Since December, plans for no fewer than five European hydrogen pipelines have been announced, suggesting a coming backbone of hydrogen-carrying pipelines stretching from Spain in the south to Norway, Sweden and Finland in the north. Two networks are planned for Germany.

The pipelines look to address the two overarching needs of energy security and decarbonisation.

The International Energy Agency, the EU and the US agree that clean hydrogen has both a place in the future energy mix and as a replacement for the mostly fossil fuel-derived hydrogen currently used for industrial purposes.

“Years ago… we lost the production and technology to China. Europe could be making the same mistake again”

Karsten Plauborg, Copenhagen Infrastructure Partners

Today, around 10 million tonnes of hydrogen are sold in the EU each year, mostly produced from fossil fuels and used in industry. The EU aspires to annually produce 10 million tonnes and import 10 million tonnes of renewable hydrogen by 2030. At the state level, a hydrogen roadmap agreed by Germany and France in late January underlined the political support for clean hydrogen.

The infrastructure investment community is showing both interest and budding commitment to the new, clean hydrogen industry. The scale of the opportunity is enormous.

“In terms of capex, the figures we are seeing are €300 billion-€600 billion over the next 10 years across the hydrogen production value chain in Europe,” says Michael Pfennig, co-head of infrastructure at Allianz Capital Partners. “We expect that actual investments into the hydrogen transport and storage infrastructure may come a bit later than investments in generation infrastructure. But just seeing the EU’s current commitment to build a European hydrogen market provides strong comfort for investments.”

Hundreds of billions of euros will be needed to erect turbines and solar panels to generate the hydrogen and facilitate the storage and transportation of the final product. In the case of lower-carbon (blue) hydrogen, there is a need for carbon capture and storage technology. So, what do investors need to get fully on board with hydrogen?

A hydrogen backbone

Some investors, such as Foresight, Ardian and Allianz, have already signed up for investments in hydrogen generation. Others, such as Copenhagen Infrastructure Partner (CIP), have funding ready and a pipeline of plans. Or even plans for a pipeline, as CIP heads up a consortium looking to build a hydrogen pipeline in the Baltic Sea to connect future offshore wind parks to energy off-takers in Germany.

This consortium also includes an Igneo Infrastructure Partners portfolio company.

To Karsten Plauborg, Partner in CIP and co-head of CIP’s Energy Transition Fund, investments in hydrogen require societal support: “Our message has always been that developing a hydrogen industry demands three things: first, access to shared transmission infrastructure, either as a pipeline or interconnector; second, CO2 emissions must carry a cost to allow green technologies to compete; and finally, we expect clarity around the green policies and regulations.”

“If it is sufficiently low or zero carbon, then the provenance of the hydrogen should not be that relevant”

Joe Davis, Foresight Group

Detailed plans for transmission via pipeline have been drawn up by 31 of Europe’s natural gas and electricity infrastructure operators (TSOs). Their vision for a future European Hydrogen Backbone is partly based on repurposed natural gas pipelines and would cost an estimated €80 billion to €143 billion.

Many TSOs are publicly owned, and each of the five pipelines announced over the past couple of months has a close or direct link to one or more states. Altogether, this suggests that public money will be part of a coming hydrogen network. And this matters.

“It is encouraging that initiatives such as dedicated hydrogen pipelines are being developed, whether supported by the private or public sector,” says Joe Davis, associate director at Foresight Group. “In the near term, it increases confidence and momentum. In the longer term, the pipelines should become enablers of different production and demand locations. If you build a project in 2040 that needs hydrogen, you would probably look to do it close to a pipeline.”

Clean pipelines

As for whether pipelines make sense for clean hydrogen, consider the alternatives: hydrogen produced in, let’s say, the North Sea could be shipped or stored and converted back to electricity when needed and sent through interconnectors using the electricity grid. Or the power from the turbines could simply enter the power grid.

However, a look at the uneven daily auction prices for European electricity usually shows that Europe’s grid is already struggling to distribute the available power. The situation is not likely to improve when more intermittent generation capacity is added to the grid. And if power cannot move to where it is needed, it is worth a lot less.

Using hydrogen in pipelines might even be a cost-efficient solution: “The technology to move from a natural gas grid or pipeline to a pure hydrogen grid or pipeline is there. And the cost of converting a natural gas pipeline to hydrogen is less than building a new dedicated pipeline and it is less than a move to 100 per cent electricity because the price of additional long-distance electrical interconnectors is very high,” says Igor Lukin, senior portfolio manager at Allianz Capital Partners.

Also, interconnectors often take a decade or more from concept to completion. In contrast, pipelines ripe for repurposing are already in place.

The sequence of when what will be done is still up for debate and it may well be different country by country,” Lukin continues. “Maybe we begin by mixing hydrogen into natural gas. Or, since what we call pipelines are rarely just one pipe but rather several pipes in parallel, you could move first one out of maybe three pipes to hydrogen and have a transition period with hydrogen and natural gas networks operating in parallel.”

Regulations needed

The expectation that hydrogen networks will be future-critical infrastructure should prompt the EU to support the establishment of this new market, and the toolkit for this is already available, says ACP’s Pfennig.

“What is required is a balanced and reliable regulatory framework, and we already have well-established incentive-based regulations in place for electricity, water and gas networks, which can serve as a template. These regulations have proven to be very effective to attract long-term and cost-competitive capital and incentivise cost-efficient operations.”

