Catalyze clean hydrogen supply and demand

In a Take or Pay agreement, the buyer and seller enter a contract to share risks between both parties. In the take scenario, the buyer purchases a pre-determined amount of goods and accepts shipment of them. In the pay scenario, the buyer still pays the seller a predetermined amount but doesn’t take shipment of the goods.

The buyer benefits from a consistent and predictable payment schedule, but avoids an obligation to take shipment of, process, and store goods that it doesn’t need. The seller benefits from predictable revenue flow, but risks having to hold onto and store product. By enabling buyers and sellers alike to demonstrate predictable cashflows, Take or Pay agreements can help market participants attract investment that will help them contribute to the development of the clean hydrogen economy.

In a Take and Pay agreement, the buyer is in breach of the contract and must pay damages when it doesn’t accept delivery of the minimum contracted quantity. The contractual guarantee of delivery and payment reduces sellers’ risk and provides them with a predictable revenue stream. This can improve their ability to attract financing to develop or expand projects. Many early clean hydrogen projects will operate under power purchase agreements (PPAs) in which power is purchased up-front, with no option to receive a rebate for purchased power that isn’t used. This will contribute to making their input costs inflexible and will make it important to have a reliable purchaser for their output. Take and Pay can address this need for risk mitigation.

Catalyzing hydrogen market investment will likely require mitigation of both perceived and actual risk associated with renewable energy investments. Given the nascent, rapidly evolving, and capital-intensive nature of the clean hydrogen industry, investments by both buyers and sellers come with risk that can make it difficult to attract needed capital. To bridge and transfer part of this investment risk, developers can purchase insurance, and insurers can purchase re-insurance to protect them in the even that a project fails.

Accessing affordable financing can be a challenge for some projects and countries. To create a thriving hydrogen global economy, it is important that countries with the right conditions—for example, the right natural resources—can participate. There are numerous existing and emerging mechanisms that can help decrease the borrowing cost of nations. Two notable ones are development banks which can provide attractive borrowing rates, or bi-lateral agreements between countries where countries with higher ratings can provide loans to lower rating countries.

In an Expression of Interest (EoI), the potential leader of a new project requests responses from prospective investment partners to evaluate the viability of the new opportunity. An EoI can be used to allow hydrogen market participants to provide more transparency in the market and to align investments between companies and ensure synchronization. The EoI acts as a non-binding declaration of interest in collaborating, and it typically covers topics including project scope, the parties’ qualifications, project timeline, and confidentiality provisions. EoIs facilitate information sharing and ensure flexibility, both of which are essential to businesses that are exploring investment in the rapidly-changing, capital-intensive clean hydrogen energy.

The book and claim method allows companies to receive carbon credits for using fuels that may not be readily available. Under book and claim, a company that cannot access hydrogen supply infrastructure—Company A—purchases hydrogen from a supplier. Rather than shipping the hydrogen to Company A, the supplier provides Company A with a certificate for the clean hydrogen purchase and instead provides the hydrogen to Company B. Company B then uses the hydrogen to power its operations, but doesn’t receive any carbon credit for the emissions its hydrogen offsets because this credit has instead been applied to Company A.

This arrangement can reduce hydrogen producers’ production and investment risk by giving them access to a vast pool of prospective buyers across the globe.

The utilization and redeployment of existing energy assets and networks offers a low-cost, sustainable pathway to entering the hydrogen market. The reuse of existing networks in a clean energy context leverages the sunk costs already incurred by energy producers and helps existing operators and stakeholders smoothly transition from a legacy focus to a future focus.

In a Contract for Difference, a seller of clean hydrogen or renewable electricity collaborates with a buyer to set an agreed-upon minimum price—known as a strike price—for their output. If the market price for the seller’s output moves above or below the strike price in the time between the contract signing and the sale, the party who would be injured by this price movement is paid the difference between the strike price and the market price. By acting simultaneously as a subsidy for producers and as a defense against price gouging, Contracts for Difference are a great way to share risk and can incentivize both power producers and power consumers to invest in hydrogen.

Adopting an auction or ‘double auction’ approach involves buying clean hydrogen at the lowest price possible and selling it to the highest bidders. It also likely involves policy intervention as a subsidy would need to be provided by the regulator to cover the gap between today’s production costs for clean hydrogen and/or power-to-X products and the market price for fossil-based products.

An intermediary is created to manage the auction process, buying clean hydrogen via ten-year Hydrogen Purchase Agreements (HPA) and selling them to possible customers who will bid for short term supply contracts using separate tenders. This approach allows for risk alignment between suppliers and buyers in the market.

Demand aggregation is a practice where companies enter an alliance to purchase a product with the goal of centralizing demand to help accelerate the development of that product. Sellers are often involved in such alliances; establishing a relationship with a demand aggregation project can provide sellers with a large market for their product. Demand aggregation can help alleviate the first mover problem in clean hydrogen by giving producers a strong, centralized market, by connecting buyers with sellers, and by leveraging the combined resources of many market participants to lobby for hydrogen-friendly regulations.

Targeted partnership between competitors, known as ‘co-opetition,’ is one of the most visible business model solutions to the chicken-or-egg problem in clean hydrogen. The U.S. Department of Energy’s Regional Clean Hydrogen Hubs model is a strong example of co-opetition at work: producers, distributors and suppliers will cooperate to develop a centralized location where an end-to-end hydrogen market can develop. This cooperation can support risk alignment by connecting market competitors across the value chain. It can also create opportunities to explore new contracting strategies as the various cooperating parties look to secure their positions in the market while keeping pricing flexible.

Under a Hydrogen-as-a-Service (HaaS) business model, the seller provides hydrogen storage and refueling infrastructure (and in some cases vehicle retrofits) at no cost to an end user in the hydrogen mobility space. In return, the end user signs an agreement to purchase hydrogen from the seller, usually for several years. HaaS directly addresses the ‘chicken or egg’ problem in hydrogen-powered fleet transportation.

It grants fleet operators access to storage and fueling infrastructure and hydrogen-ready vehicles without up-front capital investment, and it contractually guarantees hydrogen producers a profitable relationship with an off-taker. With this mechanism, the largest and fittest players can manage higher risks and help the less capable to play a role in the hydrogen space.

There is interdependency across multiple players in any value chain. However, most of the attention for resolving the first mover dilemma tends to focus primarily on the direct supplier and off-taker, with strict commercial constructs to guide the interactions. One approach being investigated in some sectors, for example steel (with the production of ‘green steel’ widely seen to be an early, attractive use of clean hydrogen), is full value chain collaboration. In this, many more players both upstream and downstream are involved.

Creating such value chain collaboration where each player is willing to give a little of its own margin to ‘grow the pie’ by focusing on lowering the price to end customers could very well lead to accelerated adoption and scale of clean hydrogen, also decreasing the need for subsidies to activate change.