State-Backed Intermediaries
Catalyse demand by purchasing a higher cost commodity (e.g. green ammonia) from a private sector producer and subsequently selling it on to a private sector buyer.
State-Backed Intermediaries
Contracts between the intermediary and suppliers can be long term, with shorter-term contracts between the intermediary and offtakers. In the process, the intermediary absorbs a portion of the green premium and offtake risks. This method is best suited for commodities with small to moderate green premiums (e.g.approximately 300% relative to a grey product), like ammonia and methanol. However, it has proven more challenging when applied to earlier stage green commodities with a higher green premium (e.g.synthetic kerosene at roughly 700-800%).
There are several choices that need to be made when designing a state-backed intermediary: the commodities in scope and the stage of the value chain to focus on; where suppliers and offtakers of the relevant products may be based; the contract lengths for suppliers and offtakers; and how such an intermediary would be funded (e.g.by one or several governments, or through blended finance).
Demand creation potential rating by sector
We have developed an indicative rating of the green demand creation potential of each policy by sector, based on the share of demand this lever can apply to, and its potential impact on a business case. Depending on local or national context this may be more or less impactful in different sectors.
Based on this analysis, state-backed intermediaries have been assessed as particularly impactful for heavy transportation fuels and chemical feedstocks - where the private sector comprises a larger share of procurement, and where intermediaries can support and reduce risk in the initial phase of market development.
Key Attributes: State-Backed Intermediaries
Carbon leakage risk
Leveraging a state-backed intermediary decreases the risk and costs that industry bears when procuring nascent green products and services. Therefore, the risk of carbon leakage associated with their use is reduced.
Technology agnostic
State-backed intermediaries could either focus on one or a few critical products. For example, Hintco¹ focuses on green hydrogen and its derivatives.
Ability to ramp up over time
The ability to scale up the use of an intermediary is constrained by the overall funding made available and the long-term backing of governments. Over time, state- backed intermediaries may become less necessary as decarbonised options become more competitive.
Burden of cost
The burden of risk and cost falls on the intermediary, and hence the state. Blended finance models, where a share of public money is used to crowd in private financing, could reduce the amount of government funds necessary or extend their impact. Similarly, providing contracts via competitive processes can improve overall value for money.
Long-term stability
Intermediaries reduce the risk associated with early- stage technologies before their costs can decrease in part by securing mid-to-long term (e.g. 10 year) offtake agreements. Future contracts from intermediaries are dependent on further commitments from government/ blended funds.
Complexity
Significant resources and funding, institutional capacity and capabilities, and market readiness are needed to establish the intermediary. However, countries can develop partnerships to seek funding or pool resources, spreading risks and sharing learnings with other countries.
1: Source Hintco
Deep Dives & Case Studies
Decarbonisation levers incentivised by policy
(see lever details in Annex 1)
1: Aviation & Maritime - Efficiency of use: improving fuel efficiency by optimising routes, speed, and other operational practices
2: Chemicals - Efficiency of use: optimal use and application of chemical products to reduce overall volumes used
3: Maritime - SZEF: scalable zero emission shipping fuel (SZEF) and includes zero or near-zero emissions methanol and ammonia
Key considerations
- Value for money: to ensure public funds are being used efficiently, competitive processes to select partners for offtake/procurement can be used. Given the levels of green premiums associated with decarbonised hydrogen, it is likely that a large amount of funding is needed to support commercial scale projects. One mechanism is a two-sided auction, where one auction is conducted with the producer to select the most competitive bid. A separate auction is then conducted to select buyers. Consequently, the intermediary bridges the price gap between the lowest cost producer and buyer with the highest willingness to pay.
- Price discovery: over time, the intermediary can gather and share data from real bids to enable price discovery and market formation.
- Bid criteria: realistic, achievable and specific criteria should be set to minimise the barriers to entry for producers.
- Availability of infrastructure: where potential suppliers and offtakers are not co-located, enabling infrastructure to transport hydrogen derivatives may be necessary, and could potentially become a constraint.
- Competition between sectors: if based on competitive bidding processes, end use sectors with a higher willingness to pay/lower abatement may be prioritised. To ensure specific sectors are incentivised, it may be necessary to have separate funding pots for different sectors.
- Complementary demand stimulation policies: this can be used in tandem with other policies (e.g. regulatory measures that will further encourage interest from buyers and increase willingness to pay, meaning less government funding will be required to support the intermediary).
- Most applicable countries: given the level of public funding required, implementing these schemes on a large scale may be more feasible for countries with more financial resources. Because these measures are best suited to reduce offtake risks from projects, intermediaries could be used to support projects in other countries (e.g. H2 Global’s first auction supported the production and import of hydrogen derivatives from outside the EU into the EU).
Sources: H2Global, SECI, CEEW Centre for Energy Finance
Case study: H2Global’s first auction
Examples of key enabling initiatives/ detailed studies
