Jul 13, 2021
Project finance banks are eyeing Europe’s emerging renewable hydrogen opportunity with caution, even if ambitious deployment targets indicate private-sector financing needs of Eur430 billion ($508 billion) by 2030.
European developers have announced over 5 GW of electrolysis projects to be commissioned by 2024 and conversations with banks have begun, but it looks like the sector will have to learn to walk before it can run.
“If you take a step back and look at the risks involved, it’s like a child that has to grow up,” Lisa McDermott, executive director for project finance at ABN Amro Bank NV, said of the renewable 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 electrolysis- or natural gas-based production with carbon capture. 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, we need to see the lessons learned,” she said, noting a lack of sector regulation.
Due to the higher risks involved with renewable hydrogen as an early-stage technology, McDermott expects lenders to set returns expectations higher than those set for traditional wind and solar projects.
To mobilize the necessary capital in the initial phase, the role of multilateral development banks will be key, the European Investment Bank, the EU’s lending arm, said.
“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, Astrid Behaghel, hydrogen coordinator at French lender BNP Paribas, said.
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 on May 20.
There was 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. State-backed guarantees could help overcome this issue, she said.
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 renewable hydrogen target by 2024.
The EIB is ready to provide finance in areas like 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.
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 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.
Beyond banks, financial firepower is growing in the private equity space.
In France, Swen Capital Partners SA has launched a Eur175 million fund specializing in renewable gases and is gearing up for investing in green hydrogen and biogas.
The company is in conversations with banks and technology providers for co-financing of infrastructure projects, Alena Fargere, principal at Swen, said in an interview.
Equity investors like Swen inherently have a greater risk appetite than banks and feel more comfortable with the technology, Fargere said.
Swen is focusing on projects proposed by independent power producers and renewable gas companies, who have greater third-party financing needs than deep-pocketed utilities.
Germany’s RWE, for instance, is not concerned over the availability of project finance in the space.
“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 price premium of renewable 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,” Fargere added. “Some are ready to pay a green premium, others are waiting for a policy framework to be put in place.”
Like Swen, Danish fund manager Copenhagen Infrastructure Partners K/S is targeting the hydrogen market through its new Eur800 million energy transition fund, which will invest in projects in hard-to-abate sectors, including shipping, steel and agriculture.
Willingness to pay for renewable hydrogen would be driven by sectors that had limited alternative options, said Pierre-Etienne Franc, the 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 Eur1 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.”
— By Camilla Naschert, S&P Global Market Intelligence, and James Burgess, S&P Global Platts