Green hydrogen is having a moment. From electrolyser manufacturing plants in Germany to green ammonia projects mushrooming under the Arabian sun, this is – as many bankers that Euromoney speaks to are keen to point out – a dynamic space.
It is also a sector that needs to be built from scratch, with a long value chain and diverse financing needs.
Typically seen as a neat solution for hard-to-abate industries, green hydrogen, or GH2, has possible applications across many different sectors.
“It is estimated that hydrogen could create as much as $11 trillion in investment opportunities over the next three decades,” Bank of America notes in a recent report.
Some of these opportunities are already visible. In January, Danish technology provider Topsoe signed a €45 million loan agreement with the European Investment Bank to support its research and development in GH2 technologies.
And in June, investors including Manulife, Alberta Investment Management Corporation, the Ontario Teachers’ Pension Plan and Singapore’s sovereign wealth fund GIC, announced a $650 million commitment to finance projects at Aces Delta in Utah, a joint venture between Mitsubishi Power Americas and Magnum Development to develop the world’s largest renewable energy hub to produce, store and deliver GH2 to the western US.
Expectations are high, but so far, transactions are few. Across the value chain, bottlenecks affecting access to power, cost competition and regulatory incentives are impacting the speed the market can grow.
Still, project developers are eager to start building GH2 plants where they can find accessible renewable energy and are going to their banks with substantial financing requests.
The arid land in the Middle East and North Africa is particularly ripe for GH2 projects, with its abundant solar energy, strategic ports for exports, and oil states with money now looking to diversify.
Priorities
At COP27, the Egyptian hosts put GH2 at the top of their priorities list. On day two of the Implementation Summit, the country announced the launch of phase one of its pioneer GH2 plant in the Suez Canal economic zone. The $5 billion green ammonia plant comes on the back of a memorandum of understanding signed between Egypt’s Orascom Construction, UAE’s ammonia producer Fertiglobe and Norwegian renewable energy firm Scatec.
This isn’t the only multilateral deal in the zone. French energy company EdF Renewables has partnered with the Green Fuel Alliance and the Egyptian government to build a green ammonia production facility at a cost of $3 billion.
Saudi-based Neom, Air Products and Acwa Power are also building a plant that will produce 600 tonnes a day of clean hydrogen using Thyssenkrupp electrolyser technology and up to 1.2 million tonnes of green ammonia a year.
The MENA region isn’t alone. The US, for one, has the Biden Inflation Reduction Act to spur its market.
“It [green hydrogen] could be the cheapest source of energy,” says Geneviève Piché, managing director, head of sustainable finance and advisory at Wells Fargo. “With enough interest and subsidies from the US to support these hubs, then we can develop models that can be scaled and replicated.”
In Europe too, targets are being set alongside the EU’s 2050 net-zero emissions targets.
In its 2020 hydrogen strategy, the European Commission forecasts a 14% share for renewable hydrogen in the bloc’s energy mix.
The REPowerEU plan sets a target for 10 million tonnes of GH2 to be produced by 2030, with a further 10 million tonnes imported, representing roughly 600 gigawatts of new wind and solar power, and 200GW of electrolysers.
These are ambitious plans. And they will require a lot more renewable power than is currently available.
Electrolysers are a widely used technology in the production of GH2. Clearly, the volume of investment in research and development in this core infrastructure is an indicator of how widely GH2 will be adopted.
According to a recent S&P Global commodity insights report, global electrolyser manufacturing capacity is set to grow to 31GW a year by 2027.
Scaling up
German manufacturer Thyssenkrupp is part of a push to make 1GW available by the end of 2022, more than double the amount the previous year.
“By scaling up our supply chain, we can manufacture the technology more efficiently,” says Andrei Zschocke, head of GH2 strategy at Thyssenkrupp Nucera. “We have a partly automated fabrication, and we are intensifying the electrolysis process itself by applying higher current density.”
