A Route to Market for Green Hydrogen
Duncan Dale, Statkraft’s VP of Origination in the UK, examines how trading structures may develop in order to drive a successful new market for green hydrogen in the UK.
Green hydrogen is the key next step to net zero. It enables us to store surplus wind and solar and convert it to heat, transport or power for later on at peak times when it’s most needed. Hydrogen economics are expected to significantly improve as our industry learns more about manufacturing electrolysis plants, and we can expect to see several GWs built in the next decade.
Statkraft’s trading business is excited about playing a big part in supporting green hydrogen projects in the UK. We are the leading player in green energy transition trading with a customer business of 4,300 MW of long-term renewables and 1,650 MW of firm flexible power. Hydrogen has strong synergies with both businesses; Statkraft will enable hydrogen projects to be realised by trading the electrolysers effectively and by providing long term fixes and floors that underwrite bank debt.
The Government’s Low Carbon Hydrogen Agreement (LCHA) demands a 15-year fixed power price – this can only be offered by backers with a strong credit and a large appetite for risk. For example, over its lifetime a 25 MW electrolyser will be taking £200m of risk downstream via the sale of the energy and £100m of risk in the upstream purchase. This makes hydrogen an attractive hedge for Infrastructure Funds with existing renewable assets, able to protect against falling gas prices, or protect from falling prices that come with increased renewable deployment.
The key drivers of green hydrogen are power costs and electrolyser capex. It’s essential that the end customer of the hydrogen is supported so they can choose to run an electrolyser when power prices are expected to be at their lowest. In many cases the customer will have the option to burn natural gas instead of hydrogen if it saves them money. This means that there will be an interaction between the spot price of power going into the electrolyser to make hydrogen and the spot price of the natural gas the customer might burn instead. Running the electrolysers at a medium load factor can save 10% of power price in 2025, growing to 20% over 7 years. At much lower load factors, in the future, when capex has decreased significantly, the discount could be as high as 50% by 2032. This shows how crucial it is to work with the end user to access this flexibility.
The power from electrolysers needs continuous optimisation. This will allow the end customer to buy at low spot prices in the Day-Ahead market, especially overnight, and avoid Peak times and prices. The Day-Ahead to Within-Day position can then be re-traded. For example, if prices go up in the Within-Day market enough, the power that was purchased can be sold and the hydrogen generators can be paused until the power prices fall again. In the meantime the customer can draw from cheaper energy alternatives. Re-trading like this adds value, which increases with price volatility.
There is also a longer-term issue. If spark prices, the difference between power and gas prices, increase substantially, then unless a project has hedged its power long term, it may be necessary to pause hydrogen generation. Therefore, most end users will still require the capability to run on natural gas as backup when the electrolyser isn’t available.
There are a number of ways of structuring the risk to the electrolyser between the upstream purchase and downstream sale. The purchaser, who is buying the power as it’s produced (known as PaP), has the risk of unpredictable renewable generation and not knowing how much power will be available. While downstream there is risk of not being able to predict consumption and demand. Alternative structures include traders fixing PaP risk, they can provide a floor of the difference between upstream and downstream spot prices, or take a share for optimising the difference.
A new market will emerge for time-stamped half hourly eligible low carbon power, starting with the UK Hydrogen Business Model (HBM) and Renewable Transport Fuel Obligation (RTFO) markets. Electrolysers need to demonstrate, at this granularity, that they’re running alongside specific renewable or other low carbon projects. In the case of RTFO hydrogen there is the additional challenge of this being a New to Earth asset. These will have their own price structure and volatility to the underlying power, for instance prices could become very high in the winter when there is little wind on the system.
It is too early to see what the winning business models and trading structures are for this exciting new hydrogen market. But Statkraft is positioned well, already managing the largest flex portfolio in the UK. We will be a big part of driving a successful model, enabling customers to get their hydrogen projects financed and running well.
To find out more, drop me a line at Duncan.Dale@statkraft.com or visit our website.
This blog was also published for RenewableUK in anticipation of the 2023 Green Hydrogen event. See link here.