The future hydrogen market

We take a look at the current state of the hydrogen sector and highlight the challenges and development phases that still lie ahead in order to establish hydrogen as the climate-neutral energy carrier of the future. How will the price develop and what role will trading play?

Reports about new political plans, announcements about infrastructure projects, agreements or declarations of intent between countries or new developments in technology have appeared almost on a weekly basis. The sheer quantity with which the topic of is represented in the media gives the impression that hydrogen could soon make the final breakthrough as an important energy carrier for the future.

The hydrogen market, a snapshot

If we take a look at the current predictions for future hydrogen-focused economies, one thing is clear: there is still a long way to go before we reach a future in which hydrogen is one of the dominant energy carriers. Most of the hydrogen already used in industry today is known as grey hydrogen. It is obtained from fossil energy carriers such as crude oil or natural gas. It therefore does not fulfil the requirements of a climate-neutral energy carrier. 

In 2021, just 4% of global hydrogen was produced using electrolysers [1]. With installed capacity of electrolysers worldwide only reaching 300 MW, this represents less than half the electrolyser capacity that the IEA assumes (over 700 GW) will be needed worldwide in 2030 to pave the way for a climate-neutral energy system worldwide [2].

So the current situation present a significant challenge in terms of a capacity gap. And that is before we consider the fact that there is currently almost no transport infrastructure in the form of pipelines, ships, lorries or trains. If green hydrogen is expected to not only replace grey hydrogen, but also natural gas and crude oil in various sectors, there is much work to be done. Figure 1 shows the current breakdown of the energy carriers used in the various sectors to show the scale of these requirements.

Related article: When is Hydrogen Green?

The questions that arise in relation to the energy system of the future are not limited to the technical aspects either. The design of any future hydrogen market outweighs any technical concerns for example. Precisely what that may look like is difficult to say and not just because of the many remaining unknowns. Many different areas also need to be examined in order to answer the question and do justice to the complexity of the energy system.

Some of the key questions to answer include:

• ‘How will hydrogen be traded in the future?’

• ‘How can a hydrogen market be established?’

• ‘How will the price of green hydrogen develop in the future?’

So how could a future hydrogen market could potentially develop and answer the above questions?

The path to a future hydrogen economy

In order to clear the way for a functioning market for hydrogen, in which supply and demand determine prices, hydrogen trading will have to go through several phases. This could be similar to the introduction of renewable energy generation in energy markets.

Today, these plants generate power at a production cost that is lower than that of many conventional power plants. However, when they were introduced to the market, they went through various subsidisation phases to reach the current situation.

In our model, the hydrogen price evolves through four phases on the way to a functioning market, which can be seen in Figure 2. The way in which the price of hydrogen is formed in the different phases changes over time. It is also dependent on external factors such as the completion of important infrastructure, such as the hydrogen backbone.  

Phase 1: Bilateral supply contracts

We are currently in phase 1. There is neither a hydrogen infrastructure nor a hydrogen market. There is also no trading system that influences the price of hydrogen. If you look for markets for hydrogen on the EEX, analogue to other commodities, you will only find a hydrogen price index as a point of reference, the so-called ‘Hydrix’. Its sole purpose is to provide historical information and create transparency.

Despite the non-existence of a market, some companies already have a demand for hydrogen. For example, to take on a pioneering role in the field of ‘green hydrogen’ or ‘climate neutrality’, or because there are major ‘lock-in’ effects in certain areas. However, less abstract, economic reasons can also lead to a company developing a need for hydrogen at this stage. For example, ThyssenKrupp is focusing on hydrogen at an early stage. In this way, the company wants to avoid being at the mercy of price peaks on the global gas market a second time.

The resulting demand from these companies leads to the installation of electrolysis capacities. Due to the aforementioned lack of trading mechanisms, bilateral contracts are currently concluded between hydrogen producers and consumers. Hydrogen is sold at the total cost incurred plus a profit margin and applicable taxes, levies and charges.

Cost-based pricing therefore prevails in this phase.  This approach will take on a market-dominating role until the underlying hydrogen infrastructure, such as the hydrogen backbone, is completed.

Phase 2: Market ramp-up

As soon as the backbone has been finalised, the hydrogen price will enter phase 2, the market ramp-up. The bilateral contracts that have predominated up to now will slowly be replaced by exchange trading as the dominant form of buying and selling. This has consequences for the hydrogen price.

Over time, the total cost becomes less and less important and is replaced by a price coupling to competing energy carriers such as natural gas, oil and grey hydrogen. This development can be explained by the fact that green hydrogen will increasingly compete with fossil fuels. The decision whether to use green hydrogen or fossil energy carriers depends increasingly on the prices of the individual commodities and the price of CO2.   

