The Innovation Fund is one of the world’s largest funding programmes for low-carbon energy technologies commercialisation and deployment. It provides support through grants, project development assistance and financial instruments such as Invest EU.
In addition to the existing grants programme, the European Commission is developing a new support mechanism of competitive bidding (‘auctions’). Auctions will expand the portfolio of support mechanisms, fostering faster and more cost-efficient support for the roll-out of low-carbon technologies needed for the green transition.
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Auctions are market-based instruments through which the Commission can allocate Innovation Fund support to accelerate innovative, low-carbon projects in the EU.
An auction is a process in which goods or services are offered for bidding. In the case of a subsidy scheme, what is auctioned is a subsidy for a specific activity or product. Typically, bidders requiring the lowest public subsidy for a decarbonisation activity or product will win the subsidy.
The Innovation Fund will begin allocating funds through a fixed-premium pilot auction directed at the production of Renewable Fuels of Non-Biological Origin (RFNBO) hydrogen. Interested projects can participate and submit a fixed-premium bid (€/kg of produced renewable hydrogen) to receive support on their production.
After some basic eligibility and quality checks, bids will be ranked from lowest to highest and awarded support, in that order, until the auction budget is exhausted. The fixed-premium support will be paid for up to ten years.
The Innovation Fund will only auction a limited budget per auction round to incentivise competition. We will open the pilot auction in November 2023 with a budget of €800 million.
Following the revised European Union Emissions Trading System (EU ETS) Directive, the Innovation Fund can support projects through different types of competitive bidding mechanisms, specifically:
- fixed-premium contracts
- Contracts for Difference (CfDs) or
- Carbon Contracts for Difference (CCfDs).
This support must enable decarbonisation technologies for which the European carbon price and regulatory framework might not be a sufficient incentive.
In the pilot auction, the Innovation Fund offers a fixed premium to support renewable hydrogen production.
Many EU Member States have introduced auctions to allocate funds to support renewable power projects, which have helped to lower the price of renewable energy and favoured the uptake of more efficient and climate-friendly technologies like wind and solar. By definition, a well-designed auction mechanism allows an efficient allocation of support - at a competitively determined level. This minimises the costs to the public and, if designed well, de-risks projects sufficiently so that they attract more private capital.
Compared to regular grants, auctions will provide payments based only on certified and verified production (i.e. no pre-financing or payments before entry into operation) and tackle projects with a different risk profile than those addressed by the current Innovation Fund regular grants programmes. They are well suited for projects that have moved closer to commercial deployment, with lower technology and construction risks, but still face profitability issues. Auctions also ensure that no public money is spent on covering project development risks best handled by the private sector.
Another advantage is that auctions create competition between producers, which may lead to lower consumer prices. In addition, competitive bidding can reduce the risk of providing more public support than necessary, thereby ensuring taxpayers’ best value for money. Competitive bidding is considered a proportionate support under the Guidelines on State aid for climate, environmental protection and energy (CEEAG). It has been a significant success story in the renewable power sector in many EU Member States, considerably bringing down the funding needs for renewable power.
Competitive bidding can also be used as a tool for price discovery for goods with unknown market prices. Currently, there is no existing liquid market for renewable hydrogen and its derivatives. The Innovation Fund will publish key price points to help foster the renewable hydrogen market.
2023 pilot auction to produce renewable hydrogen
The pilot auction under the Innovation Fund will be opened in November 2023. The objectives of this pilot auction are as follows:
As part of the ‘Fit for 55’ package, the Commission proposed to set up a competitive bidding instrument in the proposal to revise the EU ETS directive, along with several other proposals to make the EU’s climate, energy, land use, transport and taxation policies fit for reducing net GHG emissions by at least 55% by 2030, compared to 1990 levels.
Competitive bidding was also highlighted as a support mechanism for hydrogen production and uptake in the REPowerEU Plan, specifically as a central measure to reduce fossil-fuel consumption in hard-to-decarbonise industrial sectors and diversify energy imports away from Russian fossil fuels.
Further, the revised EU ETS Directive introduced competitive bidding procedures as a new possible mechanism for allocating support provided by the Innovation Fund.
The Innovation Fund pilot auction for hydrogen production is a key element of the European Hydrogen Bank (EHB), which establishes EU financing instruments and a coordination platform to cost-effectively secure domestic and international renewable hydrogen volumes in the EU.
