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10 January 2024

High hopes for hydrogen: Climbing the ladder to bankability

Middle East & Africa, Europe
Head of Project Finance at EY-AHB
Dr Sebastian Hofert von Weiss and Patrick Gonzalez Tilemann (University of Surrey) share their latest research on the challenges facing hydrogen production. Financial and political issues stand in the way of bankability, but cooperation offers a model for success.

Whilst hydrogen offers enormous potential, and is frequently hailed as the energy of the future, there are still a great number of challenges both financial and political that must be recognized and addressed before hydrogen can claim the throne as the future of green energy.

Financial Challenges

A first hindrance for the accelerated trade of hydrogen is that there is currently no commodity market – even so it is an increasingly traded raw material. Gauging the price is thus very difficult for potential offtakers wanting to make the green transition to hydrogen. This does not help in addressing the associated issue of price volatility, especially in the long run, given that it has been forecasted to become more expensive than previous estimates, at least until hydrogen can be produced at scale and can sufficiently substitute or replace other forms of energy.

That said, an important detail to note would be that green hydrogen is arguably in a better position than it ever has been in terms of prices, predominantly due to the fact that the energy crisis has increased the cost of various energy forms currently in use. This has (comparatively) made green hydrogen cheaper than ever.

One important tool that can be utilised against uncertainty with regard to hydrogen prices would be fixed prices within an offtake agreement. This would both guarantee an offtaker for the hydrogen supplier for a given amount of time, whilst shielding both parties (the offtaker and the supplier) from any unforeseen ambiguities where the price of hydrogen is concerned.

Unfortunately entering into offtake agreements is easier said than done. In reality this has so far not been an overall successful approach. The difficulty of price determination has left businesses often not wanting to enter into an offtake agreement in the first place, as the combination of unknown prices and price volatility leaves them in fear of striking a bad deal at long term offtake prices that might soon be “off market”.

Although the offtake agreement would shield companies from price volatility, it does little to combat the missing understanding of pricing hydrogen due to the lack of a commodities market for the raw material.

Whilst the price of hydrogen certainly belongs to the challenges that the raw material faces, it is also worthwhile to observe other factors that investors eyeing renewable energies are taking into account before committing to green hydrogen. One being the modernity of the technology: a general rule of thumb says that investing into modern technology often comes with a relatively large amount of associated risk. 

Green hydrogen is no different in this regard, even though a great deal of the technology required for the green hydrogen revolution either already exists or is being developed. However, it does not yet exist at a scale at which it can replace other sources of energy en masse, thus resulting in a greater degree of hesitance on behalf of potential investors willing to finance either projects producing green hydrogen or transitioning to hydrogen as a main source of energy for any given project.

Last but not least, an additional challenge to be mentioned is an often overlooked one. In most cases of energy supply these days it is largely taken for granted that logistics is no big issue. A prevailing difficulty for green hydrogen projects though is that the necessary infrastructure required for transportation of green hydrogen quite simply does not exist in the manner that would be necessary for a broader use of hydrogen. When transporting hydrogen in larger amounts, it must either be pressurised and delivered as compressed gas or it must be liquified. 

When delivering green hydrogen from the point of origin to the point of consumption, one’s options are generally limited to transportation via pipeline, by road in cryogenic liquid tanker trucks or by gaseous trailers. In the case of long distance transportation internationally, the price-optimal choice so far has been transportation via chemical carriers. This missing piece of the puzzle could be a make or break in the speed at which both green hydrogen will be able to accelerate its take over of the green energy market, and at which large projects and companies will be able to transition to hydrogen for the long run. They simply cannot rely on a form of energy with potentially unreliable transportation within the supply chain under normal circumstances.

The combined issues of pricing and infrastructure uncertainty contribute to a reluctance in engaging in a transition to a more hydrogen dominant energy sector. Nevertheless there are promising advances being made that could gradually begin to solve both aforementioned problems, namely pilot projects. Pilot projects with the right amount of capital, partnerships and hydrogen friendly regulations could begin to form reliable supply chains, proving beneficial to solving the infrastructure problem, whilst creating a consistent supply for hydrogen demand. They could set the scene for the introduction of a hydrogen commodities market.

