|An electrolyser at RWE’s Ibbenbüren gas-fired power plant. As project pipelines across Europe swell, the financial sector continues to assess the risks of the emerging green hydrogen economy.
Source: ITM Power
Project finance banks have long been key players in the renewable energy transition, providing low-cost finance for the expansion of the booming sector. Today, lenders envision similar roles in the emerging green hydrogen market, where ambitious deployment goals have increased private sector financing needs for €430 billion by 2030.
But as European developers have announced more than 5 GW of electrolysis projects to be commissioned by 2024 and conversations with banks have started, significant sums are not expected to flow anytime soon.
“If you take a step back and look at the risks involved, it’s like a growing child,” Lisa McDermott, executive director of project finance at ABN Amro Bank NV, based in the Netherlands, said of the market. green hydrogen. “There is still some way to go before banks provide large amounts of non-recourse financing.”
Hundreds of projects are planned in Europe around either “green” hydrogen, produced from renewable electricity, or “blue” hydrogen, derived from natural gas with carbon capture systems. ABN Amro is discussing financing options with counterparties in both value chains but has yet to commit funds, McDermott said in an interview.
“We have to see the first demonstration projects first; we have to see the lessons learned,” she said, adding that regulatory support also needs to be developed further. Due to the higher risks associated with green hydrogen as an early stage technology, McDermott expects lenders to set higher return expectations than those set for traditional wind and solar projects.
Once there is regulatory support and a track record of projects, the money will come, according to Allan Baker, Global Head of Energy at french bank Societe Generale SA. “There will be a huge amount of funding coming in,” Baker said at an event hosted by Reuters on June 24, adding that there was no shortage of liquidity among lenders.
To raise the necessary capital in the initial phase, the role of multilateral development banks will be essential, according to the European Investment Bank, the lending arm of the EU. “In the short term, public intervention is likely to be needed to close the economic gap and make hydrogen projects possible,” a bank spokesperson said in an email.
For lenders, financing hydrogen projects presents two major risks: the cost of electricity and the nature of the off-take agreements, said Astrid Behaghel, hydrogen coordinator at French lender BNP Paribas SA. Electricity costs can affect up to 80% of a project’s revenue, and bankability requires not only low, but also fixed costs, Behaghel said at a Reuters hydrogen event on May 20.
There is also a gap between the duration of the removal contracts and the duration of the requested funding. “We have [off-take] three to five year contracts and projects that require 10 to 15 year loans, ”Behaghel said, adding that state-backed guarantees could help overcome this problem.
Beyond this, the need for financial support from national and European funding programs will be substantial if the EU is to meet its target of 6 GW of green hydrogen by 2024. The EIB is also ready to provide funding in areas such as electrolyser manufacturing, and offers technical and financial advice to developers preparing bankable projects.
Alistair Wishart, legal advisor to the law firm Vinson & Elkins, which is involved in the early conversations about financing hydrogen projects, sees banks’ mistrust of the technology. “Lenders don’t take technology risks,” he said in an interview.
And there are a lot of them in the emerging hydrogen space. While many equipment makers have seen their stock prices rise over the past year, they typically lack strong balance sheets and banks seek collateral from these suppliers, Wishart said.
“There are ways around the problem, for example by integrating the supplier credit problem into the [engineering, construction and procurement] contract, where an EPC entrepreneur with a much stronger balance sheet gives technological guarantees, ”he said.
Electrolysis is not a new concept, but the large volumes targeted by decision makers and promised by the market will require significant acceleration. “Until you get to that point, the risk of scaling is pretty significant,” Wishart said.
UK electrolyzer manufacturer ITM Power PLC is confident that the scaling effects will lead to cheaper projects, predicting that the cost of its equipment will be cut in half during this decade, the size of the order average to almost increase tenfold.
No need to wait
Beyond banks, financial firepower grows in the private equity space.
In France, for example, Swen Capital Partners SA has launched a € 175 million fund specializing in renewable gases and is preparing to invest in green hydrogen and biogas.
The company is already in talks with banks and technology providers for co-financing infrastructure projects, Alena Fargere, director of Swen, said in an interview. Equity investors like Swen inherently have a greater risk appetite than banks and feel more comfortable with technology, Fargere said.
Swen, which has yet to invest in hydrogen, focuses on projects proposed by independent power producers and renewable gas companies, which have greater third-party financing needs than utilities with deep pockets. .
The German RWE AG, for example, is not concerned about the availability of project finance in space. “CuRather, it is not the constraint. We feel comfortable developing these projects, provided that there is a minimum of security in relation to the regulatory environment. And that’s still in the works in our opinion, “said Sebastian Vogel, head of the company’s hydrogen strategy, at an event organized on June 8 by Enlit Europe.
Regulatory support to double or triple the price of green hydrogen is underway in Europe. “If the price of CO2 goes up, that will help,” Fargere said.
But political and social pressures are already starting to force change in the market. “There is emerging consumer demand for green ammonia or green steel. Some are willing to pay a green premium, others are waiting for a policy framework to be put in place,” Fargere said.
Like Swen, Danish fund manager Copenhagen Infrastructure Partners K / S is also targeting the hydrogen market through its new Energy transition fund of 800 million euros, which will invest in projects in sectors that are difficult to control, in particular maritime transport, steel and agriculture.
Driven by the need for decarbonization, especially from sectors that depend on hydrogen for their processes, a green hydrogen market and the willingness to pay for it will follow, said Pierre-Etienne Franc, former head of hydrogen at Air Liquide SA, which now heads the FiveT Hydrogen Fund, a specialized private infrastructure fund dedicated to green hydrogen.
Backed by Baker Hughes Co. and Plug Power Inc., FiveT is expected to close by the summer and aims to raise € 1 billion. The fund will accept lower returns initially and target “patient capital,” Frank told Reuters on May 20.
“We really don’t have to wait any longer,” said Fargere de Swen. “Let’s be ambitious, courageous, concrete and deliver.”
James Burgess, reporter at S&P Global Platts, contributed to this article. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.