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Highlights

Energy transition benchmarks gain 53% in 2021

High price volatility 'virtually assured': Platts Analytics

Transparency in VCMs, hydrogen to drive demand

Commodity price benchmarks are unlikely to feature prominently at the UN Climate Change Conference starting Oct. 31, but their role in providing transparency about the cost of the energy transition -- in which price volatility looks set to be an enduring feature -- will be vital.

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A basket of 70 energy transition-related price benchmarks assessed by S&P Global Platts has increased in value by over 53% in the eight months to the end of August due to a range of drivers.

Among the biggest risers are battery metals, recycled plastics, electrolysis-derived hydrogen, voluntary carbon credits and guarantees of origin.

Selected Platts energy transition assessments

Platts Assessment 2021 average price YTD change*
Platts CEC (CORSIA-eligible carbon credit) $2.36/mtCO2e 606.25%
Post-Consumer PET bottle bales Curbside Material FOB Chicago 16.90 cts/lb 275.00%
Lithium Spodumene 6% FOB Australia $848/mt 193.33%
Lithium Carbonate DDP China Yuan/mt Wkly Yuan90,146/mt 118.33%
Recycled-PET flakes FD $1,163.22/mt 88.31%
Nordic Hydro Guarantees of Origin Year Ahead Eur0.521/MWh 88.10%
EU Wind Guarantees of Origin Year Ahead Eur0.533/MWh 86.05%
Hydrogen Netherlands SMR with CCS Eur2.24/kg 83.51%
Nordic Hydro Guarantees of Origin Current Year Eur0.355/MWh 81.65%
UK Hydrogen Alkaline Electrolysis GBP4.84/kg 79.51%

*to end-August; Source: S&P Global Platts

The drivers are a mix of rapidly re-opening economies, booming demand and supply bottlenecks. In wind and solar project development, for instance, S&P Global Platts Analytics expects up to a 10% uptick in capital costs due to bullish raw material demand.

"Due to the magnitude of the required changes to the energy system as nations strive to achieve deep decarbonization targets, a high degree of volatility in prices is virtually assured," said Platts Analytics' Dan Klein.

"The intermittent nature of renewables means that the reduction to fossil fuel demand will not always be smooth," he added.

This has political implications, with some countries starting to query the pace and extent of climate action ahead of the UN Climate Change Conference in Glasgow.

In Europe, Poland, the Czech Republic and Hungary have all called for a revision of the EU's "Fit for 55" climate package in light of soaring gas prices, which have had knock-on effects on power and carbon costs.

A majority of EU states argue, however, that an accelerated rollout of renewables helps build resilience to global price shocks and will deliver significant economies of scale.

Proving this, via transparency in power purchase agreements and the capture prices that underpin them, will be crucial in building trust that the transition is good for consumers as well as asset owners.

Building trust in VCMs

Nowhere is the need for transparency more relevant than in voluntary carbon markets (VCMs), with agreement on accounting and verification rules a key deliverable in the COP26 talks.

Clarity on an Article 6 "Paris rulebook" will help boost confidence in VCMs and drive new sources of demand for carbon credits from sectors covering the 78% of global emissions not covered by compliance markets.

Even ahead of COP26, VCMs are gaining traction in some landmark deals.

In early 2021, oil producer Occidental sold the first "carbon neutral" crude cargo, shipping 2 million barrels to Indian refiner Reliance, offsetting the emissions generated across the full life cycle of the cargo with voluntary carbon credits certified by the Verified Carbon Standard.

With a growing number of major global corporate names committing to net zero emissions by 2050, carbon credit prices have shown a clear rising trend in 2021.

S&P Global Platts assessed CORSIA-eligible carbon (CEC) credits at $7.30/mt CO2 equivalent Oct. 27, compared with just 80 cents/mt when the assessment was launched on Jan. 4, 2021.

Meanwhile nature-based credits (Platts CNC), linked to projects which reduce emissions from land-use projects, were assessed at $8.70/mt Oct. 27, compared with $4.70/mt when the assessment was launched on July 12, 2021.

Emerging H2 markets

There is the same need for robust market mechanisms and price discovery in emerging low and zero carbon hydrogen markets.

In its recent hydrogen business model consultation the UK government proposed working with price reporting agencies to explore the development of market benchmarks for low-carbon hydrogen.

"A liquid market benchmark price would provide the clearest indication of the market value of hydrogen," the Department for Business, Energy and Industrial Strategy said in the consultation document.

Ahead of liquidity, price references for early contracts would likely cite other competing fuels, with transparency in the early phases still a key attribute.

Without clear frameworks from regulators, and a broad build-out of new renewables, high and volatile feedstock power and gas prices could send discouraging signals to potential hydrogen project investors.

"Energy markets have already invested in multiple hydrogen projects around the world and are primed to add more," said Alan Hayes, Head of Energy Transition Pricing at Platts.

"Clear regulation that can set a path to the deployment of hydrogen across the energy and transport sectors, providing a real boost to further investment," he said.

Meanwhile bilateral contracts could help develop international hydrogen and ammonia trade, while commodity traders could bring more liquidity as the market develops, the IEA has said.

Platts' hydrogen price assessments show northwest European and Japanese markets as price takers in these negotiations, with Australia one of several lower-cost renewable hydrogen production sources well placed to develop future exports.

The spread between PEM electrolysis assessments (including capex) Oct. 28 showed European prices (Netherlands, $15.54/kg) almost three times those in Australia (New South Wales, $5.35/kg). For context, the comparable assessment for Japan was $8.90/kg.