17 February 2022

Mobilising private debt to support the hydrogen industry

The sector's transition to commercial scale requires direct and massive involvement by the banking sector, says Anne-Christine Champion

Anne-Christine ChampionThe hydrogen sector has enjoyed stellar growth over the past 18 months, paving the way for further progress in decarbonising the world economy, particularly in industry and transportation.

However, the sector is still hampered by a significant cost competitiveness deficit vis-à-vis established fossil fuel-based technologies.

This deficit cannot be addressed without massive investment, probably exceeding the $500 bn of announced hydrogen investments through 20301.The already significant $80 billion2 of government funding earmarked by 2030 will not of itself support this investment effort. Very quickly, private funding will have to take over from what amounts to seed financing.

Drawing the lessons from renewable energies

In this respect, the recent development of renewable energies across the world can provide some valuable lessons we can apply to the hydrogen sector.

In industries that were initially uncompetitive relative to conventional assets, public support – including feed-in-tariffs, feed-in-premia, green certificates – has been a powerful lever in stimulating private investment. Widespread implementation of these measures has fuelled a steady drop in project development and equipment production costs.

This cost deflation trend – supported by the widespread implementation of call for tender mechanisms for the allocation of public subsidies, particularly in Europe from 2017 – has enabled the sector to reach cost parity in certain geographical areas with the most established technologies.

Fuelling sustainable demand

The approach to hydrogen cannot be, however, a simple copy-paste of what worked for the renewable energy sector, and must take into account the sector's distinct characteristics.

Unlike electricity, hydrogen still requires a great deal of demand build-up to stride towards commercial viability. What's more, to foster cost reductions across the entire value chain, there needs to be a concurrent build-up in both demand and supply.

There will be several stages in this process. At this stage in the sector's development, the emphasis should be placed on industrial applications for hydrogen – chemicals, steel, cement, refining – to drive sustainable demand, while at the same time concentrating uses of the molecule.

"Banks will have a fundamental role to play by designing innovative funding solutions"

Development of these industrial 'clusters' is itself likely to underpin the development of hydrogen in mobility, particularly heavy mobility. This seems to be the prerequisite for ensuring Europe-wide hydrogen demand really does take off, calling, at a later stage in the sector's development, for the deployment of dedicated transportation and storage infrastructure.

Analysis of the early projects shows that the sector should soon reach this initial stage of concentration of demand for industrial uses. Most of the large industrial projects recently announced and likely to contribute to the sector's scaling up are progressing in their structuring, with a final investment decision (FID) expected in a matter of months.

This stage will be crucial as regards sector funding. Development of robust and sustainable demand for the projects in question is indeed a key factor underpinning cash flow sustainability over time and ensuring that private funding can be massively mobilised.

Initial regulatory milestones

In today's particularly accommodative monetary environment, public authorities must promote a suitable regulatory ecosystem that supports active involvement from the private sector.

In this respect, regulatory changes under way in Europe provide a clear signal. The European Commission's recently unveiled 'Fit for 55' climate package specifically aims to boost green hydrogen demand across the EU, through strengthened carbon pricing and sectoral regulations in industry and transportation.

These regulatory aspects are set to be complemented, at Member State-level, by support mechanisms such as contracts for difference (CfD) for green or low-carbon hydrogen production projects.

The launch of decarbonisation projects in Europe's heavy industry over the months ahead opens a unique window of opportunity to accelerate the hydrogen sector's development.

Banks will have a fundamental role to play by designing innovative funding solutions that fully draw on the 'systemic' public support arrangements currently in the making.

Focus on sustainable demand build-up must form the cornerstone of public support policies. Once the foundations have been laid, banks will develop innovative financing solutions.

Anne-Christine Champion is co-head of Natixis Corporate & Investment Banking within Groupe BPCE.

1Source: Hydrogen Council (July 2021)
2Source: op. cit.