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‘Hydrogen’s moment is here at last’ proclaimed the Economist back in 2021. Today, the bubble has burst. A recent report by BNEF said green hydrogen would remain much more expensive than previously thought for decades to come. The €2 per kilogram Ursula von der Leyen touted in a 2021 speech seems far-fetched now.
We’ve shown in 2020 and 2023 that hydrogen is no swiss-knife, miracle solution. Our graph visualising the inefficiencies of hydrogen production is famous. We believe “electrification first” should be the EU’s new energy motto.
And yet, we don’t want it to be “game over” for hydrogen. Hydrogen-based fuels remain an indispensable energy vector for ships, planes and fertilisers where electrification isn’t possible and bioenergy isn’t scalable.
That requires a new approach. To get e-ammonia, e-methanol or e-kerosene projects off the ground requires billions of euros in capital investment. Oil companies could make those investments but they are not. New entrants without limitless pockets cannot get financing without the guarantee that someone will buy their product at a price that supports their business case. The risk is simply too great.
Last year T&E identified 56 e-kerosene projects for the aviation sector and 61 e-fuels projects in development in Europe that could supply the shipping industry. But just a fraction of these have received a final investment decision (FID). Even then, flagship projects having received FIDs can still get cancelled.
How do you fix this?
The EU’s response was the Hydrogen Bank (EHB). The idea was to use a competitive auction to allocate fixed subsidies per kilogramme of renewable hydrogen produced in Europe. After the first round of bidding, seven projects were selected for a total of €720 million.
The hydrogen bank was a great innovation. But it’s not working.
The hydrogen bank’s competitive bidding mechanism led to winning subsidies averaging at around €0.50 for every kilogram of hydrogen - against an expected 2030 price of at least 6/kg in Spain, one of the countries with the most potential thanks to an abundance of sun and wind. The auction design led to a race to the bottom where companies just wanted to be on the winning list, and therefore made bids that were far too low to make their project economics viable.
Why? Seemingly, the project developers hope that having a stamp of approval from the EU will increase the project visibility, and that should be sufficient to raise private financing to bridge the gap. But without addressing the risk and offtake issue risk it is unlikely that any Hydrogen Bank winning projects will have long term viability and risk repeating the fate of the Orsted’s Flagship One, which was cancelled even after receiving a final investment decision (FID).
The problem isn’t just cost. Current ship and airline bunkering practices are based on short-term or spot contracts. They don’t buy fuel for the next ten years. In fact, neither are airlines or shippers subject to mandates requiring them to burn efuels. Oil majors are subject to an e-kerosene quota, but big oil is betting they can kill the EU’s mandate before it kicks in. Small subsidies won’t change any of that.
H2 global, a German initiative, offers a different approach. It’s based on the ‘double-auctions model’. First, there’s a government backed auction to buy for example e-ammonia. The best offer gets a long term contract with H2 global guaranteeing offtake. That gives the developer the confidence to go and raise capital and carry out the project. Then a second auction is held, this time trying to sell the e-ammonia, e.g. to the fertiliser or shipping industry.
How much these ‘demand’ sectors are willing to bid for green ammonia depends on their regulatory and market dynamics. The stronger the regulatory pressure, the more e.g. fuel suppliers or shipowners are willing to pay for hydrogen based fuels, and the lower the subsidy. The best is a simple quota like we have for aviation fuel suppliers but things like multipliers and pooling which exist in fuelEU maritime also help - although a quota on shipping fuel suppliers would be even better!
So the point is not to completely offset the green premium through taxpayers subsidies - ultimately shipping and aviation users need to pay for clean fuel - but to make multibillion euro investments a lot less risky. What is interesting is that H2 global started as a German scheme but has now attracted Dutch funding too (€300 million). It is also opening its tendering to European projects.
The EU’s carbon market for shipping and aviation is likely to raise over €10bn/year, with some of the money earmarked at EU level for investment in clean fuels, but most of the cash held by national governments. Why not use part of this money to build a H2 Global style EU hydrogen bank, or to ask H2 global to organise tenders for the EU?
Ursula von der Leyen was always a strong believer and promoter of hydrogen. She was the architect of the hydrogen bank 1.0. To save the useful bits of the hydrogen dream we need a H2 bank 2.0 If the EU succeeds in taking the risk out of investments, hydrogen’s moment could well be here at last. Europe’s shipping and aviation sectors are relying on it.
