Innovation Fund Auction – subsidies for green hydrogen projects

The year 2023 is drawing to a close - and it is already clear that it has been marked by the market ramp-up of green hydrogen. Following the adoption of the long-awaited Delegated Regulations on green hydrogen (we reported) by the Commission and the revision of the Renewable Energy Directive by the Parliament and Council, the Commission is now opening the pilot auction for hydrogen production. The funding will come from the EU's Innovation Fund, which is fed by the European Emissions Trading Scheme and serves to promote innovative low- or zero-emission technologies. A total of 800 million euros will be distributed to projects for the production of hydrogen from renewable energies over a period of ten years.

Procedure

The auction will be open from 23 November 2023 until 8 February 2024 and will proceed as follows:

Interested hydrogen producers submit their project and state the subsidy amount ("bid price") with which they believe they can offer green hydrogen competitively. This bid price may not be higher than EUR 4.50 per kilogramme of green hydrogen produced ("ceiling price"). Eligible bids are then sorted exclusively according to the bid price and the funding budget is distributed accordingly; however, there is no limit to the number of projects that can be funded. A single project can receive funding totalling a maximum of EUR 266.7 million.

Requirements for participation

In order for a project to participate in the auction, it must meet certain requirements. These are set out in the "Terms & Conditions" (T&C) published on 30 August 2023. We provide an overview here:

The hydrogen must be produced with newly installed electrolyser capacity of at least five MWe, and this capacity must be located at the same site. Pooling of small plants is not permitted. In addition, the interested project developer must offer or undercut the ceiling price set at EUR 4.50/kg. The price calculation must be based on a ten-year period. It may include investment costs for infrastructure; however, these costs will not be assessed or taken into account separately when evaluating the bids.

The requested funding amount may not exceed the maximum possible funding for a project, i.e. EUR 266.7 million. The Commission also requires a completion guarantee of 4 per cent of the grant amount applied for. This is intended to ensure sufficient financial resources and avoid speculative bids. The completion guarantee must be finalised no later than two months after the Commission has informed the participating company of its successful participation in the auction.

The hydrogen must also comply with the greenhouse gas emission saving target of 70% under the Renewable Energy Directive.

As the pilot auction is part of the national pillar of the European Hydrogen Bank, the project presented must be located within the European Economic Area. However, this geographical criterion does not apply to the investors in the project; in this respect, general principles of state aid law apply, in particular the prohibition of aid to companies subject to sanctions.

Furthermore, the project must not yet have been started. The first measure that makes an investment irreversible counts as a start. The Commission considers this to include the start of construction work or the ordering of (construction) materials, but not preparatory measures such as the purchase of land. The project must be realised within a maximum of five years from the conclusion of the funding agreement; if this period is exceeded, the agreement is terminated.

Documentation to be submitted

Applicants must submit a number of documents to the Commission's “Funding & Tenders Portal” by the deadline in order to prove that they fulfil the eligibility requirements:

• the applicant's funding model with details of
  • bid price,
  • electrolyser capacity (in MWe),
  • (expected) average annual volume of hydrogen production (kg/year) over a production period of ten years;
• a project schedule (e.g. Gantt chart);
• information on the participant and its shareholders, if any;
• strategies for
  • sourcing electricity from renewable energy sources with detailed information on, among other things, the electricity supplier, the energy source, the connection to the energy source and the price structure,
  • hydrogen off-take,
  • price hedging,
  • procurement of the electrolysers;
• proof of pre-contractual agreements with electricity suppliers / hydrogen off-takers for at least 60 percent of the required total electricity volumes during the project’s implementation period / hydrogen production and with a bank on the provision of a completion guarantee (e.g. in the form of letters of intent);
• proof of ongoing negotiations with the relevant authorities to receive environmental permits or (if required) grid connections;
  • various self-declarations of conformity regarding the fulfilment of participation requirements, i. a.a commitment to produce green hydrogen and to exclude cross-subsidisation of grey hydrogen
  • a declaration on the cumulation of aid.

Awarding of the funding

Whether the application fulfils the auction requirements is decided on the basis of the information contained in the above-mentioned documents. Eligible bids are then sorted according to the bid price.

If two applicants bid the same price, a decision will be made according to the following criteria:

• Preference for the project with the lower total funding amount;
• alternatively: Preference for the project from the Member State that has received less funding from the Innovation Fund so far;
• alternatively: Preference for the project with the earlier start date.

If a bid is accepted, the Commission will carry out an additional assessment of the applicant's financial capacity before signing the grant agreement.

Cumulation with other support

The T&Cs generally require that the hydrogen producer does not receive state aid. The few exceptions are limited to previous support measures for early project development phases (research, feasibility studies or FEED studies prior to commercial operation), previous aid for capacity expansion and aid for transport and storage infrastructure.

According to the additionality principle, the renewable electricity source for the electrolyser may also not receive state aid. However, this does not apply if the hydrogen producer starts production before 2028. The additionality principle also does not apply if the electrolyser draws electricity from the grid and the electricity running through the grid has emission values of < 18gCO2eq/MJ or a share of > 90% renewable energy. Beyond this, the rules of the Delegated Act on hydrogen production apply.

Cumulation-related restrictions with regard to contractual relationships with purchasers only exist if the purchasers receive operating aid for their hydrogen consumption or for the production of renewable fuels of non-biogenic origin. However, it is permissible to supply the hydrogen to customers who only receive aid for investments in hydrogen-based production processes that do not cover the additional costs of green hydrogen compared to grey hydrogen.

According to the T&C, subsidies to electrolyser manufacturers are considered not harmful.

Conclusion

The pilot auction will provide significant funding for the market ramp-up of green hydrogen. In addition, the results of the auction will offer valuable insights into the likely development of the hydrogen market.

Our EU/COMP team will be happy to advise you on all questions related to the green hydrogen pilot auction of the Innovation Fund.

We would like to thank Marcus Bauer Llana and Moritz Wiechert for their valuable support in the preparation of this article.