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Producers, analysts ask: Where is the money for green hydrogen projects?

20 June 2022 Amena Saiyid

Endless announcements, agreements, and targets to reach the EU's ambitious target for renewable energy-sourced, green hydrogen won't materialize until investors start financing the projects already in the pipeline, electrolyzer producers and analysts say.

Speaking at the FT Hydrogen Summit on 16 June, the top executives from electrolyzer producers Nel and ITM Power as well as other senior officials from chemical and power companies questioned why investors were not stepping up to the plate.

NEL CEO Jon André Løkke said their factories are prepared to meet the green hydrogen demand the EU is seeking in its emergency REPowerEU plan to wean itself off Russian natural gas, but they can only go so far.

"We now also have to expect something more from the market; we need to see [final investment decisions, or FIDs], we need to see money start flowing, investments made, and not just a lot of talk," he said.

An FID is the point in capital planning for projects when contracts are signed, equipment orders are taken, and major financial commitments are made.

No investment decisions to date

Løkke, the Norwegian company CEO, pointed out that no investment decisions have been made about any of the major green hydrogen projects announced to date for 20-MW projects. "We need to see concrete being poured and steel being welded," he added.

Released in March, REPowerEU identified renewable-sourced "green hydrogen" as key to replacing gas, coal, and oil in hard-to-decarbonize industries and transportation. The plan set a target of 10 million metric tons (mt) of renewable hydrogen production and 10 million mt of renewable hydrogen imports by 2030.

This essentially translates into 200 GW by 2030, said Graham Cooley, CEO of UK-based ITM Power, who said the EU needs to put incentives in place to stimulate financing.

Widespread demand

Jane Togood, sector chief executive in natural resources with UK-based chemicals company Johnson Matthey, agreed with the original equipment manufacturers (OEMs) on the need for FIDs to start rolling in because of the widespread demand for sustainable energy and related sustainable products, such as hydrogen. "And if this all starts to come in at once, it makes it very difficult for industry to respond," she said, adding that getting early projects over the line allows for a smoother transition, especially through learning what works for existing technologies.

Moreover, Togood pointed out that some of the technologies that are critical to hydrogen production require materials such as platinum and others for which supply contracts need to be set up properly.

Paddy Padmanathan, CEO of ACWA Power, said electrolyzer demand is not the constraint on green hydrogen, noting that the developer had already placed orders for about 2.8 GW of electrolyzers for the NEOM project in the northwest of Saudi Arabia that upon completion in 2026 will produce 650 mt of green hydrogen daily and about 1.2 million mt of green ammonia each year. "It's about somebody stepping up and having the courage and conviction to say, 'I'm going to build it and they will come'," he added.

"Rabbits in headlights"

Right now, Padmanathan said, "we are all frozen into this rabbits-in-headlights [display], waiting to see who blinks first."

As of May 2022, Europe currently has the largest electrolyzer project pipeline, reflecting the emphasis it is placing on green hydrogen to achieve widespread decarbonization, according to S&P Global Commodity Insights Executive Director Catherine Robinson, who leads the firm's global analysis on low carbon gases.

Robinson said investors are waiting on the European Commission (EC) to publish a final draft of the delegated act on Renewable Fuels of Non-Biological Origin under which green hydrogen falls. A draft is currently out for consultation. The final version will only be adopted after the European Parliament and the EC have approved it. "This will in effect determine which projects are eligible for support," she added.

According to S&P Global Commodity Insights' hydrogen tracker, developers of at least 16.7 GWe worth of green hydrogen projects are working to secure financing. In contrast, some 1.9 GWe have lined up financing and are ready to begin construction.

Growing corporate interest

Patrick Jones, European mining, steel and hydrogen research analyst with JP Morgan Chase, was more sanguine about the prospects of FIDs than the producers. He said the investment bank has seen more interest from corporate borrowers this year than in the whole of 2021. For instance, he said, Air Products is committing $12 billion, and Air Liquide €8 billion ($8.43 billion) in the next decade. As these projects progress, investors will gain more confidence and on the back of that progress "I expect to see FIDs being issued in the next 12 to 24 months," which will allow capital outlays and "I think drive demand and a revenue drive for electrolzyer [OEM]."

In a separate, but related FT Hydrogen Summit panel on "Repowering the EU," Jeroen Kies, who is Sumitomo Mitsui Banking Corporation's (SMBC) head of Project Finance Benelux and Nordics, International and Structured Finance Department, responded to an audience question about the challenges involved in financing green hydrogen projects.

Kies described the EU's green hydrogen target in REPowerEU as "a huge cocktail" of production, consumption, transportation, regulation, and also a lot of associated industries that need to grow at a super-fast pace.

He noted that the solar and offshore wind sectors took decades to get to the point where their projects are considered bankable, while the green hydrogen industry is not getting that same opportunity.

"I think you can actually say it's unfair towards hydrogen that it should be a supermarket in the space of two years," Kies said. "So essentially, we should also allow the markets to have its natural growth because otherwise we're going to have growth pains."

At the same time, he acknowledged that many of the projects that SMBC is currently considering haven't reached the FID phase. "And without that, it's difficult for us to finance," he added.

Kies said SMBC is consciously aware of a project's bankability meaning it shouldn't be so heavily subsidized that any change in the level of subsidy would render it uncommercial and the debt unserviceable.

Green hydrogen prospects

ACWA Power's Padmanathan said he is convinced that the current upswing in energy prices is likely to continue for another five years, and that's enough of a horizon "for us to be jumping in and getting on with green hydrogen and green hydrogen derivatives, such as ammonia."

For instance, a year ago gray ammonia, or ammonia made from hydrogen derived from the steam reforming process of natural gas, costs €350/mt, whereas today it is around €1,600/mt. "For sure, it won't be around €1,600 for the next six or 10 years, but I think there must be enough people willing to bet that it isn't ever going to be €350" again, he said.

In contrast, he said, technologies and capabilities exist to produce green ammonia for less than €1,000/mt.

Togood said people are getting "blinded" by the prospects of getting FIDs for large projects when they should be looking at the different uses for green hydrogen, whether it means using it to make sustainable aviation fuel or using it directly as a fuel source. Different projects will have different economics, she said, so the key is "we shouldn't be blinded by 'big is good'. Sometimes big isn't the answer. Small is also possible, and you can still make breakthroughs."

Posted 20 June 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst



This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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