Just 4% of the low-carbon hydrogen production projects announced globally have reached FID, according to the IEA’s latest review of the sector.

That number will alarm policymakers around the world amid a growing realisation that hefty supply-side subsidies alone are not nearly enough to unlock the investment needed to meet ambitious 2030 production capacity targets.

The IEA urges governments to match their generous supply-side subsidies with more support for the demand side of the market. The argument is that this will help bring long-term offtakers to the table, in turn making supply projects more bankable.

Concerns over the lack of willing buyers have dominated recent debate in the industry

The US government is ahead of the curve on this and has already announced a $1b project to support the development of demand to “jumpstart” the industry’s growth.

Concerns over the lack of willing buyers have dominated recent debate in the industry. A poll of delegates to consultancy Aurora Energy Research’s recent London hydrogen conference placed the lack of viable long-term offtake deals as the main issue facing production project. “Demand is a huge obstacle,” Dalia Majumder-Russell, partner at law firm CMS told the conference. The IEA describes uptake of low-carbon hydrogen as “very limited”.

Buyers looking to enter this nascent market face multiple risks, ranging from price and volume to transport and logistics, as well as regulation and government policy. The Latin legal term ‘caveat emptor’ (let the buyer beware) sums up market sentiment.

Supply bubble

However, amid the uncertainty there is also opportunity for savvy buyers. This could even start to look like a buyers’ market as developers come under pressure to consider accepting lower returns in order to get projects over the line. The rapidly growing pipeline of projects points to a possible supply bubble once investment starts to flow, handing buyers an argument for lower prices.

Lessons can also be taken from more mature commodity market, where risks around price and volume in particular are addressed through innovative contracts and trading tools.  Hydrogen prices could be indexed to more liquid proxy markets such as pipeline natural gas, LNG, power and carbon to keep them in line with broader market fundamentals

Contract prices could be renegotiated at regular intervals, as in other commodity markets, mitigating the risk for buyers of locking into deals which might look expensive five years from now.

And the ‘green premium’ needed to make supply projects viable need not be as prohibitive as many think, especially in markets such as the EU, where the cost of carbon is transparent.

Indeed, for some offtakers, price is not the main motivation when seeking supply. Security of supply may well be more important for consumers such as power generators, Catherine Raw, managing director of UK utility SSE Thermal, told Aurora’s conference.

Volume risk for buyers depends on their demand profiles but it too can be managed, especially as various forms of storage enter the market. Also, the large number of standalone projects without the internal market enjoyed by integrated players such as oil majors suggests a merchant market for hydrogen—where buyers and sellers can trade on a spot basis to smooth out short-term supply/demand imbalances—may emerge sooner rather than later.

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Author: Stuart Penson