It’s taken over 150 years for the current global fossil fuel trading systems to evolve. Paper, telegram, telex and fax were the tools of trade in the development of oil and coal markets.
Digitization means that zero-carbon hydrogen trade doesn't need to follow those old market models. With just a little international collaboration - to agree basic rules of classification and origin - an international digital hydrogen market can be established from the get-go.
All energy markets achieve cost efficiencies in part through economies of scale. Hydrogen energy storage will be the same. Fortunately, with just a little collaboration between countries and industry to align data and agree a few basic rules, the digital tools are available to make this happen quickly.
International trade in energy commodities – first coal, then oil – was developed in the age before computers. In the case of coal, international trade started in the late 1800s, before international telecommunications were common.
Even international LNG trade, which emerged much later with gas liquefaction technology in the 1970s, started before modern computers and long before the internet - only now is LNG moving towards an open, digital international market.
Information and communications constraints, as well as resource constraints, affected the development of the world’s energy commodity markets. Lack of transparency in relation to resource availability, production controls and price discovery, allowed cartel quotas and controlled market models to form from the early 20th century, and these have been maintained even to today.
Market Digitization and Energy Storage – twin forces of energy market revolution
Today, digitization - in the form of instantaneous data exchange, communications, digital settlement and clearing systems, and blockchain technologies - enable fully transparent, real time markets.
Hydrogen market scale-up - and with it the cost reductions scale brings in all energy markets - does not need to mirror the pre-computing pace or shape of fossil-fuel market development. Hydrogen can move directly to international scale and open market trading, through digitization.
The digital revolution is occurring at the same time as energy storage technologies are driving a major evolution – arguably another revolution – in the way energy markets work.
Energy security and reliability previously only available from fossil fuels, can now be provided by solar, wind and other renewable energy sources, combined with storage.
Electricity markets are already feeling the impacts of this historic market model shift. The old model of instantaneous production and consumption has been replaced. In the new electricity model, production occurs when lowest cost resources (solar, wind) are available, and energy is stored for dispatch as required. Market operators and regulators have been forced to revise electricity trading rules to reflect these new realities; digital trading, settlement and clearing systems are facilitating these new markets.
Hydrogen energy storage takes this to a truly transformational, international, level.
Hydrogen energy storage extends the role of renewable energy beyond electricity, to all parts of the modern economy – power, transport, industrial processes and agriculture - across borders and across oceans.
Hydrogen energy storage means that:
Renewable energy can be produced, stored, exported and traded in bulk, just as fossil fuels are today
Production happens where it is most economic; local renewable production can be supplemented by imported renewable energy where local production is constrained by resource or cost
Strategic energy reserves need no longer be based only on oil or natural gas -carbon-free; renewable energy stored as hydrogen can meet nations’ energy reserves needs
Economic growth and social development are no longer dependent on access to cartel-controlled oil. Clean hydrogen can provide the same security for economic development, without carbon.
This capability is technically available now.
What will bring this historic shift to zero-carbon hydrogen energy systems to commercial reality is an effective international market – a digital place where the interests of hydrogen investors, suppliers and consumers can be aligned at international scale.
Re-thinking Renewable Energy – it’s not just electric, and it’s not just local
Right now, renewable energy is viewed mainly as electricity supply, and as appropriate for local, regional or, at best, national scale. There are a few examples, the Eurozone being one, of multi-national renewable electricity supply.
Because most renewable energy is generated as electricity, used locally within a network of wires and poles, renewable energy is not currently viewed as a global energy commodity.
What would change this perception? What would create a scale view of renewable energy as a global energy commodity?
First, the realization that renewable energy shipment in bulk is now a reality. Thanks to leadership from Japan in particular, storage and liquefaction of renewable energy in bulk is now a reality.
Second, a digital market platform that facilitates alignment of producers, consumers and investors - on an international basis - who can trade with confidence in the integrity of origin of the product, and confidence in the market’s settlement and clearing processes.
Digitization provides the market tools for renewable hydrogen to go directly to global market scale. What might such a digital market look like?
