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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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