Create investment strategy for hydrogen purchase agreements
WBCSD总结
Toolkit detailing how senior leaders can support the adoption of low-carbon hydrogen, including through Power Purchase Agreements (PPAs).
Key resources
Context
This guide was written based on key insights from Baker McKenzie and WBCSD's Senior Leader Toolkit to Accelerate Strategic Investment in Low-Carbon Hydrogen Offtake.
Low-carbon hydrogen is crucial for decarbonizing industries, especially those using significant volumes of fossil gas. It offers a commercial opportunity for growth, partnerships, and low-carbon products. Senior leadership is essential to empower teams and build capacity for hydrogen adoption. The sector requires strategic assessments and operational decisions due to its pre-commercial nature.
KPIs - full info
38 Mt (million tonne) Potential annual production of low-carbon hydrogen by 2030 (Source: IEA)
6 Mt increase in potential annual demand for low-carbon hydrogen by 2030 (Source: IEA - STEPS)
Usage
JSW
JSW recognizes the leadership opportunity and adopts an internal carbon price JSW Steel have initiated a pilot project with a 25MW electrolyzer capacity at their Vijayanagar plant, which is capable of generating 3,600 tons of hydrogen per annum. This green steel production demonstrates the strength of closed-loop offtake, as JSW Group is well-positioned to develop technological, business and operational learnings as both the producer— JSW Energy — and offtaker — JSW Steel. JSW Steel have also adopted an Internal Carbon Price to make their operations future-ready, as stricter climate regulations emerge globally. This tool also supports decision-making when evaluating the financial viability of new CapEx (Capital Expenditures) projects, whilst accounting for the cost of carbon emissions.
Yara Yara’s collaborative approach to develop the world's first clean ammonia-powered container ship
With global shipping accounting for approximately 2% of global energy-related CO2 emissions in 2022, it is imperative that a company cooperates across value chains to reach the 1.5°C goal by 2030.
Yara Clean Ammonia, North Sea Container Line, and Yara International join forces to realize the world's first container ship that will use clean ammonia as fuel. Named Yara Eyde, the vessel will be the first to sail emission-free sea route between Norway and Germany.
Yara Clean Ammonia AS and North Sea Container Line AS are establishing a joint venture to realize Yara Eyde, while the ship will be operated by NCL Oslofjord AS.
"We see an increasing demand from cargo owners to reduce emissions. Yara Eyde offers competitive and emission-free logistics to cargo owners," says Bente Hetland of North Sea Container Line.
From 2026, Norwegian companies can trade their products emissions-free in and out of Norway. Yara International is participating as cargo-owner. The fertilizer produced in Norway will be shipped emission-free to Germany, cutting scope 3 emissions with 11,000 tons of CO2 per year.
Solution
Senior leaders must navigate the nascent market of low-carbon hydrogen by aligning investments with decarbonization goals. This involves identifying opportunities where hydrogen can reduce emissions and engaging with supply-chain partners. Closed-loop offtake and unlocking the value chain through collaboration are key strategies.
Empowering procurement and informing policies are crucial. Leaders should advocate for enabling policies and work closely with policymakers. Building internal expertise and fostering cross-organizational collaboration can support the transition to low-carbon hydrogen.
In closed-loop offtake, companies develop projects for their own internal supply chain use to support their carbon neutrality targets. In essence, they become both the supplier and offtaker, rather than negotiating a hydrogen purchase agreement with an external supplier.
Impact
Sustainability Impact
Climate Impact
GHG Scope | Impact |
Scope 1 | Reduction in direct emissions through hydrogen adoption. |
Scope 2 | Not directly addressed in the case study. |
Scope 3 | Reduction in supply chain emissions, particularly in sectors using fossil gas. |
Social Impact
Promotes momentum with positive social effects towards sustainable practices and innovation in industries. A sustainable hydrogen economy can deliver diverse socioeconomic and environmental benefits in support of the UN Sustainable Development Goals, both in emerging and developed markets.
Business Impact
Benefits
Low-carbon hydrogen adoption can provide a competitive advantage as regulations tighten and net-zero markets emerge. It supports strategic alignment and operational learnings within business groups.
Empowering procurement and fostering collaboration across the value chain can enhance purchasing decisions and support decarbonization goals.
Costs
Initial investments in low-carbon hydrogen are high due to its pre-commercial status. However, strategic planning and collaboration can mitigate these costs.
Closed-loop offtake models and leveraging buying power can reduce the green premium and support economic viability.
Abatement costs
Not quantified in the case study.
Co-benefits
Enhances cross-sector collaboration and innovation.
