When the president of the European Commission says hydrogen is “the focal point in the energy revolution” and the energy commissioner says it is the “vital missing piece of the puzzle”, perhaps it’s time to sit up and listen.

The catch? The president who made the first pronouncement – Romano Prodi – and the commissioner, Kadri Simson, were speaking in 2003 and 2020 respectively. Those who have continued listening, though, will have noted one major change and one alarming constant. The change concerns the falling costs and subsequent build-up of renewables, which paved the way for clean hydrogen. The constant is the fact the planet is not getting any cooler. So as we head into 2021, hydrogen is back on the agenda.

In July, Simson brought to life Prodi’s ambitions as the EC unveiled its covid recovery plan. This included policies that could unlock investment of between €180 billion and €470 billion in renewable hydrogen by 2050, when the EU wants hydrogen to comprise 13-14 percent of Europe’s energy mix. The EU wants 6GW of renewable hydrogen electrolysers installed by 2024 and 40GW by 2030. The UK is yet to release its own, post-Brexit goals. Renewable hydrogen – or ‘green hydrogen’, as it’s known in industry jargon – plays virtually no role in the mix.

Australia also wants to position itself as a world leader in green hydrogen. In 2019, its government tweaked the mandate of its Clean Energy Finance Corporation to make hydrogen an investment priority. The centrepiece was the establishment of a A$300 million (€185 million; $219 million) Advancing Hydrogen Fund, which will invest in progressing hydrogen production, developing export and domestic supply chains, establishing hydrogen hubs, and projects that build domestic demand for the fuel. These plans are in line with the National Hydrogen Strategy, which includes a target of reducing production costs to under A$2 per kilogram.

Ambitious targets

“[The EU] has a very high ambition for clean hydrogen production via electrolysis,” says Alena Fargere, principal at SWEN Capital Partners. “The biggest unitary industrial installation so far is 20MW and now we are targeting 40GW of cumulative electrolysis capacity by 2030 in Europe.”

In October, the Paris-based firm closed its SWEN Impact Fund for Transition on €175 million. The fund will be Europe’s first dedicated to investment in renewable gases, including hydrogen.

“What is different this time on top of the emerging decarbonisation efforts and affordable renewable electricity are the financial means available,” Fargere adds. “We have considerably more means to match voiced ambitions.”

Until now, hydrogen has been produced in ‘grey’ or ‘blue’ formats, meaning it was being produced through hydrocarbons, with or without carbon capture and storage modifications. Now, if developed properly, clean hydrogen can play a role across the energy mix – from energy storage, to fuelling transport, to heating homes.

That is why, as Simson put it, hydrogen is the “vital missing piece”, despite it being at such an early stage.

“These are very long-term assets with a level of price certainty in the energy source that doesn’t exist in fossil-fuel alternatives”
Rupert Maloney, CEFC

“It’s a chicken-and-egg problem and that’s why it needs public intervention,” says Christian Weinberger, senior advisor and hydrogen co-ordinator at the EC. That is also why it needs bold targets. “Those are purely political targets, there’s no science behind that,” he says of the EU’s objectives. “Hydrogen needs to get over the cost-competitiveness hurdle.”

Dalia Majumder-Russell, senior associate at law firm CMS’s energy practice, says ‘purely political’ targets may be exactly what draws in crucial investment, as seen with other types of renewable energy: “We see companies in the Netherlands and Germany asking questions because there is a target to aim at. That creates the imperative.”

In Australia, the government is thinking beyond targets and costs, and envisioning a major export opportunity.

“We see hydrogen as an enormous opportunity for Australia to continue our strong position as an energy exporter and an energy superpower,” Angus Taylor, the country’s minister for energy and emissions reduction, tells Infrastructure Investor. “Australia is extremely well-positioned, because of our natural resources [where] we can produce low-cost solar that can be complemented by wind, and [because] we have deep relationships with critical customer countries.

“Asian countries – Japan in particular, also Vietnam, Singapore and China – will lead the way in buying hydrogen, but have challenges in producing it themselves. The industry has the potential to deliver over A$10 billion a year in a reasonable timeframe. There is a lot of work to do and we’re putting our money where our mouth is.”

Aside from targets, investors will need tangible incentives to join the revolution. Fortunately, when it comes to supporting the build out of clean energy, the world has been here before.

