Impact of public support on electrofuel production plant investments

Abstract

The objective of this work was to research what types of direct support schemes are available in Europe for e-fuel projects, what possibilities and limitations do they offer and how do they affect e-fuel investments competitiveness and returns. In order to answer these questions, information about available support schemes was researched from public sources and analyzed. Based on the data found, in addition to EU-level support, Finland, Spain and the United Kingdom were scoped to be examined more closely in this work. Expert interviews were conducted to gain in sights on the industry’s investment landscape, learn how project developers see the role of sub sidies in investments and to gain inputs for financial modelling. Only the interview results regarding the impact of subsidies were reported in this thesis, while a summary of all results can be found in the appendix. Lastly, a discounted cash flow model for e-methane, e-methanol and e-SAF investments was created in order to numerically examine the impact of public support.

The majority of the public support schemes were identified to be capital grants with only one market creation program and one operational aid program. Additionally, one tax credit scheme and two policy measures enabling certificate trading were also identified. Also, EU law creates a possibility for member states to grant aid on looser terms through Important Projects of Common European Interest (IPCEI). Key findings were that State aid is capped at 45% of eligible costs and must not exceed the funding gap. Grants, operational support, and tax credits must adhere to these rules. IPCEIs only require compliance with the funding gap, allowing for higher subsidies. EU funding mechanisms, such as the Innovation Fund and European Hydrogen Bank EHB, are exempt from state aid rules but must follow cumulation rules when combined with state aid. EHB premiums cannot be combined with operational aid, and capital aid must focus on non-hydrogen-related components. National legislation may also impose additional constraints. In the United Kingdom no subsidy schemes were identified but policy measures enabling additional revenue were identified.

Production technology CAPEX structure was noticed to have an impact on restricting capital aid when combining with the EHB premium, as some in some technology’s hydrogen production covers a larger share of CAPEX compared to others.

Experts viewed subsidies as essential for derisking e-fuel investments, particularly in the in dustry's early stages when the market is still developing. Opinions on cumulating subsidies were divided: some saw it as necessary for economic viability, while others believed it complicates governance and valuation.

The impact of public support was smaller on LCOF and larger on levered and unlevered IRR. Cumulating a capital grant with operational aid further lowered LCOF and increased levered and unlevered IRR. At power prices from 42 to 63 EUR/MWh, capital grants from 41 to 297 MEUR, 0 to 140 MEUR and 74 to 222 MEUR would be required for a break-even investment case for 100 MW of e-methane, e-methanol and e-FT-liquids respectively, under taken assumptions in this work. Yearly operational aid for 10 years would vary from 17 to 85 MEUR, 0 to 55 MEUR and 23 to 80 MEUR, respectively.

The novelty of this work is in demonstrating the impact of public support on e-fuel plant investments, especially focusing on competitiveness and investment returns. Future research include analyzing how specific support methods impact e-fuel investment barriers and exploring the effects of projects guarantees and low-interest rate loans provided by public banks.