Chile is advancing its green hydrogen sector with a novel financial model designed to attract investment and stimulate project development.
This initiative, led by the German development cooperation agency GIZ and co-financed by the EU and Germany’s BMWK, proposes using Contracts for Difference (CDF) to support green hydrogen projects.
CDFs are designed to stabilize revenue by bridging the gap between market prices and strike prices agreed upon by producers and investors. The proposed model in Chile seeks to offset the higher production costs of green hydrogen by providing financial support when market prices fall below agreed levels. While this approach aims to de-risk investments, several critical factors need consideration:
Market Volatility: The effectiveness of CDFs depends on the stability of market prices and future demand for hydrogen. Given the current volatility in the green hydrogen market, there is inherent risk in relying on CDFs to stabilize revenue and attract investment.
Investment Attraction: The model aims to mobilize traditional and non-traditional investors, including sustainability funds. However, attracting sufficient capital to support the high costs of green hydrogen production remains a significant challenge. The success of this model will hinge on its ability to generate investor confidence and secure substantial funding.
Challenges in Securing Offtakers and Financing
Chile has announced over 74 green hydrogen projects, but securing off-takers and financing remains a major hurdle. The high cost of green hydrogen compared to fossil fuels is a critical issue. The proposed CDF model aims to address this by making hydrogen production more economically viable, but several challenges need to be addressed:
Economic Viability: The high cost of green hydrogen is a major barrier to its adoption. The proposed model must not only lower production costs but also ensure that the hydrogen produced is competitively priced compared to traditional energy sources.
Financing Mechanisms: The model’s ability to attract diverse investment sources will be crucial. While CDFs offer potential, the model’s success will depend on its capacity to secure both local and international funding and effectively manage investment risks.
The Chilean initiative draws on experiences from Europe, where several hydrogen financing models have been implemented. The recent European tour by GIZ and Chilean representatives aimed to gather insights from entities such as BMWK, H2Global, and the European Hydrogen Bank. While adapting European models to Chile’s context is a promising approach, several factors need careful consideration:
Local Adaptation: European models may not directly translate to the Chilean market due to different economic and regulatory conditions. The challenge will be to tailor these models to fit Chile’s specific needs while ensuring their effectiveness.
Hybrid Approach: The proposed hybrid model, combining elements from various European schemes, could offer a balanced approach. However, its success will depend on how well it integrates these elements with Chile’s local conditions and regulatory framework.
Building Local Demand and Infrastructure
Developing a local hydrogen market is a key recommendation from the European delegation. By focusing on decarbonizing local industries and building internal demand, Chile aims to create a sustainable hydrogen ecosystem. This approach has several implications:
Infrastructure and Partnerships: Effective infrastructure sharing and partnerships are essential for reducing costs and driving the development of a hydrogen economy. Coordination among various stakeholders will be critical to achieving these goals.
Economic Scale: Starting with small-scale projects could lead to higher initial costs. However, achieving economies of scale through larger projects will be necessary to drive down costs and make green hydrogen more competitive.
