Even while Europe leads the world in hydrogen finance, it will need to raise hundreds of billions of Euros for “expensive” green hydrogen projects to meet its net-zero goals.
The European Investment Bank (EIB), the EU’s development bank, examined investment hurdles for the European Commission’s (EC) innovation policy development department, DG RTD, in a study released on May 30.
The EIB’s Advisory Service polled 46 players in the European financial and industrial sectors to find out what obstacles potential hydrogen investors encounter. The majority of the participants came from France, Germany, the Netherlands, Belgium, and Denmark.
Banks, sovereign wealth funds, venture capital companies, private equity firms, and institutional investors were among the 26 European investors who participated.
It also polled 20 industrial firms involved in the hydrogen value chain, including technology providers, renewable energy producers, hydrogen consumers, and hydrogen storage operators.
“Funding committed to hydrogen projects today… remains relatively low due to a variety of challenges and uncertainties, in terms of economic competitiveness, regulatory clarity, finance availability, and lack of supply chain maturity, among others,” the report’s authors said.
In addition, the paper points out that the cost of power is a barrier to hydrogen created from renewable energy. “Renewable hydrogen generation remains expensive in most circumstances,” it stated, “and is dependent on the availability and cost of renewable power.”
In order to assure additionality, warranties of provenance, and safe transport and storage, regulations were also required to protect the integrity of a future hydrogen commodities market.
Certifications for green and blue hydrogen are now being developed as part of the EU’s net-zero modifications to the Renewable Energy Directive and the newly planned Gas Decarbonization Package.
These are being scrutinized by lawmakers because the EU set a political goal of net-zero emissions in the 2019 European Green Deal in order to meet its Paris Agreement commitment.
Investing billions of dollars
In its 2020 Hydrogen Strategy, the European Commission estimated that manufacturers would require €180 billion to €470 billion to reach 500 GW by 2050.
By 2030, it would be capable of producing 40 GW of green hydrogen and 5 million metric tons (mt) of blue hydrogen.
According to the research, only approximately €130 billion in funding has been announced for hydrogen projects so far.
Only 2% of the 23 GW of electrolyzer capacity that has been announced for 2030 has received final investment decisions. According to the European Commission (EC) in 2020, investors would need to spend €24 billion to €42 billion on electrolyzers alone by 2030.
The European Green Deal, which is now being implemented through ideas in the Fit-for-55 policy package, and the EU’s hydrogen strategy might be hampered by today’s low investment levels, according to the EIB analysis.
The European Commission increased the projected green hydrogen output levels (5.6 million mt) to 20 million mt by 2030 in its March energy policy reaction to Russia’s invasion of Ukraine.
High valuations and “the possibility for market value corrections in the industry, might disrupt the current momentum and deter additional investment activity,” investors cautioned.
The biggest impediment to hydrogen utilization is cost
The study singled out governments for humiliation for failing to regulate support for hydrogen markets in ways that made it economically appealing to potential hydrogen consumers.
Potential customers do not require hydrogen because cheaper other fuels are available, but a government might address this by monetizing avoided carbon emissions, such as through “demand generation mechanisms.”
The authors cite higher prices at numerous levels of the value chain as the key impediment, claiming that hydrogen is at a disadvantage in competitive markets.
The report’s authors discovered that “the existing cost gap for the generation, transportation, and use of low-carbon hydrogen is thus the fundamental restriction to making hydrogen business models work.”
Because there are no pipes for hydrogen, it is more expensive to transport than natural gas, which has pipelines.
Higher expenses for hydrogen-powered devices constitute another barrier to entry for potential buyers. The cost of fuel cell vehicles, for example, remains greater than existing options, according to the paper.
All of these developmental roadblocks “raise] risks for investors,” according to the research.
Hydrogen CCFDs and subsidies are required by investors
Investors polled called for “clearer public assistance channels” in European countries.
The Netherlands has already launched an auction to allow hydrogen developers to compete for the SDE++ scheme, Europe’s first Carbon Contracts for Difference (CCFD) subsidy. Similar regulations are being considered in Germany and the United Kingdom.
However, according to experts, the SDE++ plan has yet to grant any hydrogen production subsidies, and hydrogen projects are “last in line” for money.
The “incomplete and fragmented” character of hydrogen production support was questioned by potential investors. “Sectors and regions have vastly different schemes, and in some cases none at all. This necessitates a greater integration of public assistance, including from the standpoint of value chain management “The authors of the paper said.
Electricity prices are one of the most significant unsubsidized costs faced by renewable hydrogen producers trying to use grid power rather than specialized supply, according to the paper.
There’s also the contentious matter of limiting green hydrogen production subsidies to specific times of the day. Only initiatives producing green hydrogen can get funding under the Dutch SDE++ plan if the accompanying renewable energy sources are not required by the Dutch grid.
On May 20, the European Commission began a contentious consultation on a proposed delegated act on renewable hydrogen standards, in an attempt to resolve the issue of hydrogen producers competing with the grid for renewable energy.
However, for enthusiastic investors, the improvement is too slow. “Almost all stakeholders engaged through this study are considering or have already made investments in the hydrogen industry,” according to the EIB report, “but economic and regulatory circumstances would need to improve further to mobilize the entire finance needed to fulfill the ambitious EU objectives.”