He adds that Portugal was one of the first European countries to adopt a dedicated hydrogen strategy and that this also was a key consideration for Allianz to invest in the Portuguese grid.

Key aspects such as deciding on the size of a pipeline will also depend on how the various states decide to engage with the issue of building a pipeline network.

“The coming pipelines should be large enough to accommodate more hydrogen than what can be supplied initially,” says CIP’s Plauborg. “So, the first few customers will not be enough to make projects viable and without some degree of state guarantee, contracts for difference or other subsidies, the projects will carry too much risk. Basically, the affected states must decide whether they see pipelines as a cash cow from the onset or as an investment. Before the Inflation Reduction Act, the cash cow scenario looked likely, but the IRA has demonstrated that at least one country considers hydrogen infrastructure an investment.”

The lack of clarity and the uncertainty around funding was always an issue regarding hydrogen. Then the US’s IRA left Europe decidedly on the back foot.

The Atlantic divide

At the time of writing, there has been no comprehensive policy agreed either in the EU or UK in response to the IRA’s extensive subsidy programme and demands for subsidised green technology to have US-made parts.

Plauborg worries that not enough is being done to counter the American initiative. “Years ago, Europe provided subsidies that allowed the PV industry to emerge. Then we lost the production and technology to China. Europe could be making the same mistake again by asking for green products without being willing to support them. Then the industry and the technology could move to the US,” he says.

Though funds are made available through the EU’s Innovation Fund, they are much harder to access than through the American scheme. “In the US, the requirements are clear, and a tax rebate is assured if you fulfil these requirements. In the EU, you must apply to get support, and for each granted application, 20 are refused. It is simply inefficient, so I hope that the EU will turn its focus to framework rather than applications,” Plauborg says.

At Foresight, the IRA is viewed through a slightly wider lens. “Obviously, we’re aware of the IRA, and from a global energy transition standpoint, it is clearly a very good thing. At Foresight, we’re very much behind those policies and we’re keeping an eye on the potential investment opportunities that come through the US as a result of that,” says Chris Holmes, partner at Foresight Group. “Should Europe be worried? Possibly, and they are implementing their own policies to attract investment. But I think we need to look at this in a broader, more holistic context to say that the world needs to transition away from hydrocarbons.”

Blue or green?

At least some of the hydrogen shipped from the US might be blue rather than green and produced using plentiful American natural gas, just as the suggested hydrogen pipeline from Norway to Germany will carry blue hydrogen for at least a few years.

American support for low or no-carbon products could introduce a price difference between American and European hydrogen. Without a clear preference for green hydrogen, Europe could remain reliant on imported hydrogen.

“It is not in the interest of the EU to allow blue and green energy to compete on equal terms. The EU has amazing PV resources in the south and fantastic wind resources in the north, but we need mechanisms to support hydrogen produced within the EU. For this to happen, green products must have a small advantage. There should be room for blue, but green is better,” says Plauborg.

Though European off-takers might balk at signing a 10-15 year contract with European suppliers if shipments of hydrogen from the US are cheaper, Foresight considers it less of a concern. “If it is sufficiently low or zero carbon, then the provenance of the hydrogen should not be that relevant. We have had strong reception for green hydrogen from off-takers since it is as strong an energy transition story as can be made. In some cases, that is sufficient to override cost differentials,” says Davis.

Trusting the goodwill and ESG KPIs of hydrogen off-takers to keep an industry supported may be naïve. Or inspired. Or maybe not necessary if Europe decides to get back in the game.

Is it infra?

While investors in European hydrogen might wish for stronger policies, more clarity and a wider Atlantic Ocean, reports of new investments in hydrogen-related infrastructure are now regular occurrences. But it is still early days. Getting the timing right is both crucial and difficult as the market awaits a solution to the transmission issue.

“It is a classical chicken and egg situation. Everybody needs to move in lockstep to make it all happen, and the value chain is extremely complex. People will ask whether the pipeline operators will change the pipeline from natural gas to hydrogen. The pipeline operators, for example, wonder whether anybody will build an electrolyser to supply the hydrogen at scale and if the steel plants will move from coke to hydrogen,” says Lukin.

“I think the focus now is on the generation capacity because when you already have the commodity, it is more tangible to start building up the downstream and midstream infrastructure.”

Electrolysers are already widely accepted as infrastructure investments with the potential to earn stable cashflows. At the moment, a common way to address the lack of pipelines is to build electrolysers very close to the offtakers, as in the case of Foresight’s recent investment alongside HH2E in the German Theirbach hydrogen plant and Allianz’s investment in Finnish Ren-Gas.

In the short term, this is likely to be the go-to strategy for investors.

“We have three funds under management that have committed capital to hydrogen investments. For the next 12 months, we are looking at development-stage opportunities and backing developers like HH2E to build production facilities,” says Foresight’s Holmes. “Until those pipelines materialise, the application of hydrogen will be straightforward: it will be to local industrial clusters, it might also be to a specific transport solution.”

When those pipelines materialise, hydrogen may really be going places, and, says ACP’s Pfennig, there is a compelling story in these investments: “I think it is a very attractive proposition to channel coming pensioners’ and insurance clients’ money into building up a modern and sustainable European infrastructure. Investors get access to long-term, sustainable, cash-yielding and inflation-protected investments, and at the same time European consumers benefit from a long-term and reliable source of capital and a more diversified energy supply.”