Blueprinting the HyXchange Spot Market
Place of project execution:
This project will be executed by TNO and its partners in the Netherlands. The scope of the project includes Gent (BE) and Nordrhein-Westfalen (NRW, DE), as well as the broader NW-European energy system for which calculations will be performed.
0. Public summary
Hydrogen is generally expected to play an important role in the transition towards climate neutrality, as a natural complement to the vast technical potential for intermittent renewable electricity production offered by the North Sea basin (see for example (TKI nieuw gas, 2018), (Gasunie & TenneT, 2019) (Berenschot & Kalavasta, 2020)). A dependable and transparent trading platform greatly enhances market access, pools liquidity and reduces transaction costs and trading risks. Such a platform should be expected to catalyse an increasing demand for climate-neutral hydrogen produced by an expanding asset base, driving optimal balancing of supply and demand through transparent pricing.
An early exploration of the formation of such an exchange commissioned by the Dutch Ministry of Economic Affairs and Climate Policy was conducted last year (B. den Ouden, 2020). The exploration concludes that the Netherlands is very well positioned for development of an exchange-based hydrogen trading platform. The Netherlands has a unique position with vast potential for green hydrogen production from offshore wind, the landing of seaborne hydrogen imports, a solid industrial base with large hydrogen subsystems, and, of course, the unique natural gas- and industrial feedstock infrastructure as a gateway to industrial clusters in the Northwestern European hinterland. The Netherlands also has a track record when it comes to energy exchanges as the designer of the system of market coupling of the European electricity exchanges, and the creation of Europe’s leading gas market at the TTF.
The exploratory study sketches a timeline for platform development and roll-out as illustrated in the figure below. The timetable aligns with the currently envisioned completion of hydrogen backbone by 2026 and beyond (PwC/Strategy&, 2021), preceded by development of regional systems. Regional hydrogen grids at harbour regions are expected to be operational at an earlier stage. From the onset they require establishment and development of hydrogen spot markets and/or an “into pipe” market for seaborne imports.
As follow-up to the exploratory hydrogen exchange report, the key topics for a hydrogen exchange were discussed with market parties. Based on this, four preliminary products were selected for further development. Development of these products is related.
- Certificate product, being a precondition for all other products.
- Spot market product: needed, due to intermittent output profile of electrolyzers. Start by doing a market simulation, to be launched at sea port locations.
- Products for hydrogen grid balancing and storage. To be included in the Spot market simulation.
- Index product: this provides a value to the certificate product.
This PPS proposals concerns the elements 2 and 3. (Elements 1 and 4 are also developed as separate parallel projects, but not treated in this proposal)
The study seeks to establish a robust blueprint for a hydrogen exchange in the Netherlands that enables a gradual build-up of a hydrogen exchange covering an expanding geographical market catalysing the envisioned hydrogen system development.
The project will detail an institutional framework for a hydrogen exchange in terms of stakeholder roles, responsibilities and powers for the system operator (system management & operation, transport, quality conversion, balancing mechanism), the market operator (clearing & settlement, counterparty risk management), and market participants (hydrogen production, storage, conversion and deployment). Market efficiency, integrity and robustness of exchange-based hydrogen trading is assessed through extensive market simulations, conducted in close cooperation with partners in the HyXchange initiative and future market participants, building a shared view and confidence in the next steps towards exchanges-based hydrogen trading:
- First, we will explore optimal hydrogen spot market dynamics for a gradually expanding system covering green/blue hydrogen production, pipeline transport, storage and seaborne imports. For this we aim to expand on the existing utilities of TNO’s I-ELGAS model, that calculates optimal (least-cost) market allocation and associated market prices for coupled nodal markets for hydrogen, electricity and methane..
- Second, we will conduct a series of virtual market simulations with market participants using the TNO’s EYE model to assess the impact of bid behaviour and uncertainty. The simulation will both take place within the two regional hubs Port of Rotterdam and North Sea Ports, and at a national level (where it will interact with the broader NW-European energy market and utilise the Gasunie backbone).
