New low-carbon fuels, including ‘green’ hydrogen and its derivatives, were welcomed worldwide with numerous project announcements in recent years. The start of large-scale projects in Saudi Arabia, UAE and Oman shows that GCC countries are very much part of the action.
Project developers are striving to lower cost while the technology advances and support schemes slowly come into place. Yet many projects are stalled as they wait for long-term offtake agreements and financing.
Progress remains modest at best. What’s the problem?
There is still too much risk. Something critical is missing: regional marketplaces that allocate risk more evenly among producers and buyers. Only regional clean energy hubs will allow buyers to offset the risk linked to the volatility of prices for green fuels.
Sustainable fuels, vital to the energy transition, require recognition of their unique green attributes, recognition in the form of a price for the carbon they reduce.
Such recognition, through trade of green certificates, has worked for years in the renewable electricity markets of Europe, the US and Australia. Governments in these regions have understood that trading green attributes creates additional incentives for clean energy projects that accelerate carbon reduction.
It will work in the Middle East as well, leveraging this region’s great clean energy advantages to become a key trading hub for the new green fuels.
ZETA
Such is the objective of the Zero Emissions Traders Alliance, known as ZETA Global. As CEO of this newly formed group, I recently moved to this region to promote trading in sustainable commodities.
During decades of work on energy markets in Europe, I saw that giving green attributes a market price, whether in voluntary or mandatory systems, can create the leverage needed for investment that finally begins to reach significant scale. It is investment in low-carbon industrial development.
ZETA will help the GCC region catch up by advocating for a clean energy hub that creates revenue opportunities for local industries, accelerates carbon reduction and allows a more sustainable business environment to emerge.
The magic of markets
Green hydrogen projects are big, capital intensive projects that require long-term offtake agreements with price guarantees. They require major investors. But the critical issue of who carries the price risk for the commodities they will produce is not being sufficiently addressed. This uncertainty translates into a business deterrent to FID for these projects.
Such is the essential challenge: to allocate risk fairly across stakeholders, covering the gap between the price required in long-term contracts and the constantly changing market price.
Markets meet the challenge by facilitating hedging to balance price risk among producers and buyers. They do this for any commodity, be it oil or natural gas, and the new green fuels will be no different.
With markets we finally begin to overcome the ‘chicken-or-egg’ problem that now holds many projects back. Producers and financiers require a guaranteed price, while buyers cannot assume the full price risk, making the new green fuels expensive because their scalability is impossible.
Such is the magic of markets, allowing a fair share of risk, locking in returns required while allocating risk more widely, overcoming the gap between contract price and changing market prices.
A new regional trading hub
Markets such as the ETS in Europe are known to have reduced the carbon footprint of Europe by more than one-third over 15 years. Now new contracts and benchmarks are being created for the new green commodities in Europe.
With hydrogen products in particular the future possibilities are enormous. The EU has set very high targets for green hydrogen that can only be met by imports, largely from the Gulf region. Adding tradeable green certificates to this green hydrogen will add more value, accelerate climate impact, and fully leverage the Gulf countries’ great export potential.
ZETA is the right platform to develop the basic conditions for a green energy hub to emerge in the GCC. We are now working closely with business leaders and local companies, the early movers that see the upside of a regional market for the new fuels.
Together, we will plan for green certificate trading of the new fuels, making sure the certificates are fungible so that they’re widely tradeable and connected to international markets and standards. We will develop local benchmarks for these new commodities.
The Zero Emissions Traders Alliance is confident that the GCC will become a major global center for production and export of the new green fuels that the world increasingly needs. We are convinced that markets can make it happen.
The writer is CEO, Zero Emissions Traders Alliance (ZETA)