| Author(s) |
Michelle Hallack Miguel Vazquez Martinez |
| Publication type | Working paper |
Low-carbon hydrogen is expected to play a key role in realizing net-zero and sustainable development plans. Nonetheless, there is a gap between the cost of producing low-carbon hydrogen and its potential users' willingness to pay for such hydrogen. In order to implement support for the industry's development, we propose using low-carbon hydrogen long-term agreements allocated through auction mechanisms. These are contracts between producers and consumers that specify the production price, and the price consumers are willing to pay (the reference price). The reference price is indexed to liquid international indexes of natural gas, the main product that low-carbon hydrogen aims to substitute with an international market price. Thus, the reference price is set by the natural gas index plus a premium, representing the extra price consumers are willing to pay for low-carbon fuels. The gap between the two prices is covered through public policy funds. The premium and the production cost are defined through a double-sided auction. This aims to minimize the public policy funds required to incentivize the low-carbon hydrogen market, while facilitating long-term agreements and mitigating price risks that may hinder investment.
