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Catalyse clean hydrogen supply and demand

Innovative business models to strengthen hydrogen infrastructure

Clean hydrogen could play a key role in helping to meet 2050 decarbonisation objectives, yet widespread investment in hydrogen infrastructure has stalled due to uncertainty. Hydrogen’s "chicken or egg” problem—which comes first, supply or demand—understates the complexity of an issue driven by economic, regulatory and technological uncertainty. Explore 13 innovative business models that could help the industry move closer to a clean hydrogen economy in our report.

Advancing the clean hydrogen value chain

The low-carbon intensity—or "clean"—hydrogen market is far from where it needs to be to meet 2050 global decarbonisation objectives. To achieve net-zero greenhouse gas emissions by the same year, the clean hydrogen market will need to produce roughly six times current global hydrogen supply. According to Deloitte analysis, that is achievable under the right conditions. Those conditions cannot exist without decisive policy support to help create the foundation for market development.

In this report, our focus turns to players in the private sector who struggle with how to mitigate perceived risk in the early stages of market development, even in regions with relatively attractively policy conditions on account of a simple realty. While we know how to produce clean hydrogen, it remains prohibitively expensive relative to alternatives for many businesses. While costs will likely come down, progress toward a robust global hydrogen economy has been slowed by uncertainty across the value chain. Many would-be hydrogen suppliers fear demand is inadequate and many would-be buyers fear that cost-competitive supply is uncertain. For potential investors in infrastructure that could catalyse future growth, that uncertainty is palpable.

Many have come to refer to this as the “chicken-or-egg” problem in clean hydrogen: what comes first, the supply or the demand signals … or even the enabling infrastructure? That likely understates the complexity of the situation:  It might more aptly be described as the “systemic first mover dilemma” in clean hydrogen.

Deloitte and Princeton University’s Andlinger Centre have recently teamed up to explore the challenge. Working with industry participants at each stage of the hydrogen value chain, we identified at least a dozen points in the development, production and distribution of clean hydrogen where the first mover problem exists and it goes well beyond suppliers and off-takers of the clean hydrogen itself.

Five key uncertainties in the clean hydrogen market

The hydrogen infrastructure investment dilemma, grounded in lagging business model solutions, is appears to be rooted in five key uncertainties present in today’s clean hydrogen market. The uncertainties align with the factor conditions needed to accelerate the hydrogen economy. For more information on the factor conditions, consult Deloitte’s "Hydrogen: Making it happen" report.

Demand
uncertainty

What if demand sectors don’t contract for clean hydrogen at scale because of perceptions about price curves? Can companies access the needed financing mechanisms?

Regulatory
uncertainty

What if provinces/states, countries and international bodies adopt contradicting regulations?

Technology
uncertainty

Which technologies could become the industry standard and what if companies slow investment for fear of picking the wrong ones?

Production and infrastructure uncertainty

What if there’s insufficient production or the cost is inhibitive? What if infrastructure investment isn’t enough or built on time?

Collaboration
uncertainty

What if participants slow their outreach or become sceptical of possible partners to protect their own interests? What if only the biggest and fittest call the shots?

 

13 business models to expand the hydrogen value chain

Deloitte’s research finds innovative, real-life business model solutions that can help to address these uncertainties. Some are present in the hydrogen industry today; others come from more mature energy industries that relied on business model innovation when they were in nascent stages of their own. By applying these solutions, businesses may finally crack the first mover dilemma in clean hydrogen at scale.

Here, we highlight thirteen models to illustrate the value they can bring. If implemented, these solutions could help to address the first mover dilemma and move us one step closer to a scaled clean hydrogen economy.

1. Take or Pay [Risk share ➞ Demand uncertainty]

In a Take or Pay agreement, the buyer and seller enter a contract to share risks between both parties. In the take scenario, the buyer purchases a pre-determined amount of goods and accepts delivery of them. In the pay scenario, the buyer still pays the seller a predetermined amount but doesn’t take delivery of the goods.