“Just like renewables needed subsidies to get real scale, I think hydrogen will too,” says Melbourne-based Kate Vidgen, global head of oil and gas at Macquarie Capital. “If you look at the level of commitment that’s been undertaken in Europe in the last four or five months, that will almost guarantee that the cost of infrastructure – electrolysers, storage and transport – will be pushed down through scale.”

Past lessons

That said, there are plenty in Europe – policymakers and investors alike – who are scarred by the old subsidy system, and who are urging a different approach.

“The ramp-up of renewables by feed-in tariffs had a very good effect, but [also] a very bad effect,” recalls Thomas Engelmann, head of energy transition at renewables fund manager KGAL. “A lot of these facilities still get payments that they don’t need. Contracts for difference could be a very interesting instrument to push the green hydrogen market towards competitiveness.”

Weinberger agrees that the old subsidy system is too expensive to come back and that CfDs could be the answer, though this will require significant impetus from industry players.

“The subsidy system is very expensive,” he says. “The cheapest way is auctions. Are they doable? This is not yet answered politically. Industry needs to get together and build these projects up with the encouragement of government. And then there is a decision to be made on how much they will get funded for doing that.”

“Just like renewables needed subsidies to get real scale, I think hydrogen will too”
Kate Vidgen, Macquarie Capital

Weinberger’s wish was partially fulfilled in November, when Orsted and BP revealed an initial agreement to build a 50MW electrolyser at a BP refinery in Germany, powered by an Orsted offshore wind farm. However, they only plan to make a final investment decision by 2022, subject to “appropriate enabling policies being in place”, according to a statement.

Not everyone is on board with the CfD model for something as innovative as renewable hydrogen. “Sometimes, I feel we attach names to models before we establish what those models will be,” says Majumder-Russell. “We expect to see the model we are most familiar with. For an early project, it will not be a standardised, risk-allocated position, as it will be for more mature renewable technologies. There will need to be more bespoke arrangements.”

In addition to incentives, development finance from the European Investment Bank could also be crucial. “Multilateral development banks can provide a more holistic support to the energy ecosystem, providing long-term capital across the value chain,” says Shiva Dustdar, the EIB’s head of innovation finance advisory. “Currently, investors lack sufficient visibility on how the hydrogen production will find its way to customers. This is where we need strong coherent public support, not just at national level, but also across countries.”

Australia seems to agree, having two public-sector bodies currently helping to fund hydrogen projects. Led by the CEFC, the Advancing Hydrogen Fund is likely to provide finance to some of the seven projects shortlisted in July for grants from another state body, the Australian Renewable Energy Agency.

“The risk from the financial perspective is you are coming into one part of the value chain without having the other part fully developed”
Shiva Dustdar, EIB

The CEFC appointed its first head of hydrogen, Rupert Maloney, in early 2020 to oversee the investment programme. “We’re ideally looking to invest a minimum of around A$20 million [per project],” he says. “But we’re flexible and will go lower than that for the right project. We also think our finance and the AHF is really there to fund some of those larger-scale projects in Australia, and the ticket size can get quite large if you’re financing across the supply chain.”

Funding is likely to take the form of concessional debt early on, though the CEFC’s mandate means it is open to equity investments too.

Dustdar says a number of hydrogen projects are cropping up on the EIB’s radar, but many are not yet ready for investment from the bank. As with the Orsted and BP project, many developments at the moment are coming from oil and gas and utility majors.

What, then, are the prospects for infrastructure investors and institutional capital? According to the CEFC’s Maloney, the two are a great fit, provided some challenges are ironed out.

“There are a number of infrastructure managers we’re talking to that are very interested in the sector,” he says. “This has a lot of the characteristics that really appeal to them – the commercial gap is the challenge. But if you go beyond that and believe it will close, these are very long-term assets with a level of price certainty in the energy source that doesn’t exist in fossil-fuel alternatives.”

Green Down Under

Macquarie Capital was one of seven bidders shortlisted by ARENA in the grant funding round for a joint venture with mining operator Anglo American. The pair are developing a solar-powered, green hydrogen production and mine vehicle project at the Dawson Mine in Queensland.

Vidgen has “no doubt” that green hydrogen will develop into a large and successful industry, but says it may take a while for hopes to be realised. “It takes a very long time to build out the logistics and supply chains to develop that export industry,” she says. “Although that’s probably a good thing because, from an Australian perspective, it will sit quite nicely alongside the expertise we already have in LNG, and this represents a substantial opportunity.”

