In 2020, the German federal government launched H2Global, a funding project for the provision of hydrogen produced from renewable energy (‘green hydrogen'). At the end of 2021, shortly after the European Commission’s state aid approval, the German government allocated €900m in funding to H2Global.
The funding will help meet expected excess demand for green hydrogen in Germany by importing it from non-EU countries. In fact, pure hydrogen imports are not yet technically possible so the focus of H2Global is on three hydrogen derivatives in the form of so-called PtX products: Ammonia, methanol and aviation fuel, provided these derivatives are themselves produced exclusively with green hydrogen.
To match demand with supply, a ‘double auction model’ run by the Hydrogen Intermediary Company (HINT.Co) as a non-governmental intermediary will be established. HINT.Co will determine the most favourable offer on the market for a specific quantity of PtX products through competitive procedures and conclude long-term hydrogen purchase agreements (HPAs) with producers on an upstream market.
On a downstream market, the PtX products are then sold by HINT.Co to customers in Germany via short-term hydrogen sales agreements (HSAs).
Since the purchase price of the PtX products on the upstream market will, for the foreseeable future, be higher than the achievable market price on the downstream market (where there is competition with fuel from fossil sources), HINT.Co’s expected losses (the delta between purchase price and sales price) will be covered by the €900m government funding.
This week, the German Ministry for Economic Affairs and Climate Action published its ancillary provisions for the allocation of said subsidies (so far only available in German), detailing some key aspects and requirements for the upstream award process.
Procuring PtX products on the upstream market
The provisions focus mainly on the upstream market, ie the relationship between HINT.Co and suppliers of PtX products via HPAs. Broadly speaking, the ‘best’ bidder on the upstream market is not simply the one offering the largest quantity at the lowest price. Instead, HINT.Co is expected to conduct a so called “competitive dialogue”, a formal procurement procedure allowing HINT.Co some flexibility in determining its demand by negotiating with possible suppliers. For this, certain essentials are defined:
- Products: For now, only HPAs for ammonia, methanol and aviation fuel will be concluded.
- Delivery: Offers must include transport of the products to the target delivery triangle of the ports of Rotterdam, Hamburg, and Duisburg.
- Amounts: For each product €300m in funding will be allocated (flexibility: +/- 20%).
- Timing: Funding will be available as of 2024 (€20m), increase to €60m in 2025 and its full amount of €102,5m per year from 2026 to end of 2033.
- Eligible suppliers: Only suppliers whose (planned) production site is located outside of the EU and EFTA countries will be eligible to participate, but they are encouraged to also make use of EU sub-contractors (e.g. for transport). At the same time, those suppliers will have to show that they have market experience and have been present on the EU market for several years.
The provisions then also describe a number of sustainability criteria which HINT.Co will have to apply:
- The PtX products and their transport to the EU must be at least climate-neutral, ideally even climate-positive, as defined by EU legislation on renewable sources. Given that the first HPAs will not be concluded for some time, it is expected that the PtX products will also have to meet the criteria that will be defined in the EU Directive for renewable fuels and fuels of non-biogenic origin, which is currently still in draft form.
- The PtX products must also meet the 70% emission reduction, comparable to Art. 25 para. 2 of the Renewable Energy Directive.
- Electricity used during production of the hydrogen-based products has to be from renewable sources (defined as wind, solar and geothermal energy).
- Specific criteria for the use of CO2 in the production process have yet to be defined. However, should a future version of the Renewable Energy Directive contain respective requirements, those will have to be met
- Bidders must also demonstrate how the project will support implementation of the Paris Climate Agreement (2015), ensure UN Sustainable Development Goals in the respective partner country are met, conduct an environmental impact assessment and ensure compliance with international labour standards.
- Production sites may not be located in or near nature preserve areas, natural habitats or other environmentally sensitive areas.
- Water sourced for production must also be used sustainably, avoiding any degradation of quality or scarcity at the production site. In arid areas, the use of so-called ‘fossil water supplies’ located in aquifers or drinking water is forbidden. Where desalination is used, evidence of sustainable management of residues has to be provided.
Selling PtX products on the downstream market
For the downstream market, which governs the relationship between HINT.Co and any company wanting to buy PtX products via HSAs, no such detailed requirements exist. Contracts will simply be awarded to the highest bidder.
Although the funding decision already provides a fairly good picture of the H2Global project, the finer details have yet to be specified by HINT.Co. With funding being available as early as 2024, which implies that the first PtX products are to be supplied during this year, we expect HINT.Co to do so over the next months.
As HINT.Co is required to conduct a formal competitive dialogue in compliance with EU procurement laws, this process will most likely be kicked off by an invitation to tender that will be open to any eligible supplier of PtX products. However, it is not yet clear whether HINT.Co will only conduct one tender for each of the three PtX products and award HPAs for the entire funding period (2024 – 2033) or whether “latecomers” may still have a chance to participate in later years. In any event, any supplier considering participation in earnest should begin preparing for the upcoming competitive dialogue now to determine whether there may be any challenges in meeting the substantive tender requirements.
The future will show whether the current amount of €900m is sufficient to cover the rising demand for climate-neutral hydrogen and its derivatives, especially considering the current German coalition’s ambitious decarbonisation goals (see our previous post on green hydrogen).