As hydrogen economy matures, bilateral contracts expected to become passé

To scale up the low-carbon hydrogen economy in the Gulf Coast, businesses will need to begin ditching the use of bilateral contracts in favor of an open-access infrastructure similar to the natural gas market, hydrogen industry leaders and researchers said in a June 1 panel.

"Single maker, single user type of contracts are where we are today," explained Ramanan Krishnamoorti, a University of Houston professor of petroleum engineering and chemistry. "I think that's got to change."

During a panel that the Energy Futures Initiative hosted on how to build a Gulf Coast clean hydrogen market, experts agreed that the Gulf Coast—with its existing infrastructure and energy expertise—has all the ingredients to grow a clean hydrogen market. But as the number of sources and use cases expands in the region, hydrogen could quickly evolve from its use today as a feedstock for other processes to a mature commodity.

"What's happening is the sources and uses of hydrogen are expanding," said Dilanka Seimon, vice president of alternative energy for Energy Transfer. "And it will evolve just as other commodity markets have over time—from a more bilateral producer-consumer based business to a more open access infrastructure network."

There are two models that could potentially take the place of bilateral contracts—take-or-pay contracts or tolling agreements. Whereas take-or-pay contracts are more ideal for local markets, tolling agreements make more sense in the context of global trade, where hydrogen is often exported and imported as methanol or ammonia, said Krishnamoorti.

Either pathway, however, depends on how the market develops and ultimately values green or blue hydrogen, especially for manufacturers of chemical products using a hydrogen feedstock.

If there were a common, universal measurement for how green or blue hydrogen was priced in the market, then low carbon hydrogen projects could more easily attract financing.

"If there could be an index for hydrogen that is similar to what Henry Hub is for natural gas, that could do more than almost anything else to drive investment and price certainty for project developers," said Hunter Johnston, attorney at Steptoe & Johnson.

"If we have a common measure for what those products are in the market—what the premium is—then whether going on a tolling agreement or formula-based pricing, either one could be successfully project financed," he said.

The future of the hydrogen economy is somewhat dependent on how and where the Department of Energy directs its grant dollars, both the $8 billion earmarked for at least four hydrogen hubs and other money that will come through the department's Loan Programs Office, said Brad Markell, executive director of the AFL-CIO Industrial Union Council. Until then, it will be hard to predict how future hydrogen contracts will be structured.

"We're in this place where we don't have spot markets, we don't have well-developed markets," Markell said. "We're going to need to cross this valley and get to a place where we can have spot markets. I think the path there will help drive the structure of these contracts."