The production of GH2 is very power intensive; as production ramps up, so will energy consumption. The subsequent development of, for example, e-fuels is therefore dependent on access to large amounts of solar, wind and hydro power. And current levels of available renewable energy sources to feed the sector are just not where they need to be.
“One of the big bottlenecks is the incremental volume of renewable energy available for green hydrogen, especially in Europe,” admits Laurent Dallet, managing director at technology and infrastructure investment bank Nomura Greentech.
Part of Tokyo-headquartered Nomura Holdings, Nomura Greentech created its Greentech Industrials and Infrastructure group (GII) in March.
One of the big bottlenecks is the incremental volume of renewable energy available for green hydrogen, especially in Europe
Laurent Dallet, Nomura Greentech
“Through […] GII, […] we aim to boost revenues in our focus areas and leverage the relatively well performing private placement business to find new M&A acquirers,” the Japanese firm said at the time.
But so far, GII and its peers have not seen many M&A transactions in the GH2 space.
“We are seeing a lot of gross capital being raised for hydrogen assets these days, but I eventually expect to see M&A activity in this segment,” explains Dallet.
Chicken-and-egg situation
Nomura worked on Hy2gen’s €200 million investment round in February this year. Hy2gen is a German developer aiming to produce GH2 fuels to decarbonize maritime, aviation and ground transport.
“It is not a liquid market yet,” says Andreas Lukas, head of energy, utilities and infrastructure at UniCredit.
He says that the Italian bank has, however, seen some interesting transactions. It took part in a €65 million fundraising round for German green liquid natural gas developer Tree Energy Solutions (TES) last July.
The company sources GH2 in Egypt made with solar power, which it converts into methane to transport to a port facility in Germany.
“With greenfield projects, credit is usually an issue,” Lukas explains. “What they need is equity, this is what we try to arrange for these companies.”
With greenfield projects, credit is usually an issue
Andreas Lukas, UniCredit
He agrees that there hasn’t been enough upstream investment to secure sufficient renewable energy to procure GH2 plants.
Romain Talagrand, head of renewables and hydrogen, low carbon transition group at BNP Paribas, emphasizes that the need for more renewable energy is only going to grow.
“We need a lot of renewable energy to decarbonize the power sector,” he says. “And we’re going to need a lot more to then decarb other areas of the economy. You need a huge amount of renewable energy, the electrolyser processes are not as efficient, and energy use of those hard-to-abate sectors is significant.”
There is something of a chicken-and-egg situation developing: manufacturers are eager to demonstrate that GH2 technology is available and that there is a demand for it. They, in turn, need to incentivize project developers to accelerate the creation of GH2 plants, which would stimulate renewable energy production.
“We don’t see it as a bottleneck because we have solutions that are scalable,” says Zschocke at Thyssenkrupp Nucera. “If the appropriate market signals are visible for these industries, it will pick up.”
He points to Neom as a perfect example.
“It is a huge renewable project combined with green hydrogen,” says Zschocke. “For export hubs, you will mostly see the electrolyser accompanied by the renewable energy project. Green hydrogen is an enabler for green power because it creates demand where the huge potential for renewable energy is found.”
In areas where renewable energy is in abundance, project developers such as Neom are competing for physical space to build their projects.
We expect a lot of appetite from equity and debt markets to finance ground-breaking GH2 projects
Romain Talagrand, BNP Paribas
“Clearly the access to land is critical,” says Dallet at Nomura.
A GH2 plant needs a large surface area, with access to a deep-sea port for exports, as well as storage and possibly access to a national electricity grid.
Banks are understandably investing a lot of time and effort to position themselves early in this space.
“We expect a lot of appetite from equity and debt markets to finance ground-breaking GH2 projects,” says Talagrand.
Having identified the potential of GH2, banks are keen for the kudos that is associated with being on the first, ground-breaking deals.
Private equity firms are also jostling for position. As are large infrastructure funds that can put $50 million to $100 million upfront to capture a potential market that is likely to be bigger than anything on offer solely from wind and solar.
