How it works
H2Global supports the urgent need to create functioning markets for clean hydrogen and other low-emissions fuels by mobilizing public and private capital. The H2Global mechanism is designed to facilitate the ramp-up and use of clean hydrogen and other low-emissions fuels on an industrial scale, thereby actively contributing to the global energy transition and decarbonization efforts.
The H2Global mechanism
The H2Global mechanism's aim is to use public funds in the most effective and efficient way possible by creating a stable market that attracts investment from private finance. This is essential, as in the long run only private capital can cover the enormous investment required for the establishment of well-functioning markets for clean hydrogen and other low-emissions fuels.
At the core of the H2Global mechanism is a physical trading intermediary, Hintco - the Hydrogen Intermediary Company. Hintco addresses the barriers in markets for clean hydrogen and other low-emissions fuels: clean hydrogen like other low-emissions fuels is not being produced in large quantities due to low demand, and demand is low because there is not enough affordable supply.
To overcome this “chicken-and-egg” dilemma, Hintco simulates the existence of a functioning market on the supply and demand sides through an innovative double-auction approach.
In practice this means that in the pilot auction, Hintco will find the most competitive suppliers of renewable hydrogen derivatives and offer them secure purchase agreements. By concluding long-term offtake contracts (Hydrogen Purchase Agreements, HPAs) the producers obtain the necessary price, market, counterparty, and legal security. This is a necessary prerequisite to taking final investment decisions and allowing projects to switch from planning to implementing.
On the demand side, Hintco sells the purchased product in a subsequent sales auction, entering into short-term sales agreements (Hydrogen Sales Agreements, HSAs) while identifying offtakers with the highest willingness to pay.
In the short- to medium-term, it is anticipated that a gap between purchase and sales prices will occur (cost of difference). As with the Contracts for Difference (CfD) approach, this cost of difference is compensated by grants from a public or philanthropic funding body.
The H2Global impact
The primary impact is that offtake agreements signed with Hintco help awarded projects happen. With the regulatory requirements for clean hydrogen and its derivatives and carbon pricing schemes expected to tighten in the foreseeable future, short-term sales contracts allow Hintco to benefit from expected increases in market prices for clean hydrogen and its derivatives. This means that the funds required to compensate for the cost of difference will decrease over the course of the funding period.
Moreover, the short-term sales agreements create regular price signals through the continuous sales auctions on the demand side. So far, such transparent price signals are scarce. As transparent price information is one of the key features of functioning markets, Hintco directly contributes to the creation of such markets.
In addition, the short-term sales auctions provide continuous trade flows and liquidity, another core characteristic of functioning markets.
