Hydrogen offtake contracts: securing project outcomes

The global low-carbon hydrogen sector now has contracted volumes totalling 8.3Mtpa. This figure represents about 6% of the total announced hydrogen capacity of 135 Mtpa. But only about a quarter of contracted volume has progressed to firm sales and purchase agreements. 

With more than 300 deals signed, it is increasingly important for developers to identify offtake opportunities and move them towards binding deals that provide the foundation for project financing and development. 

Currently, industry standards for negotiating contracts for low-carbon hydrogen are still under development, so developers require guidance to secure sales. 

To look at this in more detail, we have written the report 'Hydrogen offtake contracts: securing project outcomes'. Read on to find out more and fill out the form at the top of the page to download a free extract from the report. 

What’s in a deal? 

A pivotal factor shaping hydrogen trade is the development of midstream infrastructure. This includes pipelines, terminals and – in some cases – cracking facilities. While substantial funding support is already in place for hydrogen production, midstream infrastructure financing remains underdeveloped because of the lack of clear support mechanisms.  

This gap poses a significant challenge.  

Without the necessary infrastructure, offtakers find it difficult to progress their negotiations from preliminary discussions to binding agreements. As a result, developers are unable to reach FID on projects which is slowing the market's growth further.  

Bridging this infrastructure gap is essential to enable a more seamless hydrogen trade on both an intra- and inter-regional level. 

The route to contracts: 

• Termsheet: a non-binding concise outline or preliminary agreement which focuses on the core elements such as price, volume, and delivery terms. 

• Letter of Intent (LoI): more detailed than a termsheet and includes core commercial aspects and additional elements like exclusivity periods and confidentiality agreements. Non-binding.  

• Heads of Agreement (HoA) / Memorandum of Understanding (MoU): can be up to 30 pages long and covers detailed aspects of the potential deal. It’s typically, non-binding but certain provisions can be binding. 

• Sales and Purchase Agreement (SPA): legally binding, detailed document that covers all agreed-upon terms and conditions for the sale and purchase of low-carbon hydrogen.  

Uncertainty across regions: 

Offtake agreements that are advancing toward binding deals have been concentrated primarily in traditional sectors such as ammonia, methanol and refining, with domestic markets accounting for 57% of total contracted volume. Europe and Northeast Asia have emerged as the primary regions engaging in hydrogen imports. 

One of the challenges facing the hydrogen sector is the disparity in pricing across different industries. The European Hydrogen Bank’s pilot auction revealed that the median offtake price for transportation was about 50% higher than that for industrial use. This was mostly because of the added costs of liquefaction and compression in the transportation sector. This has been reflected in transportation sector deals, where the volume per deal remains lower than in industry. 

Importance of agreements 

As of September 2024, 255 developers are actively involved in hydrogen projects and are currently negotiating with buyers or have already signed binding agreements.  

However, a significant risk to project development is the lack of firm offtake agreements, as highlighted by the recent cancellation of Ørsted’s FlagshipOne project which did not have a binding agreement in place.  

Without such agreements, projects are vulnerable, especially as they approach FID or have already taken FID without securing long-term buyers. 

Lens Direct 

Moving to a full SPA will typically take more than one year, with the level of detail increasing through each stage of the contracting process. Wood Mackenzie’s Lens Direct tracks the global landscape of the sector and gives details on contracted volume for green and blue hydrogen, contract name and type, sectors, buyer and seller companies to provide a comprehensive view of the sector. 

Learn more 

If you’d like to read more, you can download a free extract from our 'Hydrogen offtake contracts: securing project outcomes' report by filling out the form at the top of the page.