In Europe, for this potential to be turned into reality, the problem of an energy bottleneck needs to be solved. The bloc does not have the capacity to produce enough GH2 to decarbonize. Even if it did, market participants would struggle to match the price of GH2 being produced in places such as Saudi Arabia, Egypt, the US, or even Chile, where the levelized cost of energy (LCOE – a measure of the average net present cost of electricity generation for a generator over its lifetime) is much lower.
“For competitive green hydrogen production, you need an LCOE below €20 per megawatt, and today that is not achievable in most of Europe, except maybe in the south,” explains Dallet.
Shaping the market
Financiers need to think hard about how to allocate capital, and at which point of the GH2 value chain. The system needs a mix to match the range of problems and opportunities.
“The main challenge is to coordinate all steps of the value chain” says Talagrand at BNPP. “Developers and technology suppliers need venture and growth equity capital, while large production and infrastructure projects need equity partners and debt capital, but also off-take commitments.”
Those able to produce GH2 (or by-products such as green ammonia) at a competitive cost will become export leaders – and will likely dictate what shape the market takes.
Production projects in Chile are attracting interest from Asia and Europe, MENA states are well placed to export in every direction, and Australia is positioning itself as an exporter of green steel.
These exporters need customers, however, and long-term contracts are still scarce.
“Cheap energy is a key driver [of where GH2 plants are built], but there are other indicators,” says Zschocke. “You have to ask yourself where the industry requiring green hydrogen is located and build the infrastructure – including transport – accordingly.”
The war in Ukraine has put energy security back at the top of the European agenda. As the bloc looks to diversify its energy imports, the geographical diversity of GH2 sources is an important selling point.
At COP27, the GH2 summit was a trade fair that brought producers and end users of the technology together. The launch of Namibia’s ‘Green Hydrogen and Derivatives’ strategy led to an MoU between the African country and the EU to guarantee access to sustainably sourced raw materials and hydrogen, “as an essential prerequisite for delivering on green and clean energy objectives”, according to an EC statement after the event.
Those objectives are formidable. To meet 2021’s levels of global steel production would require 97.6 million tonnes of GH2, according to the International Renewable Energy Agency.
There is a geographical cost comparison. You can either decide to produce locally in the demand centres or produce wherever it’s cheap and then transport it
Andrei Zschocke, Thyssenkrupp Nucera
According to global steel trader Gerber Group, supplying total EU steel production – over 250 million tons a year – would require 12.5 million tons of GH2 and 596 terrawatt hours of new alternative energy. In theory, this is aligned with what the EU says it can provide through regional production and imports.
In the meantime, a handful of European projects are on the horizon, including H2 Green Steel (H2GS) in Sweden, in which BNP Paribas is involved. The project is sourcing cheap green electricity from Scandinavia, allowing for the production of green steel and GH2.
Rising energy input costs mean that green steel is becoming cost competitive, and H2GS is finding clients willing to pay the modest green premium. Examples such as this bode well for the future.
Hydrogen-hungry regions such as the EU can capitalize both on electrolyser technology expertise and its strong private investment sector to encourage production, but the financials may still be stretched.
“There is a geographical cost comparison,” says Zschocke. “You can either decide to produce locally in the demand centres or produce wherever it’s cheap and then transport it. If you do the math, it is a close call.”
Regulatory obstacles
That maths depends heavily on the regulatory incentives available for corporates and their investors. The US illustrates the extent to which favourable regulations can promote a domestic GH2 industry that can drive the global market.
The Inflation Reduction Act (IRA) of 2022 offers a production tax credit for clean hydrogen plants, from $0.60 per kilogram to $3/kg depending on the level of carbon capture, as well as a new tax credit based on life-cycle emissions. It comes on the back of 2021’s Infrastructure Investments and Jobs Act, which allocated $8 billion for the US Department of Energy to fund a set of hydrogen hubs.
Piché at Wells Fargo says: “Twelve months ago, hydrogen felt a long way off, now the IRA makes it tangible because government loans, guarantee programmes and subsidies will promote the creation of hubs.”
