Green Hydrogen: A Currency for the Energy Transition
In January, the International Renewable Energy Agency (IRENA) published a report titled The Geopolitics of the Energy Transformation: The Hydrogen Factor, arguing that a world in which green hydrogen holds a larger share of the energy mix could lead to less conflict between countries. Commenting on the report’s release, IRENA director-general Francesco La Camera said that green hydrogen, “will bring new and diverse participants to the market, diversify routes and supplies and shift power from the few to the many. With international co-operation, the hydrogen market could be more democratic and inclusive, offering opportunities for developed and developing countries alike."
But many aspects of the burgeoning green hydrogen market have yet to be established, including the benchmark currency and universal volume in which green hydrogen is traded internationally. According to the IRENA report, the currencies and pricing mechanisms established are likely to have considerable geopolitical effects. Potential importers therefore have incentives to get into the market early to cement trade practices that best advance their global standing: “the currency chosen will be positioned to become a global benchmark as the market expands. Those associated with that currency will to some degree be sheltered from exposure due to fluctuating import costs,” the report states.
The European Union, which has long been a net importer of energy, will continue to be in the green hydrogen economy. With these realities in mind, the European Union has lobbied to put its own currency, the euro, into pole position in the global green hydrogen trade, as part of both its energy transition crusade and its search for more strategic autonomy.
Q1: What is green hydrogen?
A1: Green hydrogen is hydrogen gas produced using renewable energy sources, such as wind or solar. Unlike gray or blue hydrogen, which emit carbon dioxide from coal and natural gas inputs, the only byproduct of green hydrogen is oxygen. It is created by running renewably generated electricity through an electrolyzer, which splits water molecules into hydrogen gas and oxygen. Today, green hydrogen is used mainly for refining petroleum products and in the chemical industry for making fertilizers. But the gas is considered a general-purpose energy carrier, meaning its potential applications are vast—a robust green hydrogen industry could accelerate the decarbonization of steel and fertilizer production as well as balance electricity grids when extra power is needed. Most remarkably, green hydrogen has the potential to eliminate roughly a quarter of the world’s carbon dioxide emissions.
Though the price of producing green hydrogen today is high, it is expected to fall in the coming years due to cheaper and more efficient electrolyzers coming to market. As a result, some carbon-intensive industries are making the shift, including the world’s largest shipping company, Maersk, which last year began exploring options for hydrogen-powered container ships. Hydrogen is advantageous in shipping because the fuel cells used to convert the gas to electricity are easily scalable and retrofittable for larger vessels.
Q2: Why would the currencies and pricing mechanisms have considerable geopolitical effects?
A2: According to the report, the countries best suited to become significant green hydrogen exporters will rise in geostrategic importance. The energy map will change, with some producing countries in historically energy-poor countries becoming regional hubs. The European Union knows its member states will not be among these countries, but its strong climate and financial institutions can influence how the market is established. As it is doing with liquefied natural gas (LNG) , Europe is already looking far across the globe for sourcing hydrogen. Sub-Saharan Africa, South America, and Gulf States are regions that Europe is forming relationships with for future hydrogen trade. As the international market matures, there will be a need to set standards to facilitate price discovery through futures markets like other commodities: trading hub location, currency denomination, pricing mechanisms, and contract type (long-term, take-or-pay, indexed etc.). IRENA predicts that if standards diverge, markets could become fragmented as producers jockey for regulatory primacy and erect trade barriers.
The European Union has among the highest environmental standards in place regulating its energy production. Without strict standards, producers that are far away from high-demand markets, for instance, would be inclined to withhold transportation from calculating emissions in their green hydrogen production. That is why if hydrogen is denominated in euros, the European Union will gain more leverage in determining whether green hydrogen is “green” or not, and thus if it is fungible for the international marketplace. The European Union already has a green hydrogen certification scheme in place for European producers called CertifHy, which could be used as a model for global production.
Q3: Why would a country or bloc want to secure its currency as the international benchmark?
A3: There are several advantages to pricing a commodity in one’s own currency. Oil’s quote in U.S. dollars in the world’s three most popular benchmarks—Brent Crude, West Texas Intermediate (WTI), and Dubai—provides a good example. For one, oil’s role as the bedrock foundation of the world’s largest economies has an outsized impact on global currency prices. Foreign buyers pay for dollar-denominated barrels through exchanging their currencies, which increase or decrease in value based largely on the performance of their economies unless otherwise controlled by the central government, as is the case in China. This makes oil more or less expensive at times in relation to the U.S. economy. Regardless of a country’s domestic oil production, the value of the U.S. dollar is king in the global oil trade. Net importers sometimes must pay more for a barrel, while the price of oil greatly affects the economies of net exporters. U.S. consumers, on the other hand, do not experience price changes to the same extent. The United States’ diversified economy also helps hedge against price volatility. The world’s largest strategic petroleum reserve (714 million barrels) and the United States’ ability to ramp up oil production, albeit done very carefully, gives the United States an added advantage over other countries.