Implementation
Typical business profile
Relevant for companies operating in industries using:
Fossil gas
Heavy industry
Transport
Sectors with significant supply chain emissions
Approach
First, the step-by-step approach below outlines how to strategically frame the low-carbon hydrogen investment when approaching a company’s senior leadership
Subsequently, some workable solutions for offtake agreements are presented in Table 1
Step-by-step approach - How to strategically frame the low-carbon hydrogen investment:
Engage with a different risk profile: Companies often approach projects with the aim of minimizing differences between a new solution and a 'business as usual' use case. This approach should be re-framed. Senior leaders can employ a different but not excessive risk profile when engaging with pre-commercial pilot projects to broaden the pool of reliable and cost-effective solutions available to companies, whilst potentially gaining first mover advantages as the world transitions to a low-carbon economy. This re-framing can be assessed in terms of: What certainty is needed by an owner or investor to underpin the development of a pilot project? If the business accepts more risk to support a pre-commercial product, what are the broad limits to that?
Build the right team expertise: Developing the above approach to pre-commercial product risk requires senior leaders to realign certain processes, people and technologies to support deep decarbonization. This requires cross-organizational collaboration, as well as leveraging internal competencies and skills across the organization. In some instances, a group company will act as lead and take on such risks. Senior leaders can remove internal blockages to support a bespoke risk allocation to effectively identify and action decarbonization opportunities.
Empower procurement: It is crucial to provide a benefit weighting towards low-carbon production so that purchasing decisions uphold publicly announced SBTi targets. Senior leaders can empower procurement to re-baseline their pricing scenarios to translate high-level company goals into internal policies and purchasing guidelines. For example, senior leaders can foster engagement with sales, marketing, procurement and sustainability teams so that green products can be re-valued and re-priced as low-carbon markets emerge. This cross-organizational collaboration can help to better quantify upside value.
Inform evolving policies and work closely with policymakers: Senior leaders are in a powerful position to advocate and advise policymakers on the enabling policy environment required to unlock low-carbon hydrogen projects. This includes supply-side support, demand stimulation, and critical enablers like standards and certifications. Once the strategy is framed and supported by leadership, the need may arise to further elaborate on the contracting solutions for offtake agreements, including hydrogen purchase agreements. In the table below, workable contracting solutions are elaborated in relation to hydrogen purchase agreements:
Considerations | Workable solutions | |
Offtaker “Take or Pay’’ (ToP) Obligations | - Suppliers require a minimum demand profile (the take or pay obligation) to underpin project sizing and investment decision - For an offtaker, a long-term take or pay liability can cause a material concern for competitiveness | - Offtaker flexibility in underlying asset can be provided through lower minimum ToP thresholds with incentive structures for achieving target annual quantities - Sharing risk, such as capping ToP breach liability at a level which compensates supplier for most but not all losses |
Producer “Supply or Pay” Obligations | - Provides offtakers with certainty of low-carbon hydrogen supply with liability for a supplier breaching obligations - Suppliers’ ability to deliver is influenced by power purchase agreement ("PPA") solution, the role of storage, and regulatory requirements | - “Send or pay” sized at or similar to ToP level - Tolerance for supplying a certain level of low-carbon hydrogen that doesn’t meet the ‘green’ product specifications |
Role of storage | - For an offtaker, storage can assist if supplier has short term outage and offtaker requires buffer to switch to alternative fuel - For a supplier, storage can be important tool to support production of 'green' hydrogen in the most economically efficient manner to manage | - Shared storage solution developed early to ensure appropriate pricing - PPA strategy designed to align with agreed storage capacity and how that capacity will be used to manage each parties needs |
Termination risk and liability | - Offtakers often require flexibility to reduce volume or terminate due to strategic business decisions (e.g., shutting down a facility) - Suppliers have a limited ability to mitigate losses due to the nascent market and large capital investment required to switch offtakers | - Start discussions on termination risk early with offtakers – it is as important to consider as price and volume - Plan for and price mitigation solutions that could reduce liability in the event of sit closure - Engage with policy makers to address how subsidy support can mitigate risk of loss of significant offtaker |
Change-in law mechanisms | - Regulatory uncertainty is a key challenge for suppliers | - Provide potential for discussion and dispute resolution without explicitly shifting risk from one party to the other |
Table 1: Offtake agreements – finding workable contracting solutions
Stakeholders involved
Senior leaders: Provide strategic direction and empower teams for hydrogen adoption
Procurement teams: Align purchasing decisions with decarbonization goals
Policy makers: Develop enabling policies for hydrogen projects
Key parameters to consider
Technical feasibility
Market readiness
Stakeholder engagement
Implementation and operations tips
Engage with policymakers early and foster cross-organizational collaboration
Address risk profiles and strategic opportunities for successful implementation
Going further
Sources
IEA (2023). Global Hydrogen Review 2023.
Bloomberg NEF (2023). Hydrogen offtake is tiny but growing.
Systemiq (2022). Planet positive chemicals.
H2 Green Steel (n.d.).
International Energy Agency (n.d.). International Shipping.