Phase 3: Competition for utilisation   

The end of the market ramp-up is characterised by the fact that the price of green hydrogen is completely detached from the total costs. The pricing of hydrogen thus reaches the third phase. In this phase, prices for green hydrogen are determined solely by competition for utilisation with other commodities.

Even if supply and demand for green hydrogen are not yet the decisive mechanisms for setting prices, the price will nevertheless be determined for the first time entirely by market mechanisms and independently of total costs. The extent of the influence of the individual energy carriers on the hydrogen price depends primarily on two factors: how much the absolute amount of hydrogen used in the individual sectors grows

and which energy carriers are currently being used in the respective sector.

These two parameters can be used to determine the relative influence of the individual energy carriers on the price of hydrogen. As the decarbonisation of the sectors is proceeding at different speeds for economic and technical reasons, the price sensitivity of green hydrogen is changing. This change can be seen over the years for the various energy carriers. This is shown in Figure 3.

Phase 4: Emancipation

Over the years, the market penetration of hydrogen will have steadily increased due to various economic, technical and political factors. This will position hydrogen as the dominant energy carrier on the gaseous fuels market.

It therefore plays an important role in achieving climate neutrality. Thanks to its dominance, the price of green hydrogen is now also completely detached from that of fossil energy carriers. This is because these will only play a very subordinate or even no role at all in our energy system.

In this fourth phase, the price of green hydrogen is instead determined solely by supply and demand – reaching a market equilibrium. In this phase, a similar behaviour can therefore be assumed for hydrogen as we see today with other commodities.  

But what about hydrogen imports and their role in the future hydrogen economy?

Well, Germany for example will have to import a large amount of the energy it needs in the future, just as it does today. However, this energy will no longer be imported in the form of natural gas and crude oil, but in the form of green hydrogen and ammonia. The regions of North Africa, Southern Europe and Scandinavia will play a major role in this and will act as the main source of imports.

The first import structures for green hydrogen and ammonia are already forming as we approach the end of the first phase. The importance of imports will increase over time, as more and more regions will be able to export hydrogen to Germany via pipelines.

Figure 4 visualises the breakdown of hydrogen supply in Germany. Domestic production and imports from Europe and other European countries are shown, emphasising the importance of imports once again.

The HyPrix as a telescope for future prices

This is one possible path that shows us the way to a hydrogen economy. It is also clear that our current society is only at the beginning of this path. There are still many uncertainties, especially regarding the pricing of green hydrogen.

Based on this possible development path, Energy Brainpool has developed a model in recent months to estimate future hydrogen prices. The ‘HyPrix’ hydrogen price index uses our four power price scenarios and our price assumptions for future commodities as a data basis.

In order to estimate the import volumes of green hydrogen and green ammonia, the ‘HyPrix’ is primarily based on the ‘Ten Year Network Development Plan (TYNDP 2024)’ from ENTSO-E [3] and the Agora study ‘Hydrogen Imports from Germany’ [4]. The import prices are taken into account using the ‘Global H2 Cost Tool V3’ from the EWI at the University of Cologne [5]. 

Figure 5 shows the four different price curves for green hydrogen, which show customers a possible development range for the hydrogen price. Each of the four curves is based on one of our power price scenarios and reflects its individual storyline.

Figure 6 shows the decoupling of the price of green hydrogen from total costs, as described above. This shows that the index price only follows the fluctuating total costs in phase 2 to a limited extent. Over the years, there is a widening gap between the two values, raising the question - how does this fit together? This difference can serve as a potential guide for future subsidies, especially in a qualitative comparison with the price trends of the other scenarios.

The price difference between grey and green hydrogen can also develop a similar function regarding the value of future Guarantees of Origin (GOs) for green hydrogen. Green hydrogen has long been a scarce commodity and GOs for them are therefore in high demand. Nevertheless, they are slowly but steadily losing value as market penetration increases and green hydrogen becomes the dominant gaseous energy carrier.  

HyPrix as a navigator through the hydrogen transformation, a summary 

The energy industry is currently facing profound upheaval. As players in the energy market must set a decisive course for a climate-neutral future, hydrogen and other gaseous energy carriers will become central to these discussions. This transformation brings with it numerous uncertainties which, combined with the already high complexity of the energy system, make it difficult to make long-term decisions. The ‘Hyprix’ helps by estimating prices in the short term. In addition, its long-term development path provides a robust basis for decision-making.

Sources:

[1] IRENA - Hydrogen

[2] Global hydrogen demand by production technology in the Net Zero Scenario, 2020-2030 

[3] TYNDP // 2024 Scenarios Methodology Report

[4] Wasserstoffimporte Deutschlands Welchen Beitrag können Pipelineimporte in den 2030er Jahren leisten?

[5] Institute of Energy Economics at the University of Cologne