Hydrogen Supply Agreement: Negotiations in terra incognita

Established arrangements, tried-and-tested clauses, existing regulations, and well-established market processes: Negotiating energy supply contracts – as in securing the supply of gas, for example – is a routine task for two companies that can usually be completed in a matter of weeks or months. Normally, that is. The situation is different with the hydrogen supply contract inked in early June between Salzgitter AG and the energy supplier EWE from Oldenburg: This is due to the fact that there were neither templates nor sufficient guidelines for such an agreement that the negotiating parties could use as a reference. 

What sounds like a traditional procurement process was, in practice, genuine pioneering groundwork. This is because many issues that have long been settled in other energy supply contracts – such as how supply volumes are recorded or billed, or what purity level the energy sources must meet – had to be negotiated here without any precedent to refer to. The reasons:

• No model agreements: Hydrogen is a hybrid – a molecule that behaves like a gas, but whose production is driven by the electricity market. While existing templates from the gas or electricity sectors, such as PPAs or gas supply contracts, may provide a useful guide, they are only of limited use as templates.
• Regulatory frameworks under development: Standards for grid infeed, accounting, purity requirements, and the respective measurements have not yet been finalized for hydrogen. Hydrogen supply contracts must currently be based on regulations that, in some cases, are only just being developed.
• An immature supplier market: To date, most hydrogen projects have existed only on paper. The facilities are often not built until after a contract has been signed with a future customer. It is therefore difficult to compare providers' prices, capacities, and delivery capabilities. And negotiating a hypothetical offer requires an entirely new set of evaluation criteria. What’s more, the hydrogen core network is also still under development. 

Here’s what made EWE an attractive partner: The Lower Saxony-based energy company is operating an IPCEI-funded electrolysis project, which is scheduled to come online before 2028. As a result, the grid fees for the electrolyzer will be waived as scheduled. This regulation currently applies to all facilities that begin hydrogen production before August 4, 2029. Furthermore, the strict requirements of the RFNBO regulations regarding so-called “additionality” – that is, for all renewable energy sources not derived from biomass – do not yet apply. This lowers the price of green hydrogen. 

In addition, EWE is operating its own trading house, which enables the company to efficiently manage its electricity portfolio. This is another way to control hydrogen costs, since electricity costs account for more than half the price of hydrogen in the electrolysis process. Supply is by way of Germany’s hydrogen core network – without long transport distances or reliance on imports.

The supply contract now secures Salzgitter AG approximately 10,000 tons of renewable hydrogen per year – an additional component alongside its own 100-MW electrolysis plant, which will produce approximately 9,000 tons annually starting as from mid-2027. Together, these two sources cover a significant, but a still small share of the total demand for the direct reduction plant, which stands at 150,000 tons. Nevertheless, the group has decided specifically to not issue any further calls for proposals for the time being, until a more clearly defined regulatory framework is in place and progress is made on the development of the hydrogen backbone network.