Global wind power group Iberdrola and Swedish startup H2 Green Steel plan to build a vast renewable hydrogen plant on the Iberian peninsula to power the production of iron used to make steel with drastically reduced carbon emissions.

The European Union is pushing the development of a supply chain for "green" hydrogen - made by splitting water molecules with renewable electricity - to replace the millions of tonnes of "grey" hydrogen - made with coal or natural gas - that its industry consumes every year.

Iberdrola and H2 Green Steel said on Thursday they are seeking a location in Spain or Portugal to build an electrolysis plant and a direct reduction tower to treat iron ore which they hope to fire up by 2026

The planned facility's 1 gigawatt (GW) of electrolysis capacity would far outstrip the roughly 0.3 GW currently in operation globally. The EU targets 40 GW by 2030.

Iberdrola will spend around 800 million euros ($907 million) on new renewable capacity to power the electrolyser, its head of hydrogen Millan Garcia-Tolla told Reuters.

Overall the project will cost around 2.3 billion euros. The companies will seek to tap equity, green project finance and public funding sources including the European Union's 750 billion euro pandemic recovery budget.

They could later add a specific steel facility, taking as a blueprint a similar plant H2 Green Steel is planning in northern Sweden.

Producing steel with green hydrogen emits 95% less carbon than with coal, and customers are willing to pay 25% more for it, H2 Green Steel Chief Executive Henrik Henriksson said.

Iberdrola wants to use green hydrogen for processes where electricity can't be easily used.

"If first of all we attack ... those current uses of grey hydrogen and we plan projects to 2025-2026 like cement or green steel, I think we are going to make big steps," Iberdrola's Garcia-Tolla said.

Some question the efficiency of using green hydrogen because it will require vast amounts of clean energy production and future cost reductions are uncertain. Environmental campaigners fear work on developing it will prolong use of the polluting "grey" version.

But Henriksson argued industry should work to tackle climate change with available technology.

"You can always wait until tomorrow for the silver bullet but then we will wait forever," he said.