09 May 2023 | 17:35 UTC

Analysis: Low-carbon hydrogen, ammonia deals pick up, but uncertainties weigh on Q2

Highlights

Opaqueness in pricing helps to spur partnerships

Low-carbon ammonia pricing to be linked to conventional ammonia: Yara

Announced ammonia offtakes surpass 2 million mt, hydrogen 1 million mt

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Though momentum in low-carbon hydrogen and derivative projects picked up in the first quarter with a flurry of deals signed globally, Q2 could see a slowdown amid policy uncertainties in many countries.

Delays from policymakers on regulation specifics have led to uncertainties in the market, even with vast government subsidies aimed at decarbonizing hard-to-abate sectors available.

Those delays, coupled with opaqueness in pricing for low-carbon hydrogen and ammonia, have driven market players to seek strategic partnerships aimed at securing project financing.

Announced memorandum of understanding volumes for low-carbon hydrogen and ammonia have piled up ahead of offtake agreements. In 2023's first quarter, announced low-carbon ammonia offtakes surpassed 2 million mt, while for low-carbon hydrogen the figure was 1 million mt, S&P Global Commodity Insights data showed.

"There is no established pricing mechanism for blue ammonia yet," Eren Basak Gursoy, pricing manager at Yara Clean Ammonia, said. "However, there seems to be a consensus in the market that the pricing will be linked to conventional ammonia market given the use of the same feedstock and production process. Nevertheless, blue [and green] ammonia price commands a premium due to its environmental benefits differentiating it from conventional gray ammonia. The premium for blue [and green] ammonia will be highly influenced by value to consumer, which is dependent on the regulatory environment as well as subsidies and incentives."

Blue ammonia is ammonia derived from natural gas, coupled with carbon capture and storage, while green ammonia is ammonia derived from electrolytic produced hydrogen, which uses renewable electricity.

In the US, the Treasury Department is expected to announce updates in the third quarter on calculating life cycle GHG emissions of projects looking to get IRA funding. The details are expected to provide clarity on eligibility for IRA funding. Canada, the UK and EU are also seeing policy decision delays, and they affect other regions because of the various offtake agreements being lined up.

Pending policy decisions, market participants have started offering fixed-priced long-term offtake deals and forming binding strategic bilateral agreements, hoping to secure financing for projects expected to come online in 2025-26 at the earliest.

MOUs and offtake agreements

For global projects, MOUs are seen to be more common as initial expressions of interest among market players. Most MOUs are considered non-binding, so they are likely more attractive to parties looking to establish initial relationships. The MOUs then typically transition to more binding long-term offtake agreements or small offtake contracts, such as the recent Saudi Aramco deal for certified low-carbon ammonia to Japan.

According to data collected by S&P Global, announced offtakes for Q1 were for an estimated total of 2.03 million mt of low-carbon ammonia, 1.83 million mt for green ammonia and 200,000 mt of blue ammonia.

Despite the lower volumes for blue ammonia, it is expected to come into the market before green ammonia, based on operational timelines of major projects, data from S&P Global Hydrogen Production Asset Database showed.

Offtake agreement volumes for low-carbon hydrogen were lower. Of the total announced offtake volume of 1.28 million mt of hydrogen, blue hydrogen accounted for 1.03 million mt and green hydrogen for 250,000 mt, S&P Global data showed.

Though offtake volumes for hydrogen are lower compared with ammonia, several projects focus on exporting ammonia as a hydrogen-carrying energy vector, based on the economics of transporting ammonia versus hydrogen, high energy density and infrastructure available for ammonia.

End-uses for some of the announced offtake volumes were toward decarbonizing the marine fuel sector, power generation and the conventional ammonia sector, S&P Global data showed.

According to data from S&P Global, announced MOUs directed toward low-carbon hydrogen and ammonia volumes for the first quarter of 2023 were almost triple the amount of offtake volumes, S&P Global data showed. MOUs announced for low-carbon ammonia had an estimated total volume of 7.068 million mt of ammonia for Q1, 3.97 million mt for renewable-power derived ammonia and 3.1 million mt for blue ammonia.

Estimated MOU volumes for renewably derived hydrogen were at 5.6 million mt, and a negligible amount for blue hydrogen, the data showed.

Although there were more MOUs signed than offtake agreements in Q1, only some MOUs are expected to reach maturity and/or transition to an offtake status going into Q2 amid policy uncertainties.

Global delays for hydrogen policies

Some countries and regions set to become key markets have already announced firm regulation and subsidy schemes to reinforce their competitiveness in the low-carbon hydrogen and ammonia space, all while updates are being polished.

Other subsidy schemes, such as H2GLOBAL, have emerged, aimed at importing green hydrogen and derivatives, led by Germany.

Key markets that are planning to have a clear subsidy scheme and/or contract of difference directed to low-carbon fuels this year includes Japan, with its prime minister, Kishida Fumio, announcing in late April that "Japan would update its hydrogen energy strategy in push for carbon neutrality by the end of May."

Other countries like Australia have announced Guarantee of Origin schemes aimed at designing a streamlined process for reporting emissions during hydrogen production, with the policy supporting market development.

Q1 Low Carbon Hydrogen Regulatory Updates

Country/Region

Policy

Mechanism

Period of availability

Latest updates/ Next-steps

United States Inflation Reduction Act (IRA)

Investment tax credit

Production

First 10 years of a production project's lifetime

U.S. Treasury Department to announce guidelines on emissions accounting; believed to answer questions regarding additionality, deliverability and time-matching

Carbon sequestration tax credit Projects have until January 2033 to begin construction
Regional Clean Hydrogen Hubs Program Capital Provision Until expended Concept papers were due Nov. 7, 2022 -- Full applications were due April 7, 2023 -- Final hub selection pending
Canada (Part of 2023 Budget Proposal)

Clean Hydrogen Investment Tax Credit (ITC)

Investment tax credit 2023-2035

Parliamentary vote on 2023, budget proposal pending

Awaiting details on: additionality, deliverability, and time-matching

Canada Carbon Capture, Utilization and Storage Tax Credit (CCUS ITC) Investment

Tax credit 2022 - 2030

Parliamentary vote on 2023 budget proposal pending

Awaiting stakeholder feedback from Natural Resources Canada (due by May 31, 2023)

European Union

Renewable Energy Directive (RED III) -- latest revisions

Legal definition and constitution of renewable derived hydrogen Up till 2030 Proposed Feb 2023, non legislative but legally binding for member statesnull null Requires approval from EU Parliament and countries, before it can become law
European Hydrogen Bank Pilot Auction Fixed premium subsidy

2023-2033

Announced March 2023 as part of the EU's Innovation Fund

Pilot market test to commence Q3 2023

United Kingdom Contracts for Difference Subsidy Funding CFD Subsidy Funding 2 rounds in 2023 and 2024 Launch aimed for 2023
Australia Regional Hydrogen Hubs Program Capital Provision 2 stages, up till 2030 Projects evaluated on rollout basis