Clean hydrogen can help decarbonize industry, generate power, secure energy, and transmit renewable energy from production to usage.
Multiple announcements during COP27 boosted clean hydrogen’s popularity. Despite strong policy and commercial support, just 4% of stated clean hydrogen projects are under construction or have reached a final investment decision (FID).
Lack of demand visibility, confusing legislation, and supply chain bottlenecks cause this. Financial institutions have different risk tolerances, and clean hydrogen projects often have technology and offtake issues that concern private investors and financial institutions.
Today, these projects lack de-risking structures. This comprises Power Purchase Agreements (PPAs) for long-term renewable energy, robust offtake agreements for low-technology end-use applications, Engineering, Procurement, and Construction (EPC) wrapping, and performance guarantees for new equipment.
Thus, most FID projects are financed on balance sheets by large incumbent gas or energy companies, the only institutions competent of analyzing, managing, and taking such risks.
The Accelerating Clean Hydrogen Effort and Financing the Transition initiative found ways to mobilize the finance community and reduce this concern.
1. Industrial sponsors and developers.
Investors want to fund clean hydrogen initiatives, but they don’t understand them. Many non-technical questions must be answered to reassure investors:
Hydrogen projects—how do they work? What technology should I choose, and are its makers and suppliers reliable? Are companies that own or produce electrolysers more attractive?
Thus, hydrogen funding is increasingly using the “developer model”: invest in a reputable industrial sponsor or developer rather than a winning technology. Sponsor reputation and trustworthiness are crucial throughout commercialization. Investors and financial institutions can trust a sponsor’s industry understanding, technology risk mitigation, off-takers, and product delivery.
Since 2014, Swiss developer H2 Energy has worked on renewable hydrogen projects. H2 Energy’s expertise and vast network of strategic partners and co-investors for European projects allow investors to obtain exposure to the growing market. This technique exposes institutional investors to the fledgling industry, taps into the expertise of scale-ups and pre-IPO companies, and helps investors strengthen their own capacities to make more sophisticated investments in the future.
2. Parent company investments with project-level co-investment.
While the macro-economic context has reduced market demand for riskier investments, cash is still coming to clean hydrogen, but with greater prudence and less scale. Many investors favor parent company investments in industrial incumbents for larger sector investments. These investments are usually preferred equities or convertible bonds with pre-agreed rights to co-invest in assets simultaneously or later.
The Fortescue Future Industries (FFI)-Tree Energy Solutions strategic cooperation illustrates this (TES). FFI invested €130 million towards TES’s shares and the construction of the Wilhelmshaven Green Energy Hub and port. Over the next few years, the partners will discover, develop, and invest in more assets to give FFI access to crucial clean hydrogen infrastructure for its decarbonization goal.
Prebaking the capacity to co-invest at the asset level as the portfolio grows allows investors more flexibility and access to a pipeline of high-quality projects, balancing first-mover risk and profit.
3. Contracts for difference
Due to the lack of a liquid clean hydrogen market, hydrogen projects’ future revenues are uncertain, making them unbankable. Financial institutions want long-term, reliable offtake contracts, but off-takers are often unwilling to sign into long-term agreements at the current high rates for green hydrogen, even when hydrogen offtakes are possible.
Public insurance can cover these risks. Long-tenor contracts for difference (CFDs) have helped governments bridge the green premium between low- or no-emission items and their grey or brown competitors. Europe’s 2022 RePowerEU Plan featured this technique.
The European Commission is planned to roll out carbon CFDs to enable a full switch from natural gas to renewables in hydrogen generation and the transition to hydrogen-based manufacturing processes in industrial sectors like steel manufacture.
When used with financing instruments to blend public and private capital, such as the Connecting Europe Facility, which distributes grants for hydrogen refuelling infrastructure conditional on additional financing from a financial intermediary, the reduced risk can boost investor confidence and project financing.
Clean hydrogen market opening
Hydrogen market prospects are promising. Ministers and CEOs from around the world are at the Davos Annual Meeting 2023. They must mobilize, implement, and push hydrogen commitment and regional challenges.
Clean hydrogen projects can become “business as usual” if we eliminate bottlenecks, establish policy frameworks, and enable actions that promote confidence to unleash the market for clean hydrogen and assist achieve a net-zero future.