This is what the new Innovation Fund auctions for hydrogen and industrial process heat look like

The European funding calendar for projects that contribute to mitigating climate change is heading towards an intense end to 2025, with the planned launch of two new auctions under the umbrella of the Innovation Fund programme. These are the third auction for renewable hydrogen production and the pilot auction for the decarbonisation of industrial process heat. Together, these initiatives will have a budget of more than €2 billion.

“Innovation Fund auctions work through a competitive bidding system,” explains Marcos Jareño, Head of International Business Development in European projects at Zabala Innovation. “Companies submit the amount of financial support they consider necessary to reduce CO₂ emissions. The projects that bid for the lowest support per unit produced or per tonne of CO₂ avoided are the ones selected for funding,” he adds.

In his words, “this reverse auction model brings greater transparency, fosters market-driven innovation and ensures that funds go to the solutions with the greatest climate impact at the lowest cost.”

The first Innovation Fund auction was launched in 2023, followed by a second in 2024, both focused on hydrogen production. At the end of this year, the third call will open, with a budget of €1.1 billion.

In 2025, the European Commission will launch a new additional auction aimed at decarbonising industrial processes heat. Designed on the basis of the experience gained from the hydrogen auctions, the Innovation Fund 2025 heat auction will have a budget of €1 billion.

The sector looks towards Brussels with the experience of the previous calls, where Zabala Innovation secured 45% and 25% of the funds awarded in the first and second hydrogen auctions, respectively, for its clients.

Decarbonisation of industrial heat

The industrial heat auction is conceived as a pilot for the creation of an Industrial Decarbonisation Bank (IDB). Its aim is to measure and promote the electrification of heat processes currently dependent on fossil fuels, thereby reducing greenhouse gas emissions and facilitating the cost-effective adoption of new technologies. The new auction will support projects that:

• electrify industrial process heat using technologies such as heat pumps, electric boilers, resistance heating, induction, plasma torches or shock wave heating;
• use direct renewable heat (e.g. solar thermal or geothermal) in industrial processes.

Projects will have to measure the heat produced (MWhth) and calculate the CO₂ emissions avoided by multiplying that value by an emission factor. This factor may be that of the substituted fuel or, by defaultthe Phase 4 ETS heat benchmark, an EU reference used to allocate emission allowances, based on the average emission intensity of the most efficient installations in 2016–2017 (10%).

The auction is scheduled for the end of 2025 and will take the form of a competitive fixed-premium tender, in which projects compete by offering a price per tonne of CO₂ avoided. The most efficient will be selected until the budget is exhausted.

The draft Auction Terms propose two action areas (baskets):

• Low-temperature heat: production of heat measured between 100 °C and 400 °C, with a proposed budget of €500 million.
• High-temperature heat: production of heat measured above 400 °C, also with a proposed budget of €500 million.

General conditions:

• Maximum grant amount per bid: up to €250 million.
• Minimum project size: at least 5 MWth capacity.
• Single location: virtual pooling of capacities across different locations will not be permitted.

The scheme is expected to limit support to 80% of annual hours, unless the project incorporates flexibility solutions, such as electric or thermal storage. The objective is to avoid electrification of heat increasing emissions during fossil-fuel peak hours.

Renewable hydrogen production

As in previous editions, the third hydrogen auction is also being prepared under the umbrella of the European Hydrogen Bank. Its structure envisages:

• €400 million for projects combining hydrogen classified as renewable fuel of non-biological origin (RFNBO) and other forms of low-carbon hydrogen,
• €400 million reserved exclusively for renewable RFNBO,
• €200 million for RFNBO and low-carbon hydrogen destined for the maritime sector, with the possibility of a further €100 million through participating countries (auction-as-a-service model).

Jareño stresses that the lessons learned from the first two European hydrogen auctions should serve as guidance for what lies ahead. “The central element of an auction is the price and the bidding strategy. It’s not about presenting a technically flawless project and then just naming a random figure. A responsible and very precise analysis of the cost and the expected profitability must be carried out, because once the bid is submitted the price cannot be changed,” he warns.

This expert highlights that, in the 2024 auction, “Zabala Innovation managed a quarter of the funds awarded.” In his words, “that result shows that a sound financial approach, combined with technical expertise, makes the difference when competing in an auction mechanism.”

How do the Innovation Fund auctions work?

The auction model differs from traditional grant calls. Here, it is not only technical excellence or projected environmental impact that prevails, but the combination of both with a competitive bid price.

“It is important to bear in mind that Innovation Fund auctions include a completion guarantee equivalent to 8% of the grant requested,” notes Jareño. This guarantee, already established for the third hydrogen call, is also expected to apply to the heat auction. In cases of withdrawal or project non-compliance, the European Commission may execute the guarantee. This could occur, for example, if:

• the beneficiary withdraws after signing the Grant Agreement;
• financial close is not achieved within the expected timeframe;
• the project does not enter into operation within the stipulated period.

The applicable deadlines are:

• Hydrogen: two and a half years for financial close and five years to enter into operation.
• Heat (as planned): two years for financial close and four years to enter into operation.

“This guarantee scheme requires promoters to exercise a high degree of responsibility and realism when designing their business models,” explains Jareño. “It is necessary to be ambitious in the proposal, but also conservative enough to anticipate contingencies: fluctuations in production costs, delays in the supply chain, changes in the energy market or regulatory shifts that could undermine the financial viability of the project and turn the bid into insufficient, or worse, see the completion guarantee executed due to lack of rigour in the proposal phase,” he cautions.

Net Zero technologies

Meanwhile, the regular grant channel of the Innovation Fund, Net Zero technologies, remains on hold and potential candidates must stay alert for the definition of new opening dates. Brussels’ stance seems clear: auctions are gaining prominence as a formula for allocating resources and accelerating projects that reduce emissions immediately and measurably.

Zabala Innovation has successfully financed more than 20 projects in the general call of this programme, generating returns of more than €1.5 billion for its clients. “This track record has enabled us to acquire cross-cutting experience in all key aspects of the process and of the call. In this way, we provide coordination and comprehensive support at every stage, guaranteeing our clients maximum efficiency and total peace of mind,” says Jareño.

The Innovation Fund is financed from revenues from the EU Emissions Trading System and is one of the world’s largest programmes supporting low-carbon technologies. With funding exceeding €38 billion until 2030, it focuses on large-scale industrial projects that contribute to climate neutrality.