Banks still hesitant to finance hydrogen and carbon capture projects, BCG says

The Boston Consulting Group estimates that $13 trillion in private sector investment is required in hydrogen and carbon capture, storage, and utilisation technologies in order to achieve carbon neutrality by the year 2050.

How far has the financing of the energy transition been started by the banks? The primary barriers to financing this kind of project are the subject of a BCG paper titled “Breaking the Finance Barrier for Hydrogen and Carbon Capture.”

Projects viewed as risky and still in their infancy: 75% to 80% of commercial banks anticipate that by 2030, low-carbon hydrogen and CCUS projects will account for more than 10% of their energy portfolio. They are still hesitant to finance this kind of project, which is frequently viewed as risky and still in its infancy.

Bank funding requirements should be strict: Most banks evaluate these projects in accordance with their framework for evaluating risk. They demand specific guarantees, such as safe, long-term contracts with a high level of stability. Criteria that CCUS and hydrogen project directors sometimes are unable to meet. The two biggest obstacles to funding CCUS projects (compared to 26% for hydrogen projects) are long-term non-contracting and market/commodity risks, according to more than half (55%) of the finance experts surveyed.

Many projects never get off the ground because there aren’t enough guarantees. Hence, as of now, just 7% of CCUS projects globally have advanced to the Final Investment Decision (FID) stage. Yet, these restrictions on the banks’ area of activity open the door for other, more intrepid financial players (private equity firms, infrastructure funds, etc.), who occasionally take their place and form long-term alliances with the various project leaders.

It is necessary to develop risk management skills and tools. According to 43% of financial experts surveyed, banks are unable to finance large-scale CCUS projects (33% for hydrogen projects) due to a lack of risk management expertise and resources, specifically in the areas of market, credit, and long-term instruments.

Banks have every incentive to establish themselves as industry leaders in order to take advantage of the impending rise in commercially appealing projects. According to banks, this trend will continue over time. According to the report, 50% of banks anticipate that by 2030, risk-adjusted investment returns from CCUS projects will be on par with or higher than those from solar and wind projects. This percentage increases to 67% for hydrogen. According to the report, banks who put themselves first and are prepared to be more flexible will have a significant competitive advantage.