Japan, Korea, and Singapore have all announced plans to adopt hydrogen energy and transport. Japan reviewed, updated and re-committed to its ‘Hydrogen Basic Strategy’ as recently as December 2017, including setting targets for hydrogen consumption growth to 2030-40.
However viewed individually, the demand in those markets - even in Japan - is small in terms of energy trade. At this small scale, no energy commodity can be cost-effective. Compounding this, demand-side data is not easy for investors to find, or to verify.
Producers, investors and potential consumers are stuck in a sub-scale market dynamic, reliant on government support and unable, at the moment, to attract serious investment scale.
However imagine that that there was a demand-side data platform that combined the hydrogen demand volumes of Japan, Korea, Singapore - and perhaps other Asia-Pacific economies such as Taiwan – and presented opportunities to bid to fill this aggregated demand through competitive processes, run digitally.
Investors and producers would start to see the basis for significant combined demand across national markets, and could begin to make investment and infrastructure decisions on the basis of this aggregated demand.
Each of the countries collaborating in this aggregated market model would benefit from the economies of scale they provide together.
Technology and source neutral, and voluntary
Renewable energy is inherently democratising in an economic sense, in that it does not require massive national investments to establish production. In renewable energy, modularity and economies of scale can co-exist. Solar, wind, and now batteries have proved this point.
Similarly, hydrogen energy storage is possible at a variety of scales - from modular to industrial - and therefore open a wide range of production and consumption models, infrastructure and market participants - and to competition.
As long as participating countries agree on basic rules of origin and classification (for example, ‘green’ hydrogen from renewable sources, versus ‘clean hydrogen’ from fossil sources with carbon capture), the market could be agnostic as to the hydrogen production technology used, the hydrogen source (fossil, renewable or waste), and method of liquefaction and shipping.
So long as the classification criteria are clear, and applied uniformly within the digital market, buyers will decide the price variances, if any, that should apply to different classes of hydrogen.
They will be guided in this by their end consumers, and by the carbon, energy, security and other priorities of the national markets in which they operate. Digital trading, and the transparency it could deliver, can provide price discovery and help to drive down cost.
Participation in the aggregated market need not, and indeed should not, be mandatory. If parties choose to contract on a bilateral basis for hydrogen supply, that’s fine, and will only serve to expand market scale further and reduce costs faster.
A new energy model warrants a fresh (digital, collaborative) approach
There is much to learn from fossil fuel market experience here. Perhaps chief among the learnings is what not to do.
A collaborative initiative to create an open international market-place for zero-carbon hydrogen could avoid many of the negative consequences of the oil markets - cartel control, geo-political friction, resource insecurity.
A collaborative initiative to design and implement an international, digital clean hydrogen trading system could dramatically accelerate market scale-up. It could allow zero-carbon hydrogen to achieve international economies of scale that will drive down cost far more quickly than bilateral producer-consumer transactions alone can do.
Perhaps most important of all - an open digital market will assist with the attraction of private capital – it will reduce pressure on government to fund hydrogen industry, infrastructure and technology, and in doing so will accelerate the pace of hydrogen technology and infrastructure development.
Harnessing aligned interests - Energy Security, Paris COP21, Energy equity (access) and Sustainable Economic Growth
A collaborative digital market initiative, between stakeholder countries and companies with aligned interests, can rapidly underpin hydrogen supply chain growth to the international scale at which all energy supply chains are by nature most efficient.
The digital market tools are already available. The lessons – positive and negative – from a more than a century of fossil fuel trade, are there to be drawn from.
The digital hydrogen market could be a tool to harness and align the individual national interests that right now - at a critical phase of the global energy transformation and economic development - are struggling for alignment.
Facilitating hydrogen market development can underpin exponential growth in renewable energy development and deployment, and provide the carbon-free energy security required for sustainable economic growth and social development in the 21st century.
For a nation like Australia, with renewable resources far beyond its own needs, and a strategic imperative to assist its near neighbours to achieve their decarbonization and energy security objectives, this seems a logical path to pursue.
Australia has led in coal, and now challenges for leadership in LNG. Why not zero-carbon hydrogen supply as well?