Transitioning hydrogen from its current deployment – produced from hydrocarbons for local industrial use – into a global green commodity is a huge task. The few projects now reaching FID usually involve unique two-party agreements or guaranteed offtake within development consortiums.
The lack of globally accepted standards, and the price risk of long-term contracts, remain major hurdles holding many projects back.
That the nascent industry appears stalled, with few green hydrogen projects reaching finance and construction, is largely due to these hurdles. Issues such as technology, infrastructure, shipping and safety are widely thought to be not as critical – they will be resolved if and when the industry gains momentum.
Instead, the current discussion about hydrogen is more and more about price risk embedded in the long-term offtake contracts that financiers require, and the related concern with standards and procedures to ensure green origin. The leading edge of thinking has come to focus on how to get new hydrogen markets going by lowering risk and creating clear regulatory regimes.
The concerns are being combined in efforts to create new financial markets for exchange of green hydrogen and hydrogen-derived products.
Initiatives in Europe and the Middle East anticipate the development of new commodity markets much like the markets for natural gas, electricity and other widely traded forms of energy.
Such markets will allow trading of standard contracts with related certificates or guarantees of origin to ensure low-carbon sourcing. They will work off benchmark prices and price discovery based on supply and demand fundamentals, with forward positions and hedging that mitigates risk.
Green commodities
“Trading sustainable energy products to reduce carbon will cover a wide range, from sustainable fuels to green hydrogen, green electricity, green products of any sort,” says Jan Haizmann, CEO, Zero Emissions Traders Alliance (ZETA).
“The market for these fuels at this point in time is embryonic, but we are working on market ideas and the mechanics that we have discovered to build these new markets.”
Haizmann, an energy markets specialist, has held various executive functions with the European Federation of Energy Traders (EFET) and the European Energy Exchange (EEX). He recently relocated to Dubai to launch ZETA in the Middle East.
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“I’m confident this region will become a major center for production and export of the new green fuels,” he says. “But only markets can accelerate reaching the net zero goals.”
“I see all the pieces coming into place to begin building regional markets for these new sources of energy.”
He and others look to the high-liquidity markets for major energy commodities, as well as the now well-established instruments of sustainable commodities trade, including carbon credits and renewable energy certificates in the power sector.
These are traded on major exchanges such as Intercontinental Exchange operating in Amsterdam, which handles trade of the benchmark TTF natural gas futures and options, as well as the EU carbon allowances used in the EU’s ETS. In the renewable power sector, Guarantees of Origin and Renewable Energy Certificates (RECs) are traded over-the-counter and on exchanges in North America and Europe. [if !supportLineBreakNewLine] [endif]
Emerging Hy exchanges
These established markets serve as examples for European advocates of new markets to trade sustainable commodities. Market experts are now developing the top level financial architecture and tools for future commodity trading, even as work on the port and pipeline infrastructure continues.
Last month, the first green hydrogen certificate was symbolically handed out during an onshore test event at Port of Rotterdam, awarded to PosHYdon, a Dutch initiative in collaboration with industry partners that plans to produce green hydrogen via electrolysis on a production platform in the North Sea.
The certificate, representing 1MWh hydrogen energy, was delivered by the Dutch certifying agency VertiCer and by HyXchange, a Utrecht-based initiative that is developing a platform for hydrogen trade on the main Dutch pipeline infrastructure. It is supported by the natural gas transport company Gasunie, major ports and companies.
“HyXchange is an initiative to create new exchange products for hydrogen,” says Bert den Ouden, Project Director. “We want to kick-start hydrogen markets.”
Under current Dutch rules, hydrogen and the certificates that guarantee it is derived from low carbon sources can be traded separately, an arrangement that market advocates favor. However, European rules coming into force will require the physical commodity…
Read More: How Hydrogen Will Trade in the Commodity Markets of the Future