|An electrolyzer at RWE's Ibbenbüren power-to-gas plant. While project pipelines across Europe are swelling, the financial sector is still gauging 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 funding for the expansion of the booming sector. Now, lenders are eyeing similar roles in the emerging green hydrogen market, where ambitious deployment targets have increased private-sector financing needs to €430 billion by 2030.
But while European developers have announced over 5 GW worth of electrolysis projects to be commissioned by 2024, and conversations with banks have begun, big sums are not expected to flow anytime soon.
"If you take a step back and look at the risks involved, it's like a child which has to grow up," Lisa McDermott, executive director for project finance at Dutch-based ABN Amro Bank NV, said of the green hydrogen market. "There's still some way to go before banks will be giving out large amounts of non-recourse financing."
Hundreds of projects are planned in Europe based on either "green" hydrogen, produced using renewable electricity, or "blue" hydrogen, derived using natural gas with carbon capture systems. ABN Amro is discussing financing options with counterparties in both value chains but is yet to commit any funds, McDermott said in an interview.
"We need to see the first demo projects first; we need to see the lessons learned," she said, adding that regulatory support needs to be developed further as well. Due to the higher risks involved with green hydrogen as an early-stage technology, McDermott expects lenders to set returns expectations higher 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 power at French bank Société Générale SA. "There will be a huge amount of finance flowing in," Baker said at a June 24 event hosted by Reuters, adding there is no shortage of liquidity among lenders.
To mobilize the necessary capital in the initial phase, the role of multilateral development banks will be key, according to the European Investment Bank, the EU's lending arm. "In the near-term, public intervention is likely to be required to bridge economic gaps and make hydrogen projects possible," a bank spokesperson said in an email.
For lenders, hydrogen project finance poses two key risks: the cost of electricity and the nature of off-take agreements, said Astrid Behaghel, hydrogen coordinator at French lender BNP Paribas SA. Power costs can impact up to 80% of a project's revenues, and bankability requires costs that are not only low, but also fixed, Behaghel said at a Reuters hydrogen event May 20.
There is also a mismatch between the length of off-take contracts and the duration of financing being requested. "We have [off-take] contracts of three to five years and projects that are asking for loans of 10 to 15 years," Behaghel said, adding that state-backed guarantees could help overcome this issue.
Beyond that, the need for financial support from national and EU funding programs will be substantial if the EU is to meet its 6-GW green hydrogen target by 2024. The EIB also stands ready to provide finance in areas such as electrolyzer manufacturing, and offers technical and financial advice to developers preparing bankable projects.
Alistair Wishart, counsel at law firm Vinson & Elkins, who is involved in early conversations around project finance for hydrogen, sees wariness among banks around the technology. "Lenders don't take technology risks," he said in an interview.
And there are plenty of those in the emerging hydrogen space. While many equipment-makers have seen their stock prices surge in the past year, they generally lack strong balance sheets, and banks are looking for guarantees from these suppliers, Wishart said.
"There are ways to get around the issue, for example by wrapping the supplier credit issue into the [engineering, construction and procurement] contract, where an EPC contractor with a much stronger balance sheet gives technology guarantees," he said.
Electrolysis is not a new concept, but the large volumes targeted by policymakers and promised by the market will require a significant acceleration. "Until you get to that point, the scale-up risk is quite a big one," Wishart said.
British electrolyzer-maker ITM Power PLC is confident that scaling effects will deliver cheaper projects, projecting the cost for its equipment to halve over the course of this decade, with the size of the average order set to grow nearly tenfold.
No need to wait
Beyond banks, financial firepower is growing 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 gearing up for investing in green hydrogen and biogas.
The company is already in conversations with banks and technology providers for the co-financing of infrastructure projects, Alena Fargere, principal at Swen, said in an interview. Equity investors such as Swen inherently have a greater risk appetite than banks and feel more comfortable with the technology, Fargere said.
Swen, which is yet to make a hydrogen investment, is focusing on projects proposed by independent power producers and renewable gas companies, which have greater third-party financing needs than deep-pocketed utilities.
Germany's RWE AG, for instance, is not concerned over the availability of project finance in the space. "Currently, that is not the constraint. We feel comfortable in developing those projects, provided there is a minimum level of security with regards to the regulatory environment. And that's still in the making in our view," Sebastian Vogel, the company's head of hydrogen strategy, said at a June 8 event hosted by Enlit Europe.
Regulatory support to bridge the two- to threefold price premium of green hydrogen is ongoing in Europe. "If the CO2 price goes up, that will help," Fargere said.
But political and social pressures are already beginning to force a change in the market. "There is emerging demand for green ammonia or green steel from consumers. Some are ready 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 €800 million energy transition fund, which will invest in projects in hard-to-abate sectors, including shipping, steel and agriculture.
Driven by the need for decarbonization, especially of sectors that rely on hydrogen for their processes, a green hydrogen market and the willingness to pay for it will follow suit, said Pierre-Etienne Franc, former hydrogen chief at Air Liquide SA who now heads up the FiveT Hydrogen Fund, a specialist private infrastructure fund dedicated to green hydrogen.
Backed by Baker Hughes Co. and Plug Power Inc., FiveT is set to close by the summer, aiming to raise €1 billion. The fund will accept lower returns in the beginning and target "patient capital," Franc said at the May 20 Reuters event.
"We really don't need to wait any more," said Swen's Fargere. "Let us be ambitious, brave, hands-on and deliver."
James Burgess, a reporter with 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.