natural gas, “we already have players in the market, some kind of liquidity, some kind of experience”, while hydrogen is still “at the beginning”.

As such, the industry is still pushing for the Delegated Acts — signed into law last month — to be revised in order to lower the cost of renewable H2 production, albeit at the risk of adding extra demand to the grid that may have to be met by fossil fuel-fired power plants.

“It’s not about not having regulation, but balancing and putting enough regulation to make sure things are not going completely wrong, that kickstart the projects and the market,” said Tomas Malango, director of renewable fuels at Spanish oil firm Repsol, while criticising the additionality principle in the Delegated Acts.

He added that this kind of soft regulation was seen in the renewable energy market 25 years ago, which enabled a rapid scale-up.

“If the policy of Europe… is to push one sector, then regulation needs to help or move [it] forward, and not interrogate every single defect of things that we say we support,” agreed Antón Martínez, CEO of Spain’s Enagás Renovable.

The European Commission is required to submit a report to the European Parliament and Council on the impact of the Delegated Acts by 1 July 2028 — which could prompt a redrafting of these regulations, although that could take a further two years.

“The disadvantage of regulating in detail is it takes too long,” noted Clemens.

And the clock is ticking on having enough projects on line by 2030 to meet the EU’s target of ten million tonnes of renewable H2 produced domestically.

Assuming development takes two or three years and construction another two, “that means in the coming two to three years, all these projects need to be under development”, Galjee said.

The EU also still lacks a clear framework to meet its second goal of importing ten million tonnes of green H2 from outside the bloc by 2030.

“If you want to have really a market, liquidity of the market, we need to have guarantees of origin or certification to be able to trade renewable hydrogen,” Ruiz-Domingo pointed out.