What it takes is a “willing” offtaker with a sizeable demand in the proximity of a green hydrogen facility, or at least a “landing point” (such as a shipping terminal).

An example of such a pilot project would be the deal struck between the Port of Rotterdam (in the Netherlands) and Iberdrola (the Spanish energy major). Iberdrola will export hydrogen in the form of green ammonia (as it is easier to transport than hydrogen) to the Port of Rotterdam where it will be delivered to the ACE import terminal (provided by ACE Terminal-Partner). From there the green ammonia will be broken down, allowing for the extraction of green hydrogen. Then via a daughter company of Gasunie, Hynetwork Services, the green hydrogen will be transported along their hydrogen network and delivered to customers across Europe.

Pilot projects such as these, that offer an entire value chain from supplier to consumer and with all of the necessary intermediate transportation and infrastructure in place, can truly pave the path for businesses to take the plunge into green hydrogen ventures. The hope is that they will contribute to developing industry standards for offtake agreements and establish reliable pricing mechanisms, thereby making green hydrogen projects more bankable.

Political Challenges

The political aspects of financing green hydrogen projects should not be forgotten, as they also have a role to play towards the transition to green hydrogen.

Firstly, a political framework that supports green energy is of course advantageous and a positive step in the right direction to crowning hydrogen as the leader of the green energy transition. A fairly young concept could provide a large benefit to accelerating the transition: a carbon emissions tax. The EU for example will introduce its carbon emissions tax in 2026, thus making renewables (hydrogen included) comparatively cheaper than before when competing with fossil fuels.

Secondly, a potential game changer in accelerating the transition to green hydrogen would be the support of national governments in investing in green hydrogen projects. The German government, for example, has already committed billions to the transition and will use support vehicles such as its ECA Euler Hermes to facilitate export credit guarantees, or other methods such as untied loans, in order to carry out said support. 

Methods such as these can provide the necessary financial stimulus to spur the green hydrogen transition whilst facilitating better infrastructure to trade green hydrogen. Simultaneously this would provide a more reliable environment for parties to engage in the hydrogen transition. In addition, an ECA's political risk guarantees can often go a long way in securing long term success for projects, thus enhancing both investor confidence in the viability of large hydrogen projects and their willingness to partake in financing such ventures.

Germany has already begun negotiating with a handful of African nations to supply green hydrogen to Germany, one of which is Namibia, with whom Germany has started a hydrogen project which has accrued a financial injection to the tune of €40 million. This project will create green hydrogen using renewable energies (wind and solar) and will transport green hydrogen via pipelines to Germany. Support from ECAs for such projects can further the infrastructure required to continue making hydrogen a more viable option for industry and everyday business, helping pave the path for hydrogen to compete with other energy forms.

Successful hydrogen projects

Another example of a government backed hydrogen project is the Helios project in Saudi Arabia. The Helios project is part of the overarching NEOM mega-project, which will “produce green ammonia on an industrial scale with an unprecedented annual output of 1.2 million tonnes with its own dedicated wind and solar farms.” Roughly $6.1 billion of the total investment ($8.4 billion) is being provided as debt by a club of 23 financial institutions, international banks, regional banks, Saudi sovereign funds and ECAs (one of which was Euler Hermes). 

Given the political backing for projects of this nature in Germany, the German government was prepared to accommodate financial support for the project via an export credit guarantee. This secured the export of electrolysers from ThyssenKrupp Nucera in Germany, which are vital for the construction of the green hydrogen project. Additionally, this enabled Germany to further the government’s climate strategy for an economy constantly moving towards green energy sources.

These examples portray the significant potential in speed and scale that can be unlocked when governments and commercial banks team up to accomplish a goal in realizing a given project. When the political framework and mindset is right governments can offer political security and financial support through institutions such as ECAs and the commercial banks can offer additional capital (which they are more likely to do with the guarantees provided by the ECAs). Under these circumstances even some of the most ambitious projects such as the Helios project can become a reality.

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