3. June 2022 By Zoe Holdt, Julius Glaser and Fabian Forkl
Hydrogen: developing an emerging market
Gas is and will remain a pillar of the energy industry: more than a quarter of the primary energy demand in this country (Germany) is covered by gas – or more precisely, by natural gas.
Germany currently imports gas from mainly Russia, Norway and the Netherlands via an intricate pipeline network. However, in view of the current war of aggression, gas supplies from Russia are highly controversial. The share of Russian gas supplies is to be reduced primarily by purchasing LNG (liquefied natural gas).
However, not only does LNG release CO2 during combustion, but the liquefaction process, cooling during transport, the transport itself and regasification at the import terminal also require a lot of energy.
A green alternative is needed
This is exactly where hydrogen comes into play: above all, it would be produced using green energy (with the help of renewable energies) and make it possible to use gas in a way that’s climate friendly. The German government’s National Hydrogen Strategy (NWS) predicts a hydrogen demand of 90–110 TWh for the year 2030; the current demand is about half that. However, this not only requires extensive production capacities, but also large import volumes, which, in turn, require trade and market structures.
Hydrogen is mainly produced and processed locally these days. Cross-regional trade structures are currently only very weak. However, in light of the NWS project and ambitious climate policy goals, hydrogen is expected to internationally establish itself as a commonly used energy carrier over the long term.
Hydrogen is expected to be widely established in industry and the economy due to the key role it plays in decarbonising Germany. In turn, this project requires a corresponding marketplace and trading structures. But how can such a market develop? A past study by the German Association of Energy and Water Industries (BDEW) predicts that this will happen in four rough stages by 2050.
1.) Isolated ‘hydrogen islands’
At this stage of maturity, production and consumption are limited to the local market and bilateral relationships between market participants. Various pilot projects to address this issue are already underway in Germany.
2.) Hydrogen production hubs
In this predicted stage of development, the supply relationships, which are based in a local market, grow to include the regional market (Germany/EU level).
3.) Regional trade between hubs
The next stage of maturity, directly after this, is the formation of trade relations between the regional production hubs; ‘commodification’ takes place.
4.) Global trade between hydrogen markets
In the final stage of maturity, long-term supply and trade relationships emerge on a global scale (Atlantic/Pacific)
It’s clear that these stages of development are subject to a variety of dependencies and associated assumptions. Transforming the hydrogen market from a bilateral exchange to a global marketplace requires significant investment (for example, to set up an infrastructure with pipelines, terminals and storage units, to establish appropriate logistics, to establish standardised trading contracts and to create access to tradable gas volumes).
Politics is probably the most important driver in the development of a long-term, stable and functioning hydrogen market. Not only does producing hydrogen have to become more attractive in order to increase demand and thereby also trade volumes, but using it does as well. Generous subsidies, appropriate funding or government grants for using low-carbon technologies, for example via Carbon Contracts for Difference (CCfD), are just a few examples of what can make producing and using hydrogen more attractive. Doing so requires trade cooperation with neighbouring and partner countries, developing a transport network and clarifying trade, management and patent rights. Hydrogen must be connected to existing energy exchanges and should be flexibly integrated into the electricity and gas markets. If you want to learn more about the politics surrounding this issue, please have a look at the following blog post.
The opportunities and risks involved in establishing the hydrogen market are complex.
A new hydrogen trading market is emerging which includes the areas of commercial hydrogen production and storage, the transport of hydrogen, a trading platform and conversion into final energy.
Since hydrogen is a storable and transportable commodity, new opportunities are emerging for bilateral trade between countries that have not previously traded energy with each other. This will heavily influence foreign policy as well as the energy market itself and lead to a geographical change in energy trading. The energy policies of various countries could therefore change significantly or even completely in terms of domestic politics and must be adapted to this new situation.
But the hydrogen trade has its limits, too: many countries with good production conditions can only be poorly connected to the European market via a pipeline, or not connected at all. For example, using ships to transport hydrogen can often prove uneconomical due to the need to cool the hydrogen to around –250 degrees Celsius and the comparatively low energy density. A great deal of financial effort will be required to drive these developments forward and anchor them in industry and society. Last but not least, the market platform, with its clash of supply and demand, is the mechanism that determines ‘the price’, which, in turn, plays the decisive role for the consumer.
These market development processes entail various IT-oriented and process-oriented possibilities for helping hydrogen market players record requirements and create the necessary structures (technical and organisational). Adesso’s Line of Business Utilities allows it to support companies that are on their way to making new business areas such as hydrogen more tangible, developing them and anchoring them sustainably. You can also find out more on our website.