The buyer benefits from a consistent and predictable payment schedule, but avoids an obligation to take delivery of, process and store goods that it doesn’t need. The seller benefits from predictable revenue flow, but risks having to hold onto and store product. By enabling buyers and sellers alike to demonstrate predictable cashflows, Take or Pay agreements can help market participants attract investment that will help them to contribute to the development of the clean hydrogen economy.

2. Take and Pay [Risk transfer ➞ Demand uncertainty]

In a Take and Pay agreement, the buyer is in breach of the contract and must pay damages when it doesn’t accept delivery of the minimum contracted quantity. The contractual guarantee of delivery and payment can reduce sellers’ risk and provides them with a predictable revenue stream. This can improve their ability to attract financing to develop or expand projects. Many early clean hydrogen projects often operate under power purchase agreements (PPAs) in which power is purchased up-front, with no option to receive a rebate for purchased power that isn’t used. This will contribute to making their input costs inflexible and will make it important to have a reliable purchaser for their output. Take and Pay can address this need for risk mitigation. 

3. Insurance [Risk transfer ➞ Demand uncertainty]

Catalyzing hydrogen market investment will likely require mitigation of both perceived and actual risk associated with renewable energy investments. Given the nascent, quickly evolving and capital-intensive nature of the clean hydrogen industry, investments by both buyers and sellers come with risk that can make it difficult to attract needed capital. To help bridge and transfer part of this investment risk, developers can purchase insurance and insurers can purchase re-insurance to help protect them in the even that a project fails.

4. Accessing financing and lowering costs [Risk transfer ➞ Demand uncertainty]

Accessing affordable financing can be a challenge for some projects and countries. To create a thriving hydrogen global economy, it is important that countries with the right conditions—for example, the right natural resources—can participate. There are numerous existing and emerging mechanisms that can help decrease the borrowing cost of nations. Two notable ones are development banks which can provide attractive borrowing rates or bi-lateral agreements between countries where countries with higher ratings can provide loans to lower rating countries.

5. Expression of interest [Risk alignment ➞ Production and infrastructure uncertainty]

In an Expression of Interest (EoI), the potential leader of a new project requests responses from prospective investment partners to help evaluate the viability of the new opportunity. An EoI can be used to allow hydrogen market participants to provide more transparency in the market and to align investments between companies and ensure synchronisation. The EoI acts as a non-binding declaration of interest in collaborating and it typically covers topics including project scope, the parties’ qualifications, project timeline and confidentiality provisions. EoIs help facilitate information sharing and ensure flexibility, both of which are essential to businesses that are exploring investment in the quickly-changing, capital-intensive clean hydrogen energy.

6. Book and claim [Risk alignment ➞ Production and infrastructure uncertainty]

The book and claim method allows companies to receive carbon credits for using fuels that may not be readily available. Under book and claim, a company that cannot access hydrogen supply infrastructure—Company A—purchases hydrogen from a supplier. Rather than delivering the hydrogen to Company A, the supplier provides Company A with a certificate for the clean hydrogen purchase and instead provides the hydrogen to Company B. Company B then uses the hydrogen to power its operations, but doesn’t receive any carbon credit for the emissions its hydrogen offsets because this credit has instead been applied to Company A.

This arrangement can reduce hydrogen producers’ production and investment risk by giving them access to a vast pool of prospective buyers across the globe.

7. Redeploy existing assets [Risk alignment ➞ Production and infrastructure uncertainty]

The utilisation and redeployment of existing energy assets and networks can offer a low-cost, sustainable pathway to entering the hydrogen market. The reuse of existing networks in a clean energy context leverages the sunk costs already incurred by energy producers and helps existing operators and stakeholders smoothly transition from a legacy focus to a future focus.

