Exploring One of The ‘Most Extensive’ Funding Programmes
The Innovation Fund’s total funding depends on the carbon price, and it may amount to about €40 billion from 2020 to 2030, calculated by using a carbon price of €75/tCO2.
The Fund focuses on highly innovative technologies and flagship projects within Europe that can bring about significant emission reductions.
The Innovation Fund aims to decarbonize the nascent and developing industries through innovative technologies. It is fully funded by the Emission Trading System (ETS). The goal is to invest in many different technologies and to share the technological risk of financing projects with project promoters.
The fund awards grants through calls for proposals (IF Grant) and through competitive bidding procedures (IF auctions).
The Grant program supports innovative low-carbon technologies and processes in energy-intensive industries, innovative renewable energy, storage and CCUS. The budget is allocated once a year via calls for proposals with windows for general Decarbonization (for small, medium and large scale projects), clean tech manufacturing and pilot projects for deep decarbonization. Since 2020, the Innovation Fund (grant) has provided around 2.5B€ to the hydrogen sector and is hence one the most important public funding support mechanism for the sector.
On Auctions, for now, the Innovation Fund supports the hydrogen sector through the Hydrogen Bank, with a total budget of EUR 3 billion. The Bank is a ‘pay-as-bid’ auction where producers bid for a fixed subsidy per kilogramme of renewable hydrogen produced. The goal is to bridge the price gap between current production costs and the price that hydrogen offtakers are ready to pay.
Why auctions?
Auctions were chosen as a mechanism for allocating support to renewable hydrogen projects because they effectively harness market forces to determine pricing, ensuring that subsidies are awarded efficiently.
The fixed premium model, in particular, allows for rapid execution, as projects are ranked primarily on price, streamlining the decision-making process (the IF Grant assessment of projects usually lasts around 6 months, while the assessment of the pilot auction projects was done in around 2 months).
While there are eligibility and pre-qualification criteria, this approach is significantly faster than conducting a full project assessment, such as in the IF traditional grant processes. During the first pilot auction, bids were submitted to receive support in the form of a premium for producing Renewable Fuels of Non-Biological Origin (RFNBOs).
Bidders requiring the lowest level of support were prioritized for subsidies, fostering a competitive environment where innovative and cost-effective solutions could thrive. This model has proven to be a simple and agile way to support renewable hydrogen production, de-risk projects, and facilitate price discovery.
Moreover, the transparent nature of the auction process builds trust among stakeholders, including project developers and policymakers, while accommodating a diverse range of project types and sizes.
Auctions-as-a-Service (AaaS)
The “Auctions-as-a-Service” scheme within the Hydrogen Bank allows Member States to finance additional projects that participate in the auction process after the Innovation Fund’s budget has been fully allocated.
This instrument enables Member States to identify and support competitive projects within their territories that have not received EU funding, all without the need for a separate national auction process. Participation in this scheme is voluntary for Member States.
To be eligible for selection under the “Auctions-as-a-Service,” project developers must express their interest in using this option when submitting their bids. Any support provided by Member States through this service will be classified as State aid, requiring them to notify the Commission of their support. However, they will benefit from a streamlined State aid approval process.
Germany has topped up the pilot auction with €350m in the first example of the initative’s auctions as a service model. This approved scheme is set to facilitate the construction of up to 90 MW of electrolysis capacity and is expected to incentivize the production of approximately 75,000 tonnes of renewable hydrogen.
Additionally, Austria has expressed interest in the tool and plans to contribute €400 million to fund additional national projects in the second auction.
A key aspect of this scheme is that Member States are subject to an additional ceiling in the auction process, which is set at three times the auction clearing price.
For instance, following the pilot auction with a clearing price of €0.48 per kilogram, Germany’s €350 million could not be allocated to projects proposing bids higher than €1.44 per kilogram.
Contributing to climate goals and hydrogen development
These auctions incentivize investment in clean technologies by offering financial support in the form of premiums for Renewable Fuels of Non-Biological Origin.
This creates a clear economic signal for developers and investors, encouraging them to invest in hydrogen production and related infrastructure. As a result, the auctions help accelerate the deployment of hydrogen technologies, fostering a robust supply chain and facilitating the scaling up of production capacity.
Furthermore, by prioritizing projects that require the lowest levels of public support, Innovation Fund auctions ensure that taxpayer money is used efficiently, driving down costs while maximizing environmental benefits. This competitive landscape not only promotes innovation and technological advancements in hydrogen production but also reduces reliance on fossil fuels.
