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H2Global

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H2Global is a temporary funding instrument in the sense of a symmetric market premium model for a timely and effective market ramp-up of green hydrogen (H2) and power-to-x products (PtX).[1] The aim of the H2Global concept is to create sufficient planning and investment security for operating companies and investors to invest in production and plant capacities on an industrial scale already today, without the existence of a functioning green H2 and PtX market.

Initial situation and objectives of the concept

In line with the Paris Agreement, which came into force in November 2016, the EU and Germany have set themselves a climate protection target of reducing greenhouse gas emissions by 80 to 95% by 2050 compared to 1990 levels. In order to achieve this long-term climate goal and drive the transformation to aCO2-neutral future, the German government has identified the promotion and production of renewable energy-based hydrogen as “indispensable”.[2] The following problems exist: According to current estimates, the demand for green hydrogen in Germany will far exceed the potential supply in Germany and Europe in the medium and long term. Germany will therefore have to import H2 and H2 derivatives in order to achieve its decarbonisation targets. In addition, the production price of green hydrogen and its PtX derivatives (e.g. so-called e-fuels such as green kerosene) is currently still significantly higher than the price of their established, fossil-based counterparts. Therefore, there is also a significant price difference between the supply and demand price for green hydrogen and its derivatives, which stands in the way of an unsupported market ramp-up of the segment in the foreseeable future.

H2Global therefore addresses the following objectives, which were laid down in the German government’s National Hydrogen Strategy (NWS) published in June 2020:

  • a rapid and efficient global market ramp-up and associated scaling and cost reduction of the production of green H2 and its downstream products in a phase in which the necessary regulatory framework conditions have not yet been implemented (bridging function), which would be necessary for a market-relevant price. H2Global is clearly limited in time and volume.
  • supporting private investment in the economic and sustainable production, transport and use of green hydrogen in order to stimulate long-term market demand for emission-free produced hydrogen and its derived products in Germany.
  • the establishment of hydrogen supply chains to Germany.

How it works

Double auction model and compensation for differential costs

In order to link supply and demand, the concept envisages the establishment of a non-governmental intermediary (special purpose entity called Hydrogen Intermediary Network Company “HINT.CO”). This intermediary determines the best or most favourable offer (worldwide or in a specific region) for a defined quantity of green hydrogen or a derivative by means of competitive procedures and concludes long-term purchase agreements (Hydrogen Purchase Agreements – HPA) including delivery to Germany. Subsequently, the intermediary concludes shorter-term sales contracts (Hydrogen Service Agreements – HSA) with purchasers in Germany (“double auction model”). For the foreseeable future, the purchase price will still be significantly higher than the achievable market price in Germany. The remaining difference between the purchase and sales price is compensated by the intermediary via a corresponding grant from the Federal Government. The model refers to existing contracts-for-difference (CfD) approaches via this compensation mechanism. The long-term purchase contracts and the high creditworthiness of HINT.CO due to the existing risk assumption by the federal government create the necessary planning and investment security for the development of large-volume electrolysis capacities and transport infrastructure.[3]

Schematic representation of HINT.CO as an intermediary between the supply and demand side with a double-sided auction model

Possibility to reduce the difference

Due to the prospective adjustment of the regulatory framework conditions (e.g. ambitious implementation of RED-II) and the resulting successive increase in demand and willingness to pay for CO2-free energy carriers, it will in all likelihood be possible in the medium term to achieve a premium in the market price for the sale of green hydrogen or its derivatives in Germany compared to grey hydrogen or PtX derivatives. Due to the maturity divergence on the side of the purchase and sales contracts of HINT.CO, it can participate in a potential increase of the market prices for CO2-free energy carriers in the sense of a symmetrical market premium model. The necessary compensation of the cost difference by the federal government would thus be reduced over the term of the purchase agreements (HPA). The funds made available by the federal government to compensate for the differential costs could thus be used for new, additional auctions or could flow back to the federal government. With no change in the use of funds, additional auctions can thus be carried out and H2Global offers an upside potential so that significantly more projects can be funded and a higher electrolysis capacity can be installed beyond the ex-ante defined minimum output.

Schematic representation of the development of differential costs

Implementation by foundation

H2Global will be implemented by a foundation under civil law (possibly as a consumption foundation according to § 80 para. 2 sentence 2 BGB).[4] The foundation will become the recipient of BMWi grants, which it will use to offset the losses of the H2 sale. In accordance with its budgetary obligations (§ 23,44 BHO), the BMWi will define the exact purpose and use of these grants in consultation with other ministries. The intermediary, HINT.Co, will be set up as a special-purpose enterprise of the Foundation in the legal form of a GmbH (limited liability company), of which the Foundation is the sole shareholder. HINT.Co will be responsible for the purchase and sale of the green hydrogen and H2 derivatives via corresponding tenders and auctions. HINT.Co will use an external service provider to carry out the auctions. The Board of Trustees of the Foundation ensures compliance with the purpose of the grant as defined in the grant notices of the BMWi and the specifications for the use of funds. To this end, the Foundation develops, communicates to the (market) public, and monitors all regulations that form the basis of the procurement and delivery auctions as well as the participation of the respective market participants. In doing so, the Foundation will regularly make use of suitable external specialist institutions and service providers. The Foundation is represented in public by an elected President.

Development

Based on the goal of a timely market ramp-up of green hydrogen products anchored in the NWS and the Covid 19 stimulus package, a project team led by Markus Exenberger and Timo Bollerhey of the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH submitted an initial concept sketch of H2Global to the German Federal Ministry for Economic Affairs and Energy (BMWi) in autumn 2020. This was further developed in a second phase by an interdisciplinary team of experts under the project sponsorship of the German Hydrogen and Fuel Cell Association (DWV), in cooperation with GIZ, the law firms Wellmann & Klein, Redeker Sellner Dahs, Becker Büttner Held, the East Bavarian Technical University of Regensburg, the Institute of Energy Economics at the University of Cologne, and the Fraunhofer Institute for Solar Energy Systems.

With the end of the funding period for the development of the concept on 31 March 2021, the establishment of an industrial foundation is planned, through which H2Global is to be implemented after the final development of the concept. The go-ahead for the first projects is expected to be given in the course of the calendar year 2021.[5][6]

Individual references

  1. Klaus Stratmann:How Germany wants to secure access to green hydrogen.In: Handelsblatt. 17 November 2020, retrieved 10 April 2021 (German).
  2. BMBF internet editorial office:National Hydrogen Strategy – BMBF.Retrieved April 7, 2021.
  3. Klaus Stratmann:Green hydrogen: Germany paves the way for industrial production.In: Handelsblatt. 8 January 2021, retrieved 10 April 2021 (German).
  4. Klaus Stratmann:Turbo for green hydrogen: The global breakthrough for the energy carrier is in sight.In: Handelsblatt. 18 February 2021, retrieved 10 April 2021.
  5. Klaus Stratmann:Federal government wants to push ahead with large-scale hydrogen projects.In: Handelsblatt. 17 March 2021, retrieved 10 April 2021.
  6. Energy policy: Green hydrogen: Germany paves the way for industrial production.Retrieved 8 April 2021.