Offtake agreements and pricing

Executive summary

Genuinely ‘low carbon’ and ‘green’ hydrogen sectors are expected to play an increasingly significant role beyond 2040 in a carbon-neutral energy system. This is particularly true for hard to abate sectors where electrification is only partially possible – for example, in the heavy industrial, chemical, and long-haul transportation sectors. 

However, given the nascent stage of the sector, one of the key hurdles to establishing a global green hydrogen market will be the development of bankable offtake arrangements which regulate the sale, purchase, storage and supply of green hydrogen (and its derivatives).  Research by BloombergNEF reports that, of all clean hydrogen capacity planned by 2030, only 10% of announced projects have identified a buyer. This gives rise to an important ‘chicken-or-egg’ scenario for the green hydrogen sector: developing green hydrogen projects at scale will remain challenging without bankable forms of offtake agreements and, similarly, it will be difficult to negotiate bankable hydrogen offtake agreements without there being sufficient projects to establish an international market to trade hydrogen and its derivatives.

There is, however, a strong and growing appetite to invest in the production and supply of green hydrogen globally. Governments are keen to attract inbound investments for hydrogen projects in their jurisdictions, project developers are motivated to invest in green hydrogen technologies as part of their decarbonisation ambitions, and project financiers and development finance institutions are looking to fund green hydrogen projects as part of their plans to transition away from fossil fuels. This appetite is reflected by the fact that several of the public and private funding processes held to date have been oversubscribed.  There are also a growing number of notable contract-for-difference schemes and other market mechanisms led by governments around the world to facilitate investment in hydrogen projects. 

Considering this growing appetite, hydrogen offtake agreements that balance the interests of producers, consumers, funders and investors alike will be critical to the bankability and commercial viability of individual projects and the sector as a whole. While a range of market mechanisms including financial incentives, contracts for difference schemes and demand targets will be needed to bridge the price gap between green and fossil fuel hydrogen, offtake agreements and pricing mechanisms can also contribute to reducing offtake risks. These arrangements will, in turn, provide a bridge between the supply and demand markets for hydrogen and will be a key factor in determining whether hydrogen can realise its potential as a sustainable alternative to fossil fuels.