This article was first published in H2 View.
By Allan Baker, Head of Power Advisory & Project Finance at Societe Generale, Hydrogen Council member
As we round the corner towards the next COP26 in Glasgow, on the tail of the latest IPCC report, we know that hydrogen will play a major role in industry decarbonisation and ultimately achieving climate goals. The technology is ready, there is political backing like never before, and over 350 large-scale projects are in the pipeline globally1 – all of which shows unprecedented momentum. Yet, there are still big challenges to make the clean hydrogen revolution happen – and it starts with securing the market and financing mass scale up.
Scaling up funds
A smart combination of public and private financial instruments is possible, providing unique benefits and impacts. While grants can support innovation or early-stage demonstration projects, public procurement helps scale up the value chain through public sector investment, and instruments such as equity participation allow venture capitalists to play a leading role by investing in early-stage companies with high growth potential. If supported by appropriate long-term regulatory frameworks, these financial tools can help unlock large-scale projects and industry growth.
Hydrogen is following the trajectory that other clean technologies, such as wind and solar, have travelled before. First, large-scale projects are realised with the help of public funding – primarily grants and CAPEX subsidies for pilots and infrastructure. Then, as the industry begins to demonstrate a credible track record of returns within a reasonable time frame, an increasing pool of financial players and funds are willing to come into the capital structure on the equity or debt side, and the share of public support decreases. The advantage for hydrogen, in terms of timeframe, is that it’s not a new technology – so it leapfrogs some of the steps that other nascent technologies had to traverse.
Yet despite hydrogen technology being available, the market is still in relatively early stages and, as with wind and solar, mobilising the necessary large-scale private capital is only possible with government support at the outset, both fiscal and regulatory, to sufficiently de-risk investments. While industry and the financial community are taking on technology and counterparty risks, only governments can provide the necessary overall enabling environment by bearing risks linked to market development. Regulators around the world have understood this and are now working to kickstart the industry through temporary subsidising and clear long-term regulatory frameworks: more than 30 countries now have concrete hydrogen strategies in place, foreseeing $76 billion of funding2. Add carbon taxes and emission certificates to the mix, and this further shifts the economics in favour of clean energy technologies.
Making hydrogen bankable
While governments around the world are stepping up to support scale up, the financial community is also starting to hedge its bets on potential growth markets. Several dedicated hydrogen funds have emerged in recent months – and more funds, banks and ventures are watching closely, waiting to see the whole value chain move beyond the project level. This means hydrogen still needs to demonstrate how the global market will be established – not only from the supply side, but also distribution and end use. Essentially, for investors, they want to know where the revenues will come from.
Some of the biggest projects today are mass green hydrogen production projects in locations with specific advantages such as the Middle East or Australia – regions where vast amounts of renewable energy can be generated at low cost and used to produce green hydrogen with electrolysis. This provides impressive scale, but the sizable amount of hydrogen won’t be solely for domestic consumption, it will need to be transported to demand centres elsewhere as hydrogen or in the form of more easily shipped derivatives such as green ammonia. This distribution and demand side of the equation isn’t yet self-evident from a technical and economic standpoint. An investor attempting to quantify risk and revenue needs to know who that hydrogen will be sold to and at what price. To reduce uncertainties and demonstrate that projects are commercially viable, they need solid, long-term offtake contracts that are credit worthy.
As a member of the Hydrogen Council’s Investor Group, it’s an exciting time to be collaborating with the hydrogen industry to help join the dots. The pressure is certainly increasing for governments, big corporates, and investors to turn climate pledges into concrete actions, and it’s encouraging to see the various players aligning to help incentivise, finance and build the energy system of the future.