The H2Global Mechanism

In line with the Paris Agreement, the EU and Germany have set the ambitious climate protection goal of achieving greenhouse gas neutrality by 2050 resp. 2045. This requires significant changes in all sectors of the economy. For the complete transformation towards a CO2-neutral future, we depend on the use of green hydrogen and its derivatives, such as ammonia, methanol, and sustainable aviation fuel. The German government therefore supports the rapid market ramp-up of PtX value chains. Its National Hydrogen Strategy focuses on supporting private investments in the sustainable production, transport, and use of PtX products.

In this context, Timo Bollerhey and Markus Exenberger in cooperation with an interdisciplinary team of experts initiated and developed the funding instrument H2Global with financing of the German Federal Ministry for Economic Affairs and Climate Action (BMWK). H2Global was designed to pave the way for PtX products that are sustainably produced from renewable energies in partner countries to be available in Germany and Europe. Doing so, H2Global contributes directly to the protection of the environment and the climate.

H2Global is an auction-based mechanism with the objective to promote a timely and effective PtX market ramp-up on an industrial scale. Currently, high upfront investment costs, the inability to recover these costs and the overall inhibiting regulatory environment contribute to a market failure with actors holding on to emission intensive products and technologies. The corresponding lack in available and affordable climate-neutral energy sources prevents CO2 emitters from decarbonizing quickly and consistently. To help overcome this market failure, a dedicated intermediary, the Hydrogen Intermediary Network Company GmbH (hereafter HINT.CO), will conclude long-term purchase contracts on the supply side and short-term sales contracts on the demand side. Based on a mechanism in analogy to the Contracts for Difference (CfD) approach, the difference between supply prices (production and transport) and demand prices will be compensated by HINT.CO using grant funding from the German government. The combination of these long-term purchase agreements with HINT.CO as a government-backed off-taker provide the necessary investment security to unlock large-scale investments now, resulting in a catalytic effect for ramping up the hydrogen economy.

For both, the purchase of the products by HINT.CO and the sales side, the price is determined via competition-based bidding procedures as part of a tailored funding window (see below). In line with sustainability criteria, the bids with the lowest supply price and the highest demand price are awarded the purchase and sales contract, respectively, in order to minimize the price difference that is to be compensated. Thanks to short-term sales contracts, H2Global can benefit from expected increasing market prices for conventional products reducing the gap that has to be compensated in the future. Accordingly, the funds required to compensate the price difference will potentially decrease over the course of the funding period, making it a highly effective and cost efficient mechanism compared to common subsidy schemes.

With H2Global, operators and investors receive the planning and investment security that is required for the development of large-volume electrolysis capacities, as they can build their business and financing model based on long-term purchase agreements with a solvent contract partner at cost-reflective prices. Simultaneously, on the demand side of HINT.CO, H2Global enables the integration of PtX products into the economic cycle at competitive prices.

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