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Q&A with Hy24 CEO Pierre-Etienne Franc, who heads a €1 billion investment fund

08 March 2022 Amena Saiyid

Pierre-Etienne Franc is no stranger to the world of finance or hydrogen.

After spending a quarter century developing Air Liquide's business, managing the use, research, and development of hydrogen use and applications, Franc stepped away to start a pure play hydrogen investment fund known as FiveT Hydrogen.

Six months later, FiveT Hydrogen partnered with France's Ardian and launched a clean hydrogen infrastructure investment platform, dubbed Hy24. With Franc as CEO, Hy24 has already raised €1 billion ($1.09 billion) in its first fund, which is targeting €1.5bn overall and has inked deals across Europe and in North America.

On 7 March, the fund acquired a €100 million ($109 million) equity investment from the Japan Bank for International Cooperation, marking its first partnership with a multinational bank and its foray into Asia.

In a Q&A with Net-Zero Business Daily by S&P Global Commodities Insights, Franc spoke candidly about Hy24's plans, the investment prospects for clean hydrogen infrastructure, and the fuel itself to replace carbon-intensive applications especially in the transportation sector.

Net-Zero Business Daily: Starting with the basics, how does your fund decide what is clean hydrogen? Is it green (renewable-sourced) hydrogen, or blue hydrogen gleaned from natural gas, or pink hydrogen where the source is nuclear?

Franc: We are looking at hydrogen that is qualified under the European taxonomy and Sustainable Finance Disclosure Regulation (SFDR) in a way that it is Article 9 compatible—so whatever process we use needs to reduce [GHG] emissions by a factor of 70 to 80%.

[Note: Article 9 of the SFDR applies to funds that have sustainable investment and/or reduction in carbon emissions as their objective].

This means blue hydrogen, derived from natural gas utilizing a very high level of carbon capture is acceptable. As is green hydrogen using renewable sources of energy such as hydroelectric, solar, or wind. Nuclear-based hydrogen is also acceptable.

Now, there are some markets or segment of consumers that will only value purely green hydrogen, like the refineries in Europe, given European regulations. As you probably know, they need to accept hydrogen if it is created from green sources of electricity, with the temporality and additionality principles, so that makes it more stringent. So while we will have a strong focus on green hydrogen, we also have broader coverage because in many other countries, nuclear-based hydrogen or CCS [carbon capture and storage] would be acceptable. It needs to be contributing to the climate … If it does not, it's, it's useless. And even financial investors, I think would probably fly away from those fossil-based assets because they could become stranded assets in the long term. And we don't want that. We want to offer a long-term asset base play for our investors.

Net-Zero Business Daily: Do you employ some criteria for selecting these projects?

Franc: We look with the view that we need to invest in assets that will generate true capital gain in the next eight to 10 years. In order to do so, there need to be sizable projects. So, hundreds of megawatts of solar, bigger equipment upstream, [and] they need to be mature technologies, solid partners, and have a certain minimum level of offtakers because that's fundamental. And they need to be driven by either very good entrepreneurs who know the hydrogen and project space—or solid industrial players.

Look at the hydrogen projects where we have invested, we have a mix of all. We have strong stakeholders around the table. You've got Trafigura, you've got Technip [Energies], you've got CDPQ [Caisse de depot et placement du Quebec], which is a wide bench of strong players. And you've got sites identified to develop ammonia projects in Quebec and in Norway that are close to the sea, with very good connections to the grid. They also have hydroelectricity access with a very low cost of power and a solid uptake situation. Those are the key ingredients to make it happen.

Another way is to partner with very large players, [who] already have secured financing for projects and … want to share the risk or the cost or consolidate, or who want to grow together with you.

That's the case with the second project [when] we decided to do with Enagás in Spain, where we basically speed up their renewable to gas projects, as a financial partner. For us partnering with Enagás in Spain, where they have a very solid ecosystem play and regulated position, gives us a very strong level of comfort.

Net-Zero Business Daily: How about a minimum level of investment?

Franc: We consider that we're going to invest at least €30 million ($32.7 million) per project, going up to €150- €180 million ($163.8-$196.6 million) based on the final size of the Fund. Because projects change over time, we start maybe with €30 million, but knowing that this project will morph into others the final take for the company may be in the range of €50-€100 million ($54.64-$109.2 million).

