Sep-2023

Financing the future of hydrogen

With only around 9% of new green hydrogen projects under construction or having reached final investment decision stage, what are the challenges and likely pathways to drive the industry forward?

Nadim Chaudhry
World Hydrogen Leaders

Article Summary

Hydrogen – particularly green hydrogen – is now recognised as a vital zero-emissions energy source instrumental in the fight against climate change. It can be transported over long distances, stored for lengthy periods and certain existing fossil fuel infrastructure such as gas pipelines can be adapted to handle hydrogen supply. It is also a clean energy and feedstock source for those hard to abate industries which rely on high temperatures for key parts of their process. 

Despite these attributes, the promise of a new hydrogen economy is facing multiple financial hurdles including capital still not flowing in at the scale needed; inflation (with costs of projects having increased considerably over the last year compared to when budgets were decided); slowness to implement policy around regulation and subsidies; and technology and infrastructure issues.

A year ago, at COP27 there were several significant announcements around new initiatives and projects to move the clean hydrogen industry forward. However, despite some progress, the economic challenges around the future of hydrogen remain, ultimately resulting in few low-carbon hydrogen project financing deals being closed. 

While some in the industry argue that the small number of final investment decisions (FID) is normal for such a nascent industry, others are concerned that only around 4-5% of clean hydrogen projects are under construction or have reached FID stage.¹ 

What’s holding us back? 
The International Energy Agency (IEA) points to a combination of policy and regulatory uncertainty, high costs, lack of infrastructure and uncertain demand for the final product. To keep climate goals on track, it estimates that 70 million tonnes of clean hydrogen will need to be produced per annum by 2030, with only 1 million being produced today. But at the current rate of around 1,000 announced projects to date globally, this means we are looking at only 30 million tonnes annually by 2030.2 And of those that actually have investment locked in, the figure falls to less than 2 million tonnes.² According to the Hydrogen Council, a total investment of $320 billion is needed for those anticipated 1,000 projects, but with only $29 billion committed so far.²

From a geographic standpoint, Europe leads the way, accounting for 117 investments in green hydrogen projects in comparison to 46 in North America, 21 in the Middle East and 18 in China. However, across all new financing, less than 10% actually accounts for committed capital, with the US accounting for a significant 70%.²

Currently, green hydrogen has less energy per unit volume than fossil fuels, contributing to its higher price. Unlike grey hydrogen, which is extracted from natural gases in a carbon-intensive process, green hydrogen relies on electrolysis powered by renewable energy, such as solar or wind power, to split water into hydrogen and oxygen. However, renewable energy facilities are not being built at the rate needed to decarbonise the new sustainable electricity demand. Added to this, the few hydrogen projects that are operational are relatively small-scale, representing less than 1% of total hydrogen production over the last three years²  – and typically, green hydrogen infrastructure mainly becomes economically feasible when bigger facilities can meet higher demand.

Inflation matters
Following the supply chain disruptions and political tensions emerging from the Russia-Ukraine war, inflation has become a major concern for many industries. With more nations reducing their reliance on Russian gas and looking to towards energy self-sufficiency, there has been an increased demand for raw resources (particularly steel and copper) for renewable development, which has also been exacerbated by logistics issues. While these higher costs of construction have not had much impact on assets already in operation (as costs are typically hedged at the time of FID), inflation risk remains in the growth pipeline, where tariffs have been approved but the project itself hasn’t been confirmed and costs not yet locked in. 

As an example, according to S&P Global Commodity Insights, the cost of electrolytic hydrogen from renewable energy rocketed to $16.80/kg in July of last year, three times the normal price in recent times.³  

Inflation predictions for the foreseeable future are likely to mean that future projects become more expensive, particularly those with multiyear construction periods, where assets are valued at the start of the construction period. While developers will no doubt factor this in, they are likely to be confronted with increased insurance premiums. 

The need for policy
Many believe that without strong government policy support, green hydrogen development will not scale up in the timescale required. 

As Director of Infrastructure Investments at Igneo Infrastructure Partners – and one of the impressive line-up of speakers at World Hydrogen Week, Devina Parasurama suggests that “investors require a degree of certainty, more financial support and scale, which can be done through effective policies at various levels. At the national level, strategies with timelines and targets are the first step to creating a stable planning horizon and certainty for stakeholders.  

“Supply-side policies are required to advance technologies from early R&D to scale up stage. Similarly, demand-side policies such as assisting consumers with conversion costs reduces the investors’ constant worry about where the demand will come from, at what level, and crucially, when. Fiscal policies, such as carbon pricing and CFDs, will encourage the use of low- or zero-carbon hydrogen – this will help lower operational costs and provide predictable terms for both producers and end users. Finally, certification and standards provide clarity and harmonisation, which will be key in scaling hydrogen and fostering international trade.”