EIB investor report delivers big opportunities and hard truths on EU hydrogen financing

Hydrogen Sector 07.06.22
Written by: HYCAP

The European Investment Bank (EIB) has released a report into the state of the EU’s hydrogen finance market, and it has some strong recommendations if the bloc is going to meet its production goal of utilising 20 million tonnes of clean hydrogen a year by 2030.

The report, titled Unlocking the Hydrogen Economy, summarises the results of an investor consultation into how to accelerate the adoption of hydrogen, which the EIB describes as offering “enormous potential” for the reduction of global carbon emissions by replacing fossil fuels in hard-to-decarbonise industries.

The development of a hydrogen economy is likely to need hundreds of billions of euros of investment in the coming decades from both the private and public sectors, according to the report, but a range of “economic, regulatory, industrial and operational challenges” need to be tackled before hydrogen can reach its potential.

Scale alone may not bring hydrogen costs down to where they need to be, so innovation is needed to advance technologies, such as electrolysis, that have the potential to create a step change in production economics, investors told the EIB.

Hydrogen venture capital is relatively concentrated among a few European players that dominate the space.

Early-stage research and development usually relies on grants from public and private organisations, and there is an opportunity to do more in this space to ensure hydrogen does not fall behind other fields, investors said.

Hydrogen venture capital is relatively concentrated among a few European players that dominate the space. Challenges include the high cost of demonstration projects, the offtake price, duration and volume risk, as well as technology, operational and counterparty credit risks.

This is where specialist investors can add value, and where a generalist fund might struggle.

The EIB’s recommendations fall into four categories: economic competitiveness; clear and streamlined regulation; ecosystem support; and value-chain thinking.

A variety of support mechanisms are proposed, including contracts for difference, which are already being enacted in the UK and have been put forward in the European Commission’s RepowerEU legislation. Other suggestions include guaranteed offtake, feed-in tariffs, a European clearing house or market-making mechanism, auctions and green public procurement.

Furthermore, the EIB suggests the provision of enhanced demonstration financing instruments funded by quasi-equity investment from the private sector, allowing the investor and the investee to better share the risks and rewards of projects.

The EIB also recommends the establishment of credit-enhancing mechanisms that reduce lender risk on hydrogen projects, such as first-loss guarantees whereby the EC or the EIB pledge to cover a percentage of any potential losses from a project.

The EIB could also make conditional grants to cover agreed costs for hydrogen projects, reducing the amount of debt or equity financing required.

Hydrogen investments are often more complex than other new energy projects and involve more participants, including renewable energy suppliers, electrolyser manufacturers, storage providers, hydrogen transport and offtake deals. The EIB believes it can play a role in building a hydrogen ecosystem by connecting financiers and projects as well as spreading the word about blended finance options.

Clean hydrogen has the potential to decarbonise industries from steel manufacturing to transport to agriculture and construction.

“Advisory support could also extend to hands-on project development assistance, particularly in the case of large, complex projects involving multiple players and value chain segments,” the EIB said in the report.

That could take the form of demand aggregation around hydrogen production centres, integrating hydrogen production into renewable energy projects as a power storage solution, or the creation of mobility hubs.

In the UK, some of these issues are already being addressed through government financing initiatives, including the £240 million Net Zero Hydrogen Fund, £26 million for the Industrial Hydrogen Accelerator, and £100 million for the Hydrogen Business Model, a subsidy scheme for green hydrogen production.

Last month, the UK government awarded £60 million to 28 hydrogen projects across the country as part of a competition aimed at fostering innovation in the production and storage of hydrogen.

However, there are still some learnings the UK can take from the EIB report. Promoting co-investment between the public and private sector could unlock billions more for hydrogen investment at this crucial stage in the technology’s development.

Clean hydrogen has the potential to decarbonise industries from steel manufacturing to transport to agriculture and construction. While there are solutions ready to go, the sector as a whole is very early in its development with huge potential yet to be realised.

By bringing the public and private sectors to together, we can ensure the UK is at the centre of this crucial piece in the decarbonisation puzzle.

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