For her bank, this is a big opportunity, even if it hasn’t quite materialized.
“The technology is there, but the financial models that make the numbers work have not yet come out,” she says.
That hasn’t stopped European banks tapping into the US GH2 market.
“It will be interesting to see how other markets will react to what the US are doing,” says Talagrand. “We see a lot of European clients interested in green hydrogen saying they will shift their focus to the US because of the IRA.”
Twelve months ago, hydrogen felt a long way off, now the US Inflation Reduction Act makes it tangible because government loans, guarantee programmes and subsidies will promote the creation of hubs
Geneviève Piché, Wells Fargo
That shift is understandable since US subsidies on clean hydrogen are amplifying the rising input costs of gas in Europe.
And now that a green alternative is becoming cost competitive, import regions such as Europe need to get their industries ready to receive it. This means improving the pace at which policy and regulatory changes are implemented, to facilitate a downstream seller-buyer relationship.
“It is in the strategic interest of Europe to make sure we can import competitive green hydrogen and preserve our industry,” says Marco Alverà, group chief executive of TES.
There are signs that the EU is moving, leveraging its relationships with the US and MENA countries to balance out rising energy costs.
During a recent trip to Washington, French president Emmanuel Macron requested concessions from the Biden administration to protect European manufacturers from being at a cost disadvantage as a result of the IRA, while European Council president Charles Michel has been looking for energy supply from Saudi Arabia, Algeria, Qatar and the UAE, and says that Saudi Arabia wants to know if the EU is ready to accept long-term contracts for GH2 investments.
Policy processes within the EU are, however, famously slow, and investors won’t wait for politicians to redirect capital flows. If one or more regions become poles of expertise due to a favourable regulatory environment, that is where the capital will head to.
In the US, one of the key factors in the IRA is that the bill defines ‘clean hydrogen’ according to carbon emissions only. The need for clarity on terminology is not new, and if Europe were to better define what constitutes clean hydrogen or ammonia, it could drive more commitment on the buy side, but only if off-takers are willing to take the long-term risk.
What remains to be seen is how quickly the market will be able to supply enough renewable energy to supply the emerging GH2 projects that the banks and funds are busy evaluating right now.
On and off grid
One of the keys to the success of H2 Green Steel in Sweden is that the project is off grid. That means it sources renewable energy directly from its power plant and feeds it into an electrolyser, without the need for an electricity connection through the national grid.
If Europe wants to expand its green hydrogen (GH2) production capacity, it will have to greatly increase its renewable energy production. But grid congestion is becoming more acute, especially in southern markets such as Spain and Portugal, which are not interconnected with their neighbours.
The grid is there to link power production and the downstream market.
“Today this grid is stranded, so lots of countries have issues incorporating green hydrogen into their grids,” says Laurent Dallet, managing director at technology and infrastructure investment bank Nomura Greentech, adding that in Spain for example, hydrogen projects with guaranteed land access still must wait for four or five years for grid connection.
This explains why, when it comes to producing GH2 at scale, the US has forged ahead. Developers there are raising equity capital for large projects to produce gigawatts of renewables to feed gigawatts of electrolyser, bypassing the grid.
An established grid connection adds value to a GH2 project. But across the European continent, large capital investments will have to be made in the electricity grid itself to allow for more renewable energy input.
In the meantime, off-grid projects connecting production capacity directly to electrolyser capacity to produce vertically integrated hydrogen are best seen as self-contained projects.
“The only way to do that is to have a single investor that is going to be incentivized not to sell on the grid, and where the return on investment is only on the green hydrogen or ammonia,” an expert at an advisory firm tells Euromoney.
Vertical integration also has cost advantages, because if the same financier invests across the whole GH2 value chain and can rely on a long-term sales agreement for the GH2 or the ammonia, the project will generate economic return without having to tap volatile electricity markets.
“You can’t control the price of electricity if it is grid-connected,” the source adds.