8. Contract for Difference [Risk sharing ➞ Regulatory uncertainty]

In a Contract for Difference, a seller of clean hydrogen or renewable electricity collaborates with a buyer to set an agreed-upon minimum price—known as a strike price—for their output. If the market price for the seller’s output moves above or below the strike price in the time between the contract signing and the sale, the party who would be injured by this price movement is paid the difference between the strike price and the market price. By acting simultaneously as a subsidy for producers and as a defence against price gouging, Contracts for Difference are a great way to share risk and can incentivise both power producers and power consumers to invest in hydrogen.

9. Auctions [Risk alignment ➞ Regulatory and collaboration uncertainty]

Adopting an auction or "double auction" approach involves buying clean hydrogen at the lowest price possible and selling it to the highest bidders. It also likely involves policy intervention as a subsidy would need to be provided by the regulator to cover the gap between today’s production costs for clean hydrogen and/or power-to-X products and the market price for fossil-based products.

An intermediary is created to help manage the auction process, buying clean hydrogen via ten-year Hydrogen Purchase Agreements (HPA) and selling them to possible customers who will bid for short term supply contracts using separate tenders. This approach allows for risk alignment between suppliers and buyers in the market.

10. Demand Aggregation [Risk alignment + Risk transfer ➞ Collaboration uncertainty]

Demand aggregation is a practice where companies enter an alliance to purchase a product with the goal of centralising demand to help accelerate the development of that product. Sellers are often involved in such alliances; establishing a relationship with a demand aggregation project can provide sellers with a large market for their product. Demand aggregation can help to alleviate the first mover problem in clean hydrogen by giving producers a strong, centralised market, by connecting buyers with sellers and by leveraging the combined resources of many market participants to lobby for hydrogen-friendly regulations.

11. Co-opetition [Risk alignment ➞ Collaboration uncertainty]

Targeted partnership between competitors, known as "co-opetition," is one of the most visible business model solutions to the chicken-or-egg problem in clean hydrogen. The US Department of Energy’s Regional Clean Hydrogen Hubs model is a strong example of co-opetition at work: producers, distributors and suppliers cooperate to help develop a centralised location where an end-to-end hydrogen market can develop. This cooperation can support risk alignment by connecting market competitors across the value chain. It can also create opportunities to explore new contracting strategies as the various cooperating parties look to secure their positions in the market while keeping pricing flexible.

12. Hydrogen as a service [Risk transfer ➞ Collaboration uncertainty]

Under a Hydrogen-as-a-Service (HaaS) business model, the seller provides hydrogen storage and refuelling infrastructure (and in some cases vehicle retrofits) at no cost to an end-user in the hydrogen mobility space. In return, the end-user signs an agreement to purchase hydrogen from the seller, usually for several years. HaaS directly addresses the "chicken or egg" problem in hydrogen-powered fleet transportation.

It grants fleet operators access to storage and fuelling infrastructure and hydrogen-ready vehicles without up-front capital investment and it contractually guarantees hydrogen producers a profitable relationship with an off-taker. With this mechanism, the largest and fittest players can manage higher risks and help the less capable to play a role in the hydrogen space.

13. Value chain collaboration [Risk share + risk alignment ➞ Collaboration uncertainty]

There is interdependency across multiple players in any value chain. However, most of the attention for resolving the first mover dilemma tends to focus primarily on the direct supplier and off-taker, with strict commercial constructs to guide the interactions. One approach being investigated in some sectors, for example steel (with the production of "green steel" widely seen to be an early, attractive use of clean hydrogen), is full value chain collaboration. In this, many more players both upstream and downstream are involved.

Creating such value chain collaboration where each player is willing to give a little of its own margin to 'grow the pie' by focusing on lowering the price to end customers could very well lead to accelerated adoption and scale of clean hydrogen, also decreasing the need for subsidies to activate change.

Achieving clean hydrogen’s potential

Clean hydrogen’s potential to enable a net-zero future is immense but achieving that potential will require thoughtful investment and fresh approaches from businesses across the value chain. With the help of innovative business models, business leaders can crack the systemic first mover dilemma and capitalise on the clean hydrogen boom that recent advances in technology and policy have enabled.

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