As Dominik Huebler* explains, although potentially controversial, newly published proposals for the production of offshore hydrogen in Germany could serve as a blueprint for other countries
With the last round of German offshore wind auctions having just closed with several casino-style random draws, preparations for the allocation of the rights to the first German offshore hydrogen sites, a process due to take place in 2022, are already in full swing, following a different allocation procedure.
Germany has ambitious plans for up to 5 GW of hydrogen production capacity to be installed onshore and offshore by 2030. As highlighted by OWJ, on 1 October 2021, an ordinance spelling out the details of the upcoming offshore hydrogen ‘beauty contest’ came into force, paving the way for interested developers to prepare bids for the first site. Here, together with my colleagues Leonie Janisch and Hendrik Schub, I take a closer look at what is known about the new tender and some of the risks it carries for the development of the sector.
Despite Germany’s big plans, the first tender will award rights for only one site of around 28 km2 for ‘other energy generation’ in the North Sea (SEN-1). The proposed site is adjacent to the Hohe See, Albatros and Global Tech I offshore windfarms. The winner will obtain the rights to apply for a plan approval process to develop the site but will also need to apply for subsidies in a separate process.
Since different project proposals are set to compete against each other, the expected production capacity of the site will only be known after the tender. Indicative estimates suggest it might support a 250-300 MW offshore electrolysis pilot project.
The site will not be connected to the grid: electricity generation and the production of another energy carrier transportable via ship or pipeline are also to be conducted at the site. While the tender is technology neutral in principle, the Ministry for Economic Affairs expects the site to be used for offshore hydrogen production with electricity generated from offshore wind.
While Germany’s recent offshore wind tenders required a ‘bare knuckle fight’ and low price bids, the ordinance passed by the outgoing government prescribes a ‘beauty contest’ to award offshore sites for hydrogen. In a beauty contest, bids are differentiated based on pre-determined criteria instead of price, theoretically allowing governments to incentivise a range of quantitative and qualitative project features. Some readers may be reminded of the Dutch offshore wind tender system which uses a similar approach.
In Germany, the winner will be selected based on a mix of six qualitative and quantitative criteria, for each of which the Federal Maritime and Hydrographic Agency (BSH) will award a maximum of nine points. These include:
If multiple offers obtain the same score, their contribution to economic development will be decisive and the bid that will involve the greatest number of small and medium-sized companies will win the tender.
However, gaps in the regulatory framework create significant risks for the process. Looking at the multitude of criteria, the beauty contest will demand significant preparation from interested bidders. It is also likely that any award will be controversial, given the mix of qualitative and quantitative award criteria and the lack of clarity on how to calculate some of them that allow for a lot of discretion on the part of those assessing the bids.
In addition to the controversial ‘technological maturity’ criterion, another potential bone of contention is the technology neutrality of the rules. For instance, the maritime area development plan rules out the use of new pipelines to connect the site to the shore and the selection criteria favour existing pipelines over ships. At the same time, access terms for existing pipelines would first have to be defined as they do not fall under German onshore gas network regulation.
Additional potential problems are created by the fact that some of the selection criteria carry penalties if the partly self-reported project features that form the basis for selection are not fulfilled. In practice, this may create incentives to prioritise or overstate expected performance.
This trend may be exacerbated by uncertainty about the design of the eventual subsidy scheme. Little is currently known about the nature of the subsidy programme for offshore hydrogen that will accompany the 2022 tender and the form the subsidy takes will affect the economics of projects differently. For instance, a subsidy per unit of energy produced would strengthen the energy capacity criterion, while a lump-sum payment for early completion would put more emphasis on low project costs. This means that potential project sponsors will want to influence the design of the subsidy programme, to suit their project, if they possibly can.
One more dimension of complexity is added by the fact that German ideas about what counts as green hydrogen differ somewhat from those of the European Commission. Resolution of these differences will have a material impact on the amount of ‘green’ hydrogen that will be available in the medium term and will affect the level of competition in the ‘green’ hydrogen market and thus the size of the market opportunity for offshore hydrogen developers.
However, despite these uncertainties, Germany is at the forefront of European offshore hydrogen development. Publication of the tender design it intends to use could influence thinking in other markets, which are currently also looking at initial steps towards offshore hydrogen.
Denmark is developing a procurement framework for energy islands which may host offshore hydrogen production facilities. In the Netherlands, the PosHYdon project, funded through the Demonstration Energy and climate Innovation (DEI+) scheme, intends to build the first offshore hydrogen production facility on a platform and connect it to the gas network. The EU-supported Oyster project also aims to explore offshore hydrogen and there are other similar projects underway across Europe.
Germany’s 2022 tender may thus provide important insights into different concepts for hydrogen development and the results may also provide insight into the suitability of beauty contests as a way of efficiently allocating the rights to sites that underpin the future development of offshore hydrogen production. It may also highlight key issues that policymakers and bidders will want to take into account for future allocation procedures elsewhere.
*Dominik Huebler is senior economist, energy, transport at NERA
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