This pilot auction operationalises the domestic pillar of the EHB, as detailed in the figure below:
Why hydrogen? The goal of the Innovation Fund is to support the demonstration and commercialisation of innovative low-carbon technologies and processes. While many decarbonisation technologies are already mature, climate-neutral options are not yet available or scalable for hard-to-decarbonise sectors of the EU economy, such as heavy-duty transport and energy-intensive industrial processes. Hydrogen produced using renewable electricity, ‘RFNBO hydrogen’, is a climate-neutral option for these sectors and fully aligned with the REPowerEU Plan political priorities. The Commission has defined RFNBO hydrogen by adopting two Delegated Acts as required under the Renewable Energy Directive. The first Delegated Act defines under which conditions hydrogen, hydrogen-based fuels or other energy carriers can be considered RFNBOs. The second Delegated Act provides a methodology for calculating life-cycle GHG emissions for RFNBOs. Compliance with the two Acts is also necessary for hydrogen production to be counted towards Member States’ renewable energy targets.
The first competitive bidding mechanism under the Innovation Fund will be operationalised through a pilot auction to support renewable hydrogen production. We published the Terms and Conditions for the pilot auction on 30 August 2023. We intend to open the pilot auction on 23 November 2023 (estimated auction closure: 8 February 2024).
A €800 million budget will be available for bidders (project developers). Funding will be awarded as a fixed premium in €/kg of verified and certified RFNBO hydrogen produced, on top of market revenues that developers can achieve, and guaranteed for up to ten years of operation. Awarded projects will enter into a grant agreement with the European Climate, Infrastructure and Environment Executive Agency (CINEA), the implementing authority for the scheme.
We published the pilot auction’s Terms and Conditions (T&C) on 30 August 2023. We split them into four chapters:
- Background and auction objectives
- Overview of auction design elements
- Qualification requirements
- Rules for cumulation of support with other public support
Some key aspects of the design entail the following:
- Admissibility, eligibility and quality criteria. To qualify for the auction’s price ranking stage, applicants must submit documents articulating the project relevance and aspects such as technical, financial and operational capacity (see section 3 of the T&C). This information will be checked and evaluated on a pass/fail basis before ranking the proposals according to their bid price. Applicants must submit the requested application forms, supporting documents and templates before the due date, which will be announced in the call via the Funding & Tenders portal. Some key elements of the auction design are summarised below, but we encourage all prospective bidders to refer to the T&C:
- Bid proposals must relate to projects with a production located in the European Economic Area.
- The auctioned good is RFNBO hydrogen, in line with the definitions and requirements from the Renewable Energy Directive and its Delegated Acts.
- Ceiling price for the bids: 4.5 €/kg of hydrogen produced.
- Maximum budget restriction for each bid: one-third of the total available budget defined for the auctioned topic (i.e. one-third of €800 million or €266,7 million).
- Maximum time to entry into operation: five years after grant agreement signature.
- A completion guarantee is required to enter the auction and avoid speculative bidding.
- Price ranking. Qualifying proposals will be ranked from lowest to highest bid price and awarded in that order until the available budget (€800 million) is exhausted.
- Payments. Made only upon verified and certified RFNBO hydrogen production and are scheduled semi-annually upon entry into operation. Production flexibility rules are in place, catering for the intermittent nature of renewable power supply.
The Commission is offering the Innovation Fund auction design as a platform for countries of the European Economic Area (EEA) to use to allocate additional national Funds. For more information on this, please refer to the section below on Auctions as a Service.
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The Innovation Fund pilot auction call is intended to be opened on 23 November 2023 (estimated call closure: 8 February 2024). Interested bidders (hydrogen project developers) are encouraged to consider the pilot auction T&C and prepare their bids before the call opening. Once the pilot auction is opened, interested bidders can access application documents via the EU Funding and Tenders portal. Due to the fast implementation timeline of this programme, we are publishing the T&C before the auction opening to give prospective bidders more time to prepare their submissions.
CINEA is the implementing body for the Innovation Fund’s pilot auction. It manages the Commission’s programmes contributing to decarbonisation and sustainability, including the regular grant programmes of the Innovation Fund.
CINEA will implement the auction, i.e. publish the auction call for proposals, evaluate bid proposals, award bids, and sign the grant agreements with successful bidders (i.e. the contract for fixed premium support).
