The hydrogen market today has annual demand of around 95mt, equivalent to the combined gas demand of Germany, the Netherlands, the UK, Italy and France in 2022. However, there is little-to-no understanding of hydrogen’s fair market value in the sense of a transparent, established price reference. Today, the majority of hydrogen is traded under bilateral offtake agreements, meaning its price is known only to the counterparties on each side of the deal.

The lack of a price for hydrogen is important, as it risks hindering the energy transition. In standard commoditisation of energy products, price differentials indicate what balancing actions should be taken. If there is too much of a commodity, the price eases, deterring sellers and incentivising buyers. Similarly, if there is a shortfall, the price should rise, reversing the dynamic.

Without a transparent price, buyers and sellers act with less certainty, and new entrants struggle to consider cost-benefit analysis, prolonging the time to take FIDs.

Lastly, in a traded market with price transparency, it is possible to take multiple positions to balance and optimise portfolios, such as through a primary offtake agreement while holding positions for overlapping delivery periods.

There are arguably three potential pathways towards the emergence of a market price reference. For the purposes of this article, these shall be listed as the conventional approach, the policy-driven approach and the accelerated approach.

95mt/yr – Global hydrogen demand today

The conventional approach

History is important in commodity markets when identifying structural consistency. The conventional approach is exemplified through the evolution of European gas hubs, tracking them to becoming liquid, signalling ideal market conditions.

In the 1960s, following discoveries of natural gas in the Netherlands and the British section of the North Sea, market participants faced a challenge. A new source of energy supply meant no historical reference for value, meaning it was hard to sell and harder still to gain financing.

To overcome this, participants used long-term contracts (LTCs) lasting 20–25 years, referenced to oil, a related and more established commodity. Oil was indexed in LTCs as it was a competing fuel, so if the price of oil changed, the drivers of that price change should also impact gas.

Over the first LTCs, infrastructure developed to connect market parties, driving price evolution as parties could buy spot volumes to balance unexpected outages or changes to demand. The spot price could have been based on contract prices but represented a shorter deal.

Starting with the UK, Heren Energy, now known as ICIS, became the first market information source to price the spot activity of the UK gas market in the mid-1990s. These assessments were generated using submissions from market parties that wished to understand fair market value for their spot transactions.
At the same time, gas transmission system operators (TSOs) developed a high level of data transparency, reporting on changes to supply and demand in near-to-real time, meaning participants could review this data with market prices to hand and negotiate trades in response.

As more parties entered European markets, information transparency elevated and trade increased into the 2000s, and to this day there are core gas markets in Europe where liquidity continues to grow.

The conventional approach predicates established supply and demand, as well as infrastructure and information transparency. Although there is demand for some 95mt of hydrogen globally today, in 2022, 0.7% of global hydrogen production came from low-carbon sources, according to the IEA’s Global Hydrogen Review. This means interactions between current buyers and sellers of hydrogen are not reflective of a future hydrogen market, and therefore initial projects need to be established, likely underpinned by LTCs.
However, sellers may not enter an LTC for all their capacity. As hydrogen is produced from power and gas, producers may spare capacity for when power and gas prices are low, optimising output. Further, as the capacity is spare, volumes can be used for spot deals, meaning some spot activity could emerge from the middle of the 2020s when the first hydrogen projects commence operation.

Infrastructure will be critical for spot trade and the emergence of a price. Today there are very few hydrogen networks in operation, and those operational tend to be privately owned. European TSOs indicate that the first publicly accessible hydrogen grids may develop over the 2020s, depending on the country, with some regions more towards post-2030. The Netherlands could offer the first public hydrogen grid by 2025 in Rotterdam, before expanding nationally. Germany’s revised hydrogen strategy also outlined 1,800km of hydrogen network by 2028.

A hydrogen price could emerge through the conventional approach from 2025. However, storage capacity may prove critical. Further, although a price could be developed, market parties may not accept it at a national level if based on localised information, pushing the development of a price towards the end of the decade, as national hydrogen grids and storage capacity come online.

Policy approach

Although lessons from history are important, they are not binding. The policy approach explores how hydrogen is different, and how this difference is being supported by governments. To bring the hydrogen market to reality, governments are developing policies to financially incentivise its use. It is through production support that the market’s development of a price could be drawn out, as subsidy models so far have aimed to enhance transparency.

Chief among these is the European Hydrogen Bank, a scheme brought forward by the European Commission in 2022 that offers hydrogen producers a fixed subsidy per kilo of hydrogen produced over a ten-year period. The subsidy is awarded via competitive auction, with the first held in November 2023.
The European Hydrogen Bank intends to publish initial results of the auction in the first quarter of 2024, including anonymised offtake prices. This means European and global market participants can see raw offtake agreement information at which market parties aim to transact.

It is no small thing to say that such an abundance of information at such an early phase in the market will categorically move Europe closer towards a realisable price reference.

However, one difficulty is that these prices will be infrequent, so as energy markets move, which can happen by the hour, the information from auctions could quickly be less relevant—at least until later auctions are held.

Nonetheless, the emergence of this information will be highly useful in moving deals forward, likely supporting project negotiation and therefore bringing volumes to the market.

Other policy support mechanisms encourage price transparency, and therefore parties involved in such schemes are likely to be initial drivers of information to develop a price reference. However, like the conventional approach, it will be a case of seeing these projects enter operation over the late 2020s.

Accelerated approach

The accelerated approach considers what information is available today, ahead of projects coming online.
Price information is present in the market at the negotiation phase between buyer and seller, ahead of taking FID. Under the accelerated approach, rather than await specific trades, a methodology could be developed that captures today’s price information based on these negotiations.

By developing a potential price assessment methodology to acknowledge usable bids and offers from the negotiation phase of a project’s development, participants could offer the hydrogen market substantial price transparency that could be used to develop an assessment.

Similar to the policy approach, this assessment would hold limitations due to the nascency of the market, but its frequency would track market progress.

The methodology would need to be adaptable, prioritising trades and deals, progressing down to LTC information. So long as a methodology ordered source type appropriately, there could be a lasting price history.

Standards such as project size would need to be developed to ensure the assessment is representative of the market. Or, in the case of sub-size project information submission, this detail would need to be reflected in the assessment’s notation for the week.

This is the task of price reporting agencies today, to assess what has worked in the past but to be open to the information of the present. With a robust pricing methodology, an assessment could be published towards the middle of the decade or sooner.

Which approach for hydrogen?

A hydrogen price is on the horizon provided market participants present information in a transparent manner. However, it is likely that the development of hydrogen may well balance components of all approaches. An assessment could be developed through the accelerated approach, but the strength of this assessment may struggle ahead of characteristics seen in the conventional approach. Policy will be critical to revealing price information and creating an environment where participants feel comfortable with price transparency—likely an outcome from the European Hydrogen Bank.

Nonetheless, fully liquid trade requires certain market characteristics seen in the conventional approach. Projects need to be built, LTCs and subsidies phased out, and additional components such as the use of carbon pricing need to come to play. As fossil fuels become more costly through carbon pricing, hydrogen projects will be able to stand without support, driving further FIDs and adding molecules to the value chain, ready to be transacted.

This article is part of the upcoming special report Outlook 2024, which features expectations from the energy industry for key trends in the year ahead. 



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