Net-Zero Business Daily: It appears most of your projects are in Europe. Is that deliberate, or are you looking outside Europe to say the Americas or Australia. How about Chile and Australia?

Franc: We definitely are looking for projects in those parts of the world. We were held back a bit by the first wave of COVID pandemic so we could not travel. We were busy raising the fund [and] just finished the first raise in December. But we definitely want to develop projects in the Americas. The partnership we have with Enagás is going to look at Chile as one of the key countries, and it is going to look at Morocco as well. We also have projects in Quebec, and others in the US which may come via the Fund's [Limited Partners] Plug Power, Chart Industries or Baker Hughes, or directly of course. We will staff some people in the US very soon.

And in Asia, we have just started a team in Singapore, who are going to help originate deals. And of course, Australia is one of the key places we're looking at as well as Korea and Japan for different reasons: Korea and Japan more for downstream projects while Australia for more power to hydrogen projects.

Net-Zero Business Daily: Is there a focus on a particular aspect of the hydrogen value chain, say production, distribution or end use, or is it all of the above?

Franc: The aim of the fund is to help to grow the whole ecosystem … from the upstream to the downstream. However, we have some defined segments that we are targeting. We shall invest at least 50% of the fund into transportation-related projects, meaning maritime, trucks, trains, and everything related to moving and shipping things—basically, the stations, the supply chain and end use, etc. The other 50% is going to be a mix of midstream, typically, power to gas projects with some downstream conversion into refined products like ammonia or methanol. This is what we do with hydrogen, but also power-to-gas projects to serve heavy industries like steelmaking, chemical refining. What makes the fund relatively unique is that we believe heavy transportation, intensive mobility, and long-haul transportation will not work without hydrogen.

Net-Zero Business Daily: What about air transportation and freight?

Franc: We are thinking in terms of airports and ground transportation. We need to fuel airports with hydrogen-based solutions so that we prepare for when airplanes are ready. The airplanes will be ready probably [in] middle of next decade. That would probably be for [the] next fund. Right now, we are starting with airports. One of Hy24's investors is the French airport operator Aeroports de Paris.

Net-Zero Business Daily: One of your partners Plug Power is involved in some airport projects in Europe and signed an agreement with Airbus in October to develop the first "Hydrogen Hub" pilot at a US airport that will serve as a case study for hydrogen infrastructure-scale up at other airports.

Franc: [Plug Power] has a very solid technology for forklifts, which can be very well suited to ground transportation. They are involved in some pilot projects at some airport to develop equipment that will transport packages. Such equipment can be significant consumers of fuel. And they can be repurposed to use hydrogen. I think Plug is involved in that, and that could be a place for us.

Net-Zero Business Daily: As Hy24 is looking to bring private capital into projects in multiple countries, what do you see as the role of governments in terms of financing, policy?

Franc: Governments need to be involved in the whole value chain of hydrogen. As the energy transition is [ramping] up, the cost of these new technologies is higher than the fossil-based energy.

Governments need to be there first to regulate and push downstream use to shift from fossil to hydrogen; that is what is going on in Europe. And that's why Europe is pushing the [Green New Deal]. But the policymakers need also to help bridge the cost of green hydrogen versus gray hydrogen during the period that accompanies the decrease of the cost curve.

[We need Europe] to support the deployment of the downstream infrastructure, the stations, the distribution stations. If you don't have funding, it's extremely difficult for investors to move because the market risk remains very high. We expect them not to support capex for individual projects, but rather to engage in large funding mechanisms like public private partnerships where players like Hy24 are charged with basically deploying, operating, and maintaining a set of assets around the territory for a given price for 10 years. That will ensure that the infrastructure is there. They can use regulations to move OEMs [original equipment manufacturers] and consumers to low-carbon technologies. We need this not only for hydrogen but also for electric vehicles and batteries. That's critical. It's a societal move, but it needs to be profitable.

Net-Zero Business Daily: What trends if any have you observed in financing hydrogen projects? Are people willing to take more risks now when it comes to hydrogen? Is it easier to secure financing now than it was a year or so ago?

Franc: I think the story of the fund is a good summary of the changing dynamic.

When I launched the idea of the fund, I was working with Air Liquide, and I was the Secretary of the Hydrogen Council. It was back in September 2019, and we had gathered the investors for the second time. We had first brought them together in September 2017 when they were just looking at things, saying: "Well, this is new, we don't know."

