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How energy traders can benefit from Europe’s emerging hydrogen market

Development of liquid markets will require sufficient marketable hydrogen volumes as well as free access to pipelines, terminals and storages

Demand for hydrogen in Europe is expected to grow significantly until 2050. This providing opportunities for energy traders. Why? Because the hydrogen value chain involves the transformation and processing of tradable commodities; the evolving hydrogen market provides “cross-commodity” trading opportunities. In light of this, trading companies need to act today to build up the know-how and relationships required to quickly enter the market once trading opportunities emerge.

Why hydrogen trading will become a necessity

Because supply and demand cannot be balanced in most parts of Europe, hydrogen trading is a necessity. In particular, sufficient volumes of green hydrogen can only be supplied from abroad. An imbalance between hydrogen supply and demand also exists within Germany. While northwest Germany may have excess supply of green hydrogen, a balance between supply and demand and access to green hydrogen is not assured in southern Germany.

How a traded market will evolve over time

It is expected that hydrogen will initially be supplied within joint ventures and industrial parks, in which players from different sectors combine their hydrogen-related business activities. These isolated ‘hydrogen islands’ would be sufficient to meet German demand if production capacity is built up according to the German National Hydrogen Strategy.

In the medium term, as Fig.1 shows,  hydrogen production hubs will develop within a country and within Europe with the aim of aligning all international suppliers. These hubs would in turn induce the construction of local transportation networks around them, and around entry points of hydrogen imports. The localised sub-networks will gradually integrate into a Europe-wide network. With the growth of hydrogen demand clustered in specific regions and industries, a suitable transportation system to connect regional and industrial demand clusters to sources of supply will become essential for a liquid market.

Bilateral/long term contracts

During these stages, it is likely that the logistics business will develop similarly to the pre-liberalisation natural gas business, LPG “trading” or distribution business for industrial gases—in which the outcome depends on the future design of the hydrogen logistics system. Pure energy business models are primarily based on offering utility cost optimisation services to hydrogen production facility owners.

Preconditions to develop to a traded market

To develop from a market with bilateral contracts between large producers and consumers into a traded market involving a large number of players, several preconditions need to be met. As the European hydrogen market develops, we can apply lessons learned from the development of today’s natural gas markets. It will be vital to have sufficient marketable hydrogen volumes as well as free access to pipelines, terminals and storage sites guaranteed by regulatory mechanisms.

As the European hydrogen market develops, we can apply lessons learned from the development of today’s natural gas markets

Hydrogen logistics, including patterns of physical gas flows and available storage depots, are complemented by a balancing regime for hydrogen, which allows participants to specify contractual terms that minimise volumetric risks for hydrogen shippers. It is also important for  liquid trading to take place at delivery points that exhibit a natural flow of supply and demand and/or are located on the pathway between areas with a structural excess/deficit. The transition to a global hydrogen market is highly dependent on the technological progress regarding hydrogen transportation.

Asset-backed trading along the hydrogen value chain

A traded market with multiple liquid trading hubs creates opportunities for asset-backed trading business models along the hydrogen value chain. By exploiting mismatches between supply and demand in various regions, energy traders can make use of opportunities in geographical arbitrage and freight optimisation. By taking positions on the developments of price spreads between hydrogen, power, gas and carbon on the back of physical production assets, energy traders can engage in cross-commodity trading. Further opportunities lie in the midstream supply business, where energy traders can take positions along the physical hydrogen logistics chain based on physical transportation assets, such as pipelines, terminals and storage sites.

Hence, potential business models based on connecting supply and demand are highly dependent on the structure of the developing hydrogen market (see Fig. 2). Given the high degree of uncertainty, how can trading organisations prepare themselves for this development? A recent PwC study, Development of the Structure of the European Hydrogen Market and Implications for Energy Traders, provides valuable insights on how trading organisations can set up and adapt their business models according to evolving market structures.

PwC provides comprehensive support to companies in the energy sector during this process and develops practical solutions that deliver maximum value for its clients. With the resources of our expert network in 155 countries at hand, we build a trusting and cooperative relationship with our clients to precisely identify their needs and support them with targeted measures.

Folker Trepte is Leader Energy, Utilities & Resources, PwC Germany 

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