EU, U.K. Seen Striking Carbon Contracts that will Spur a Huge Hydrogen Investment (2)

By Mathew Carr

Nov. 10, 2020 — LONDON: Germany, other EU nations are seen using carbon contracts for difference, to spur billions of euros of investments in hydrogen and hasten the region’s climate transition.

Carbon contracts are one way to minimize price uncertainty. They are formed where a government or institution agrees with an investor (or a builder of a hydrogen-production plant) on a fixed carbon price over a given time period, according to consultancy Climate Strategies.

https://climatestrategies.org/wp-content/uploads/2020/09/Carbon-Contracts_CFMP-Policy-Brief-2020.pdf

Carbon Contracts for Difference (CCfD) pay out the difference between the price of EU emissions allowances and the contract price, thus effectively ensuring a guaranteed carbon price for the project. In exchange for this insurance, investors are liable for payment if the carbon price exceeds the contract’s strike price. Companies would therefore have an incentive to make climate-friendly, innovative investments and thereby reduce their CO2 emissions.

Carbon prices are likely to determine hydrogen prices, as hydrogen competes with fossil fuels.

Carbon allowance costs now make up about half of Europe’s wholesale electricity costs, after the EU introduced a carbon market back in 2005. They also provide revenue for governments from an asset that’s previously been given away for free (the right to pollute) and an incentive to go clean.

CCfD could also be struck with buyers of hydrogen, such as steel plants, depending who finances the hydrogen-production facility.

Debate about how they will work is just getting started, according to one person close to German policy-maker thinking. There is possibly an announcement coming from the U.K. government as early as this week, said a second person following the situation.

It’s seen that green hydrogen will be produced using spare renewable electricity, making it GHG free. Making hydrogen in this way requires huge volumes of power.

See this post from Timera Energy:
https://timera-energy.com/building-a-hydrogen-electrolyser-investment-case/

This: The potential structure of support mechanisms is starting to take shape, for example incorporating:

  • Fixed or input cost indexed payments to green hydrogen producers that support & stabilise revenue
  • Carbon CfDs for industrial buyers of green hydrogen (supporting offtake contracts with electrolysers)
  • Favourable charging rules e.g. German plan to exempt electrolysers from grid charges & the renewables levy
  • Adaption of other renewable support mechanisms & tender processes to cover electrolysers.

See this post too:
https://www.linkedin.com/posts/grahamcooley_building-a-hydrogen-electrolyser-investment-activity-6731636614864351232-6l7_

(Updated, smoothed edited Tuesday night, updated Wednesday.)

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