In 2019, they were interested, but when we spoke about needing to build a fund, they looked at it a bit still like it's too far away.

And then COVID came and the big European strategy push came with the hydrogen as the centerpiece. And then following that a number of governments moved and a lot of large projects popped up because they understood the role of hydrogen. And since then, the push for the fund has dramatically changed.

The interest in the financial sector is far different than it was two years ago because they know that this decade is the decade of hydrogen and they know that they need to make a couple of bets in large projects. They also know that the issue is not around technology and that there is a consensus on the need for hydrogen, and that there is regulation coming. The only thing that needs to be done now is to secure large offtakers so that large projects can take place. That has absolutely shifted very significantly. And COVID, honestly helped. That may be one place where COVID, paradoxically, helped.

Net-Zero Business Daily: Where should incentives be offered? What's your take on government incentives?

Franc: There are three types of incentives out there. You've got capex support on the equipment, which is there most of the time and which is critical to start. But it's not often the long-term best solution. The long-term best solution is to ensure project support so that you can show that people are invested in the projects and will continue to be engaged in delivering the operation and maintenance for 10 years. That unlocks lower-cost debt funding for these projects due to the reduction of risk.

So, what I expect is that the subsidy progress from a capex to an operating expense support type of scheme. And the most important incentive in the end is you've got to have stringent regulation pushing the end user to shift to green products. Because if you are supposed to produce green hydrogen, and there is no compulsory shift on the refining, chemical, or steam-making side, then people will still want to buy gray because it will be cheaper.

Net-Zero Business Daily: Looking ahead, can you discuss the impact of rising interest rates, and whether they will affect the fund's clean tech plans or strategy in any way?

Franc: I think what we're seeing today is first is inflation due to fossil sources or "fossilflation." Scarcity and rising prices and the current Ukrainian crisis, of course, isn't helping either.

That is actually serving the green hydrogen play because it's raising the cost of gray hydrogen [hydrogen generated at oil and gas sites with GHG capture technology] long-term. With the cost of natural gas moving at €100/Mwh [spiked this week at higher €300/Mwh] or sometimes more, four times higher than earlier, the grey hydrogen cost moves up as well higher than €4.5/kg from €1.5/kg, which gets closer to expected green H2 price in competitive renewable countries.

On the renewables side, you work on the legacy of past assets with no marginal cost because the cost of sun and wind is nothing. What's going to raise the price is that the producers might try to sell at the marginal price of natural gas-based power plants, which are going to sell for higher. So it's having an impact increasing the pricing for a renewable base product not because of the asset cost has changed.

Now, the only question is next to inflation you have the risk of rising interest rates, and that is indeed a worrying topic.

As interest rates move higher it is going to put at risk the competitiveness of new renewable projects.

Net-Zero Business Daily: With the war in Ukraine, is that going to impact the fund's strategy in Europe?

Franc: Honestly, it is difficult to tell so far. We were already about instability in the region so weren't focused on investing in Ukraine or Russia as a priority. And most of the green hydrogen push is not coming from there. Rather, it's coming from the southern hemisphere players, [like] South America, Australia, and continuing to Southern Europe.

I think the big topic beyond the enormous human tragedies for our energy is that it's going to distract people from the main goal, which is to move to a low-carbon world and to work on low-carbon energy regulations and policies. There is a risk that we are going to be very focused on the price of gas, accessibility of gas, and geopolitical topics. And that's a concern because we cannot derail the energy transition plan. An energy security approach will need to include plans to transition effectively.

Net-Zero Business Daily: What are the one or two things that hydrogen really needs? Is it funding or is it a technology breakthrough? Is it massive amounts of clean energy or is it affordable carbon capture, utilization, and storage?

Franc: Basically, we need a couple of countries to develop a large number of offtake agreements because hydrogen needs now what was done with the LNG market 30 years ago. Offtake agreements and very large wind generation projects from Australia, from Oman, and from Chile … will basically drive scale to the marketplace. Second, we need the regulations that are in place in Europe and in a couple of other countries for transportation and industries that will enable the consumers to shift to low-carbon solutions for operators of trucks and taxis, makers of steel and chemicals, and refiners of petroleum products.

It's not so much technology, in fact. That's not to say technology doesn't have a role as it is a nascent technology, but the industry knows how to scale. The problem is we don't have the time. We need to go very fast. So we need to go to scale at a much faster pace.

Posted 08 March 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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