Public support for the roll-out of renewable hydrogen in Europe: A real options perspective

To meet the rapidly growing demand for renewable hydrogen from its own sources, Europe must significantly accelerate the development of electrolysis capacities. With the European Hydrogen Bank, the EU has implemented a new support instrument that provides for the auctioning of production premiums. Based on a Real Options approach, this paper analyzes the expected impact of this instrument on investment incentives in electrolysis capacities and the expected investment timing. It shows that premium payments can contribute to a significant acceleration of capacity building in many European regions. Moreover, at comparable levels of intertemporal support, they are predicted to be more effective than the policy alternative of price guarantees, due to the more balanced time profile of support. However, the auctioning conditions of the European Hydrogen Bank should be modified to intensify competition and avoid over-subsidization of hydrogen producers in regions with low electricity costs.