The ETS Innovation Fund is one of the world’s most extensive funding programmes for demonstrating innovative low carbon technologies. 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.

2023 Results

The premium requested by the awarded project promoters ranged between €0.37 and €0.48 per kilogram of hydrogen produced, well below the €4.5 ceiling price, for projects located in Spain (3), Portugal (2), Norway (1), and Finland (1). Out of the seven projects, six signed the grant agreement, while one Spanish project from Benbros Energy withdrew from the process. The two largest projects, each with a capacity of 500 MW located in Portugal and Spain, accounted for 66% of the total budget, bidding at the clearing price of €0.48 per kilogram, primarily for ammonia production. Notably, 90% of the 132 projects bidding to produce approximately 8 million tonnes of hydrogen over the next decade were eligible for the premium. The high quality of the participating projects signals to the industry that the budget for subsequent auctions should be increased. However, even if all projects had received support, they would collectively represent only a small fraction (0.8 million tonnes per year) of the renewable hydrogen volumes needed to meet Europe’s 2030 Green Deal targets. Given the relatively small budget and limited sample of projects, the winning bids may not accurately represent the entire market. Additionally, the high levelized cost of hydrogen reported by some bidding countries reflects the strict regulatory framework for RFNBO production, and the relatively small number of bids—compared to our project pipeline database—indicates that many promoters are struggling with the complex rules surrounding aid cumulation.

Changes to 2024 auction

The design of the IF24 Auction introduced several significant changes compared to the IF23 Auction, aimed at reinforcing Europe’s leadership in the hydrogen economy and addressing lessons learned from previous experiences. One of the most notable updates is the revised objectives of the auction, which now explicitly emphasize the Hydrogen Bank’s role in ensuring Europe’s industrial leadership and securing essential goods supply, alongside boosting competitiveness.

The second auction also features a new funding structure, allocating €1 billion for RFNBO hydrogen production across all sectors and introducing a dedicated budget of €200 million for maritime-sector projects, reflecting a targeted approach to decarbonizing hard-to-abate industries.

Stricter rules on project completion have been implemented, increasing the completion guarantee from 4% to 8% and requiring projects to achieve financial closure within 2.5 years of signing the grant agreement. This reinforces accountability while maintaining the existing five-year timeline for project operation. The introduction of a comprehensive sanctions regime tries to ensure that projects comply with performance and safety standards.

In terms of funding dynamics, while the ceiling price for hydrogen has been slightly adjusted to €4 per kilogram, concerns remain regarding the absence of inflation indexation, which could pose challenges for project viability. The maximum grant amount has also been capped (250M€ for the General window, 200M€ for maritime).

The Commission took a big step in its engagement to work towards a more resilient, industrialised and secure Europe, with the introduction of mandatory resilience criteria for the next call. Projects that want to participate in the next call will have to limit the sourcing of electrolyser stacks (which include surface treatment, cell unit production and stack assembly) from China to not more than 25% (in MWe). Additionally, compliance with European and international safety (e.g. ISO 22734:2019 and its future updates) and cybersecurity standards are going to be mandatory requirements.

Overall, the updates in the IF24 Auction demonstrate a strategic shift towards a more mature and effective hydrogen funding mechanism, although certain provisions still need to be addressed to enhance competitiveness and participation in future auctions.

Budget for maritime

The dedicated budget for maritime-sector projects in the IF24 Auction reflects a strategic recognition of the critical role that the shipping industry plays in the broader transition to a sustainable and decarbonized economy. The maritime sector is among the hardest to abate when it comes to greenhouse gas emissions, accounting for approximately 3 to 4% of the EU’s total CO2 emissions. On January 1, 2024, the EU extended the coverage of its Emissions Trading System (ETS) to incorporate the maritime sector, following the broader EU ETS reform that came into force in June 2023. This expansion includes emissions from large ships departing from and arriving in EU ports, regardless of their flag, emphasizing the need for targeted support to accelerate the adoption of renewable hydrogen and other clean technologies. By allocating specific funding to this sector, policymakers aim to stimulate innovation, encourage investment, and facilitate the development of the necessary infrastructure for hydrogen-based fuels in maritime applications.

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

Innovation Fund auctions significantly contribute to the EU’s broader climate goals and the development of the hydrogen market by providing a structured and competitive framework for funding innovative projects that reduce greenhouse gas emissions. By supporting renewable hydrogen production through these auctions, the EU is directly addressing its commitment to achieving net-zero emissions by 2050.

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.

Overall, Innovation Fund auctions are a key mechanism for advancing the EU’s climate objectives by enabling the transition to a low-carbon economy, promoting the hydrogen market, and driving investments in sustainable energy solutions.