Green premium remains for renewable hydrogen after EU's 1.5-GW auction result

The low clearing price for the EU's inaugural European Hydrogen Bank auction, with funding for 1.5 GW of electrolysis across seven successful projects, shows a willingness to pay a "green premium" by offtakers, industry representatives said.

The first auction under the European Hydrogen Bank mechanism cleared well below the ceiling price on April 30, with the seven winning projects bidding at 37-48 euro cent/kg (40-51 cents/kg) for a total 1.58 million mt of hydrogen over 10 years, much of it on the Iberian Peninsula.

Platts, part of S&P Global Commodity Insights, last assessed the cost of green hydrogen production via alkaline electrolysis in Spain, backed by renewable power purchase agreements, at Eur7.15/kg ($7.63/kg) on April 30, up from Eur4.01/kg at the start of the month.

While the price calculation assessment reflects costs for typical merchant producer meeting EU Renewable Energy Directive requirements, and not necessarily the lowest-cost producer in the region, the EU subsidy still leaves some ground to cover.

"This auction's results show that the willingness to pay a green premium is present both in industry as well as in mobility end-users, resulting in relatively low public subsidy needs overall," industry group Hydrogen Europe said in a statement.

However, "given the relatively small budget, winning bids are not representative of the whole market," it said.

Hydrogen Europe CEO Jorgo Chatzimarkakis said prices could rise in the near term, before dropping and stabilizing longer term.

European Commission data showed bid prices ramping up steadily, with over 2 million mt more green hydrogen over 10 years bid at below Eur1/kg. The vast majority of bids came in below Eur2.50/kg.

Green premium

Copenhagen Infrastructure Partners, involved in the two largest successful projects -- the 500-MW Renato Ptx Catalina project in Spain and MadoquaPower2X's project of the same size in Portugal -- said the grant awards brought the projects closer to a final investment decision, "reducing the gap between cost price and sales price."

Madoqua Renewables said its project in Sines would be operational in 2028 at the latest. Projects must be operational no later than late 2029 under the terms and conditions of the EHB auction.

Madoqua CEO Rogaciano Rebelo told S&P Global that a premium remained for renewable hydrogen production costs, after the EHB subsidy.

"There will always be a green premium associated with 'green' products," Rebelo said in an email May 1.

"Subsidy alone cannot bridge the gap between gray hydrogen and RFNBO [renewable fuel of non-biological origin] hydrogen. Subsidy is an enabler and just one of the key ingredients in the recipe of bridging."

Other elements were solar radiation intensity, wind availability, regulation on the use of fossil-based energy resources and scaling alternative production technologies, along with the development of the RFNBO hydrogen market.

"All these elements together will gradually depress the cost gap between grey and RFNBO H2 over time," Rebelo said.

However, he noted that renewables-derived production "inherently commands a premium which needs to be considered within the pricing mechanism."

Offtake sectors

The seven successful bidders from the EHB's first round represent a varied pool of offtake sectors, including refineries, low-carbon ammonia and gas-grid injection, analysts with S&P Global said.

EU fuel producers and industry have to use renewable hydrogen to meet RFNBO targets, mandating a 42.5% renewable share for hydrogen in industry by 2030.

Industrial users are willing to pay a lower price for renewable hydrogen, while aviation buyers are on the higher end, according to S&P Global analysis.

"Compliance buying is emerging as a major driver of project development," S&P Global Commodity Insights hydrogen and low-carbon gas analyst Anastasia Pantazopoulou said. "The combination of consumption mandates, competitive auctions and regional cost differences is defining Europe's hydrogen landscape."

Winning bids under the EHB auction must be able to demonstrate they have lined up offtakers, with at least 60% of production volumes covered by memorandums of understanding or other similar pre-contractual agreements.

Future rounds

Some in the industry called for a revision of the auction criteria for future rounds.

"The full potential of the European Hydrogen Bank as being a central instrument to help decarbonize hard-to-electrify sectors with renewable hydrogen is not being realized yet," Orsted EVP Europe Olivia Breese said in a LinkedIn post on May 1.

Breese called for a "drastic budget increase" to unlock the renewable hydrogen volumes needed, in addition to clear visibility on future auction rounds with clear budgets and timelines.

Funds should also be indexed to hedge against inflation, and there should be a focus on hard-to-electrify sectors.

A second auction round is expected in the autumn, with a budget of Eur2.2 billion.

The EC has indicated it plans to lower the price ceiling to Eur3.50/kg and reduced the timeframe for project startup to three years following subsidy grant, according to draft terms and conditions published by the EC on April 30.

The Commission is also proposing a budget flexibility rule for an additional 20% of the total budget, based on the pipeline of projects received.

However, "altering completion bids requirements based on current results would be premature," Hydrogen Europe said, given the relatively high levelized cost associated with other bidding projects.