We designed the pilot auction with extensive stakeholder consultation over 2022 and 2023 and the support of consultants to assist in analysing competitive bidding mechanisms and the design and implementation of the pilot auction.
Documentation from the stakeholder consultations and support contract:
- 16/05/2023 - Follow-up stakeholder workshop on the draft economic T&C for the 2023 Innovation Fund pilot auction
- 21/11/2022 - Stakeholder workshop on designing a competitive bidding tool to fund hydrogen innovation
- 28/10/2022 - Workshop with academia, think-tanks and Member States
- Support Contract - Assistance in the Analysis and Set-up of a Competitive Bidding Mechanism for Contracts for Difference, Carbon Contracts for Difference or Other Comparable Schemes under the Innovation Fund
Auctions as a Service (AaaS)
To avoid fragmentation at the early stage of hydrogen market formation in Europe and to save administrative costs of developing different hydrogen support schemes by the EEA, the Commission will also extend the Innovation Fund pilot auctions as a platform to interested countries of the EEA. This mechanism, called Auctions-as-a-Service (AaaS), will enable countries of the EEA to use their national budget resources to award support to projects located on their territory while relying on an EU-wide auction mechanism to identify the most competitive projects.
To participate in the AaaS, interested countries must have a national budget allocated and follow the State aid notification process before the opening of the Innovation Fund pilot auction. If the auction T&C are still the same, State aid clearance can be provided as early as the opening of the pilot auction at the end of the year. The Commission will assist countries with pre-filled notification templates reflecting the auction T&C.
In practice, the concept of AaaS consists of:
- EEA countries using the State Aid compliant, EU-wide Innovation Fund pilot auction as an auction mechanism
- the Commission facilitating the notification of country schemes
- CINEA informing countries about the results of the pilot auction with a ranking of potential vetted and cost-competitive projects to be implemented in participating countries
- the Commission providing guidance for minimum requirements for contracts to be signed at the national level between project developers and national authorities.
The AaaS will work accordingly:
- EEA countries commit national budget to the AaaS and communicate their intention to participate to the Commission.
- CINEA opens the pilot auction.
- Projects across EEA submit bids, which will be assessed, ranked, and cleared in line with the auction T&C.
- The lowest bids are cleared under the auction budget until it is exhausted, following the ranking of projects.
- The ranking of the remaining unawarded projects is cleared under the national budget(s) and information about the successful bids is passed to the respective country.
- An additional ceiling price applies to projects supported under AaaS to ensure competition in the presence of additional national funds. This additional, country-specific ceiling price will be calculated as follows:
- [The price of the last project cleared under the Innovation Fund budget, that is not from the same country] * [a factor X (to be decided)]. The formula will be established at the EU level.
- CINEA is responsible for awarding, contracting, and monitoring support for projects under the Innovation Fund budget.
- Participating countries are responsible for awarding, contracting, and monitoring project support under national budgets.
If a country wants to allocate support to hydrogen production using the AaaS system, it should consider the following steps:
- The participating country must have a support scheme in place or adopt a new one for the AaaS.
- Any support scheme must be cleared through the State Aid procedure with the Commission and shall comply with the CEEAG unless it falls within the General Block Exemption Regulation (GBER) thresholds.
- The participating country must ensure certain elements are present in their support schemes (e.g. provisions on monitoring, transparency, reporting and payment arrangements, an indication of the budget that intend to allocate for the national compartment of the auction). Once this is ensured, they send the complete notification of national schemes for using the AaaS.Countries with a serious interest in participating in the pilot auction and with available budget must inform the Commission as soon as possible. Upon reviewing the notification, the Commission’s Directorate-General for Competition will issue a decision on the national schemes before opening the pilot auction.
CINEA will clear the auctions in Q1 2024 and pass the list of national projects with respective national budgets to countries that signed up for the AaaS.
During the implementation of the projects, participating countries will be responsible for monitoring the respective projects.
When bidders apply to the pilot auction, they can indicate their interest in being considered for AaaS. Projects can only be considered for AaaS if they are in a country that has decided to offer a national scheme through AaaS. Projects will first be considered under the Innovation Fund budget. If not awarded within this budget, they will be considered for AaaS.
Countries that signed up for the AaaS will receive the ranked list of projects in their territory. Countries must follow the ranking of projects as issued by the Innovation Fund and cannot add additional award criteria.
Projects awarded through AaaS will sign corresponding national grant agreements and documentation with the respective awarding country.