All potential designs for the €3bn ($2.9bn) European Hydrogen Bank are still in play, Hydrogen Insight has learned, as the European Commission (EC) scrambles to put together a new mechanism for H2 funding after it was unexpectedly announced by EC president Ursula von der Leyen last month.
Importantly, the Hydrogen Bank will not be a physical entity comparable to a typical bank, but an “instrument” that will strive to fill the gap between the price that hydrogen producers need to advance their projects and the price users are prepared to pay.
Justin Rosing, an official from the EC’s directorate general of energy, told Hydrogen Insight that the Commission is currently looking at a range of mechanisms to achieve this, backed with cash from the EU’s €38bn Innovation Fund.
“Auctions are a very useful way to get price transparency,” he said on the sidelines of the World Hydrogen Congress in Rotterdam today. “We’re looking at various ways it should be shaped. All options are still on the table. That’s where we stand at the moment.”
Europe's hydrogen sector was taken by surprise a few weeks ago when von der Leyen unveiled the Hydrogen Bank during her annual state of the union speech, without giving any details as to the bank's purpose or structure.
Speculation was rife that the bank would be used to purchase large volumes of green hydrogen to provide long-term certainty for producers and users alike.
“The initial idea is to look at contracts for difference [CfDs], to close the [producer-buyer price] gap with money from the Innovation Fund,” Rosen told Hydrogen Insight. “But we are currently still looking at how we should shape it. Alongside that perhaps at a later moment carbon contracts for difference [CCfDs] could work.”
The Hydrogen Bank funding will initially be focused on domestic hydrogen production, but may later expand to include international hydrogen production, Rosen said. In this regard, the EC is mindful that the design must align with Germany’s state-level H2 Global scheme, which is tendering for hydrogen supply on behalf of the country’s major hydrogen buyers.
In fact, the EC is considering implementing H2 Global’s double-auction scheme, where hydrogen tendered at the lowest possible price from producing countries under 10 year contracts, and then auctioned off again for the highest possible price in Europe.
“The initial focus is on domestic production, but we need to look at imports,” Rosen told Hydrogen Insight. “But obviously project risks if you are abroad are different so we’re really at the initial stage of exploring it. This is just one element along a very important funding resources and instruments we have created.”
Carbon contracts for difference
CfDs, in which developers are guaranteed a long-term fixed price for the energy they produce, with the difference between that and the wholesale price either topped up by the state or paid back by the developer, have long been established in the European energy markets as an effective tool for underwriting investment in capital intensive low-carbon projects, such as wind or solar farms.
Often CfDs are agreed via an auction process, in which producers bid for a contract with the lowest fixed price they can offer.
By comparison CCfDs are relatively new and would hinge on developers and state or EU-level regulators agreeing a long-term carbon price —most likely via an auction process — that would make the project economically viable and also accurately reflects the carbon abatement potential of the project. If the actual carbon price is lower, then the EU or state would top it up, if it is higher, the developer would pay back the difference.
The goal of contracts for difference is to provide long-term revenue certainty for projects that will smooth access to project financing, as well as allowing them compete with their polluting counterparts —in this case grey hydrogen made with fossil gas.
The EU has yet to agree or implement a system design for CCfDs, but it is currently overhauling the regulation for its carbon market, the Emissions Trading System (ETS), to accommodate the new mechanism.
A total of €3bn has been made available from the Innovation Fund to directly finance the Hydrogen Bank but the overhaul of the ETS would widen the scope of the Fund to include CCfD auctions within the ETS framework. It is as yet unclear whether this regulatory change would also increase the long-term funding.