As the world’s second-largest importer of crude oil behind only China, the European Union has in the past discussed ways to challenge the dominance of the dollar in commodity trading. A euro-denominated commodity market would lead to a realignment of power in energy markets and a strengthened euro. A 2018 European Commission recommendation stated that “strengthening the international role of the euro in the field of energy trade. . . will help to achieve the EU energy policy objectives and reduce the risk of disruption of energy supplies. European businesses will enjoy stronger autonomy, allowing them to pay or receive payments for their international trade, and finance themselves with reduced exposure to legal actions taken by third country jurisdictions.” As suggested, trading in euros could also shield the European Union from U.S. extraterritorial sanctions when buying oil from an adversarial producer such as Iran.
Q4: Why the euro?
A4: It thus makes sense for the European Union to jump at the chance to influence what IRENA believes will be the future of energy. As IRENA director-general La Camera believes, hydrogen is likely to level the playing field and create new markets in countries where cheap wind and solar power are available—a very different market dynamic from the oil cartels of today. Such countries would be in Africa, the Americas, the Middle East, and Oceania, but not in Europe, which presents problems for the bloc. IRENA predicts that two-thirds of green hydrogen produced will be used locally. The other third will be half transported via pipeline and half via ships in the form of hydrogen derivatives such as ammonia. The report mentions liquifying hydrogen and supplanting the LNG trade, but a fleet of transport-ready vessels is limited to just one today, developed by Kawasaki.
As a net importer of green hydrogen, the European Union can seek to gain leverage by cementing the euro as the universal currency of the green hydrogen benchmark. Like oil, some of the largest producers could be countries that do not necessarily have the best relations with the United States. It would also take away the United States’ very realistic opportunity to again dominate an energy market. The United States has among the highest production potential and self-sufficiency for exporting green hydrogen in the world. The European Union does not want to maintain the same inferior market position as it does in oil, especially when it is up against the United States.
Q5: How can the European Union establish a hydrogen market in euros?
A5: The surest way for the European Union to get a jump on the green hydrogen market is to ramp up demand from end users in member states and make transactions in euros. The European Union can do this by continuing to invest in green hydrogen projects as it moves away from traditional sources of fossil fuels from long-standing origins, namely Russia. Enough proven demand and usage will prompt price rating agencies (PRA), such as S&P Global or Argus, to license their assessments to commodity future exchanges such as the Intercontinental Exchange (ICE). Participants would be interested in speculating on the price of green hydrogen or buying and selling contracts for physical delivery to the European hub, either for financial gain or to hedge against market volatility. This would ultimately boost liquidity in the market and lock in the euro as the dominant currency.
The European Union should also continue striking bilateral deals in euros with green hydrogen exporters until a European trading hub coalesces. At last year’s 26th United Nations Climate Change Conference (COP 26) in Glasgow, Chile, which has one of the lowest green hydrogen production costs due to its abundant wind energy, signed a memorandum of understanding with the Belgian port of Antwerp aimed at ensuring the proper international market channels for green hydrogen and a supply price tag goal of 1.10 euros per kilogram. The port of Antwerp will soon merge with the port of Zeebrugge, which hosts Belgium’s largest LNG import terminal. As trade increases between the two countries, more participants on both the buy and supply sides will enter the market and trade green hydrogen in euros.
This green hydrogen hub could be modeled after the very successful natural gas hub just up the coast: Title Transfer Facility (TTF) in the Netherlands, the unrivaled natural gas virtual trading hub in Europe. TTF is denominated in euros, despite declining natural gas output in the Groningen Field. The success of TTF as an international benchmark has come from its location at the heart of European natural gas markets, its vast bidirectional pipeline network, and its strategic proximity to high demand centers in Germany, the United Kingdom, France, and Benelux, as well as supply centers within the Netherlands and in the North Sea. As Europe liberalized its gas market in the early 2000s, the Dutch government provided a market-friendly environment with transparent rules to level the playing field for all participants via TTF and associated infrastructure.
The U.S. market was always seen as the dominant standard in determining the price of the international gas trade. But increasing demand in Europe for LNG and TTF’s accessibility gave rise to increased utilization of the hub by global traders—even some Asian markets now use TTF for transactions. TTF has demonstrated that a trading hub can be highly liquid and euro-denominated while being in a region of low production, in the same way green hydrogen will be. EU governments could either model a green hydrogen hub after TTF at the Antwerp/Zeebrugge port, or even begin repurposing TTF’s natural gas infrastructure for hydrogen regasification and transportation.
Zach Simon is a former intern with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. William Reinsch holds the CSIS Scholl Chair in International Business.
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