The project charts operational design for a hydrogen exchange in terms of market processes such as nominations, allocation, settlement and reconciliation in context of the hydrogen, electricity and natural gas system and associated geographical - and temporal scope, like temporal granularity, trading periods, gate closure and delivery periods, along with associated product specifications in alignment with coupled power and natural gas markets.
This project is led by TNO with support of HyXchange. TNO will lead the modelling exercise and further develop the I-ELGAS model and the EYE market simulation model. HyXchange will lead discussions between market parties and act as point of contact for internal and external participants / interested parties to this project (for instance EZK, IenW, RVO, NEa, Vertogas, BMWI, EU COM, etc).
Other partners in this project are:
- Dutch ports (Port of Rotterdam, Groningen Seaports, Port of Amsterdam, North Sea Ports): project donor
- Gasunie: project donor
- The province of Zuid-Holland: project donor
- Smart Delta Resources: project donor
- A selection of (voluntarily participating) market parties
Description of project activities
The following work packages are foreseen within the scope of this project:
- WP 1: Scoping of the project (with participating market parties and public stakeholders)
- WP 2: I-ELGAS Optimization Model Preparation
- WP 3: Optimization-Based Market Analysis
- WP 4: EYE Simulation Model Preparation (bids and offers)
- WP 5: Bid-Based Hydrogen Market Simulations
- WP 6: Reporting, dissemination of results and next steps
WP 1-3 utilises the functionalities of I-ELGAS and we will investigate further:
- Balancing intermittent electrolyzer H2 output with flexible H2 output of low-carbon SMR+CCS.
- H2 storage (line-pack and/or salt caverns) for optimization and time-shift of renewable H2.
- Optimizing feed-in of renewable feed-in enhancing operational time to electrolyzers.
- Market impact and market role of hydrogen imports and associated storage/conversion.
- Interaction with demand sector dynamics
- Regional start-up markets and subsequent integration across the backbone, linking the regions and storage facilities
WP 4-5 utilises the EYE model of TNO and together with market parties we will investigate:
- Impact of market ‘participants’ behaviour on requirements for balancing and storage.
- Importance of local hydrogen storage prior to completion of the hydrogen backbone and/or congestion in the lower network.
WP 6 will combine this study’ findings and actively disseminate results.
The study is expected to provide a clear line of sight for design of a hydrogen exchange in the Netherlands. It is a precursor for a physical market simulation that can start when a regional start-up market has amassed sufficient liquidity, expected before 2025. Insights resulting from this blueprinting study and the physical market simulation will essentially shape the development of a Dutch hydrogen market and establish the rules for the Dutch hydrogen exchange (HyXchange).
The study will establish at least the following aspects of the future hydrogen system requirements, namely:
- What will be time unit of hydrogen balancing and possible consequences for the trading system to facilitate the spot market and balancing market,
- Role of Hystock Zuidwending (and required capacity and flowrate) connected on a national level by means of the Gasunie hydrogen backbone:
- Flexibility role of grey/blue hydrogen, import hydrogen + related storage/conversion
- Windfarms producing electricity + hydrogen (electrolyzers onshore / offshore / integrated)
- How could the dynamics evolve with the connection of regions, before and after the connection by the Gasunie Hydrogen backbone.
- Diversity of consumers: industry sectors; built environment; transport; each with their own demand patterns and needs. Special attention will be given to the industry with Hydrogen sustainability targets for 2030 (in fit for 55) like the fertilizer and chemical industry, and/or using Hydrogen to achieve decarbonization targets (like steel industry in the IJmuiden region)
- Insight in selected infrastructure cases and market impact in two specific regions: Rotterdam harbour including the connection to Chemelot and North Rhine-Westphalia (NRW)), and region (Vlissingen-Terneuzen-Gent).
 HyXchange is represented by the legal entity B. den Ouden management B.V. hereinafter referred to as HyXchange. Berenschot will operate as subcontractor and perform supporting research/process activities for HyXchange and TNO upon request.