When the CERAWeek Innovation Agora kicks off next week, hydrogen will be on everyone’s mind. As one of the themes of this year’s summit, the molecule serves as the foundation for a range of clean fuels that will be integral to a net-zero economy. While hydrogen has been circulating as an industrial commodity for decades, markets for the low-carbon variety are still nascent.
In this interview, Mike Adams, 8 Rivers’ Senior Vice-President and Managing Director for Capital Management, provides his take on how these markets will evolve in the coming years and what success looks like.
You’re appearing on a panel at CERAWeek about hydrogen offtakes. Can you provide a sneak peek of what you will talk about?
The key message is that the financial structures for hydrogen offtakes require alignment between the buyer, seller, and other project stakeholders and a clear understanding of who is willing to or capable of bearing which risks. Much of the low-carbon hydrogen market is regulatory-driven, and these partnerships are just starting to take shape now.
What exactly are we referring to when we talk about offtakes for low-carbon hydrogen?
These are long-term contracts—typically of ten or more years—that lock in a buyer for the hydrogen at a given price. These contracts often take effect before the final investment decision is made on a hydrogen production facility and can serve as the foundation for debt or equity financing for the facility. It’s basically letting the project developer say, I have a guaranteed buyer for this commodity for the foreseeable future, so this facility is a good bet.
How does the offtake market for low-carbon hydrogen differ from what we’re used to with “traditional” hydrogen?
Today, most hydrogen is made from steam methane reforming with no carbon capture. Production facilities are usually sited close to the end-user, which is dominated by ammonia production for fertilizer.
We expect the picture to look dramatically different in the coming years, largely due to two drivers: power generation in South Korea and Japan, and industrial processes in Europe and North America. Both of these use cases face decarbonization pressures from different sources, often on the regulatory end.
In the Asian context, South Korea and Japan are both planning on leveraging the combustion of ammonia made from low-carbon hydrogen to generate electricity, while factories in the West will likely use low-carbon hydrogen as a feedstock to make goods like steel and chemicals.
At the same time, we expect North America to dominate the production of low-carbon hydrogen, largely due to incentives in the Inflation Reduction Act. All this means that we need to rethink the relationship between buyers and sellers, especially given the long distances this low-carbon hydrogen will need to flow to reach users in Asia and Europe from producers in the US.
How does this change what the offtake market will look like going forward?
For the first time, the carbon intensity (CI) of the hydrogen is being valued. Take ammonia, where the Tampa index has traditionally served as the benchmark price on deliveries in the US market. It’s really difficult as a blue ammonia supplier today to look at that index and say, that’s indicative of the value I should receive, because it does not value the low carbon-intensity attribute, and the historical prices are not indicative of the impacts of the new international demand.
This results in a market that’s in the midst of a lot of change. There are a lot of discussions between producers and buyers about how the risk-sharing picture should shape up. This takes into account the potential complexities associated with shipping ammonia, with CO2 storage, with risk of CO2 leakage, and so on. Where do all these considerations sit in the value chain between the buyer, the producer, suppliers and the storage provider? How will different parties value them or mitigate them in structuring offtake agreements? We haven’t established the industry norms around these questions yet, but they are coming together quickly.
What does a successful offtake market ultimately look like?
Long-term success will see a clear market price for low-CI ammonia on international markets—with minimal policy support—in the same way that there’s an market price for liquified natural gas today. That’s ultimately the barometer of success: that there’s a highly liquid market with standardized contracts.
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