In Europe, some are looking to more recent trends to help with the flow of capital into new projects. “Investors want to contribute to the energy transition to a larger extent,” says Fargere. “During the covid crisis, we saw our renewable gas infrastructure projects did not suffer much compared to other infrastructure projects. The first clean hydrogen production projects I expect to finance are 1MW to 20MW electrolysers for industries already using hydrogen, and new hydrogren applications in heavy duty and maritime.”

Majumder-Russell points to another emerging trend that could work in hydrogen’s favour with institutional investors. “The ESG landscape is changing and there’s a lot more interest in looking to charge towards climate change goals,” she says. “This will allow riskier technologies to be more attractive to institutional investors.”

“Is KGAL prepared to go early in a market to analyse it? Yes. Would I invest into hydrogen tomorrow? No. It would not be economically viable”
Thomas Engelmann, KGAL

Engelmann sees these trends too, but does not believe the market is immediately ready for a manager such as KGAL: “Is KGAL prepared to go very early in a market to analyse it? Yes. Would I invest with our investors’ money into hydrogen tomorrow? No. It would not be economically viable.

“There needs [to be] a stimulation, so that an investor must not bear the risks. We are now preparing for a market which is ready for investment in one or two years. If it is not there because there is no support regime, we cannot invest. Hydrogen is the fundamental opportunity to connect other sectors. This is why I believe, in one or two years, market partners like us will find investment opportunities in that market. If we don’t find it, decarbonisation is gone.”

A similar view in terms of timeframe is held at SUSI Partners. “Green hydrogen infrastructure can become a core part of the energy transition. We are starting to see initial activity, but it will take a bit more time for the sector to mature and become investable at scale,” says Johannes Vetsch, a director at the Switzerland-based firm. “Institutional infrastructure capital will likely seek exposure once technologies become cost competitive, applications mature, demand becomes visible and regulatory frameworks are clarified.”

As managers such as KGAL and SUSI wait in the wings, some risks will have to be taken by less conservative investors. Macquarie Capital believes it can help fill this role.

“The initial projects tend to be too small for larger infrastructure investors,” says Vidgen. “At Macquarie, we’re happy to look at smaller investments than we ordinarily would because of the potential for growth. The other challenge is with the market itself. A lot of people compare hydrogen to renewables, which is fine as there are lots of similarities. But one thing that is different is that wind and solar’s output – electricity – had a known market.

“Most of the hydrogen that’s produced now is not traded and is produced on site, so you need an offtake agreement for new projects. The challenge there is that the period of time you’d want an offtake to last doesn’t match what users need. For example, if you’re going to fund a fleet of hydrogen buses, the maximum time for most bus operator concessions would be seven years, but an investor would want to amortise their electrolyser over 15 years.”

The EIB may have a significant role to play in helping to balance such interests. Its aim is for 50 percent of its financing to be in climate action by 2025, and Dustdar expects hydrogen to play an increasing role in this. However, she insists the sector will need support from other industry players.

“Hydrogen requires a whole ecosystem for the projects to become viable,” she says. “A lot of emphasis right now is on the production side. However, it doesn’t really help to have a great gigafactory if the hydrogen cannot be transported, stored and end up with the end user. The risk from the financial perspective is you are coming into one part of the value chain without having the other part fully developed.

“The challenge is how we get a start on this. Who will pay for that production? There will be lots of steel manufacturers who want this hydrogen, but how will it get transported? Pipelines will be the cheapest way, but they will only be cost efficient when you have lots of capacity.”

There are also energy efficiencies to consider, which may not be as easy to bring about as cost efficiencies.

“Hydrogen doesn’t come for free,” says Tom Baxter, a chemical engineering consultant and visiting professor of chemical engineering at the University of Strathclyde. “You have to put energy in to get the hydrogen out. Immediately, you’ve got a big inefficiency.”

Baxter says he was previously “seduced” by hydrogen, but now argues for a more rigorous assessment of its place in the energy mix: “Let’s do a proper, holistic and comparative analysis. Not a hydrogen working group, but a transport or heat working group which looks at other options. Take the topic and have an unbiased look at the costs, schedule, risks, the impact on environment and society.”

Whether Baxter’s demands become reality or not, the issues he lists will be crucial to resolve if there is to be a ‘hydrogen economy’. Otherwise, we might find ourselves waiting another 17 years, until a new generation of politicians picks up the investment baton again.