Renewable hydrogen offers massive potential, but off-taker uncertainty can keep private banks at bay. Business models emerging now in France, in which public authorities enter into long-term hydrogen purchasing contracts to provide public services, promise to create the conditions for private capital involvement by providing a stable source of demand with a fixed price for renewable hydrogen, according to research by Natixis Bank shared at the Financing Renewable Hydrogen Projects webinar.
By Jason Deign
Public authorities could play a key role in the development of emerging markets for renewable hydrogen, according to a senior banking figure.
French municipalities, for instance, are spawning the creation of green hydrogen hubs that could play a vital part in attracting private capital, according to Ivan Pavlovic, senior energy, green and sustainable specialist at the commercial bank Natixis.
“We are seeing the emergence in France of a ‘local asset co’ model allowing the development of ecosystems around hydrogen within the framework of territorial hubs,” Pavlovic said in a webinar organised by ATA Insights.
“A local authority will create a special-purpose vehicle carrying an electrolyser as well as a refuelling station. The green hydrogen produced in this way will be used to supply captive fleets of buses and waste collection trucks under the control of the municipality or a private company.”
The fact that this model provides a stable outlet for green hydrogen, with contractually fixed pricing, could serve as a lure to private capital, Pavlovic indicated.
Although Europe’s emerging renewable hydrogen market needs €430 billion in private sector finance, investors have so far been wary of getting involved.[i]
One of the problems facing would-be investors is that the hydrogen value chain comprises three types of activities: industrial production of equipment such as electrolysers, commodity production of low-carbon gas and infrastructure activities such as the operation of charging stations.
Each of these activities has different risks and addressable markets, complicating the investment picture and underscoring the need for public support, noted Pavlovic. Besides providing investment certainty, Pavlovic highlighted three other benefits of the local asset co model:
- Special-purpose vehicles can involve actors as diverse as energy providers, equipment suppliers and investors including infrastructure funds.
- Hydrogen is produced close to the point of use, minimising the still significant challenges associated with storing and moving the gas.
- The hydrogen asset co model is scalable and can easily be built out by adding new electrolysers and refuelling stations.
“Interestingly, this emerging local asset co model can be broadly replicated at the level of international infrastructures such as ports and airports,” Pavlovic commented.
“In the case of airports, the replication of this model is facilitated by the multiplicity of potential hydrogen uses—think of all the buses, trucks, elevators, forklifts that can be powered by electrolysers—[and] the regulated nature of the airport operator’s revenues.”
Chart 1: Simplified Flowchart for a Potential Airport Infrastructure Asset
Local asset co hydrogen purchasing agreements or government feed-in premiums could help attract senior secured debt alongside current forms of finance, which mostly involve equity capital and senior unsecured debt from industrial energy players active in the development of projects, he said.
Another possible financing route is the creation of leasing or pay-per-use schemes by equipment manufacturers in partnership with commercial banks, said Pavlovic.
“Once the standardisation of these financing schemes has been achieved, a third step would allow banks to syndicate or securitise loans to final investors, with the benefit of freeing up some financing capability on their balance sheet while onboarding investors,” he said.
Chart 2: Typology of Main Capital and Debt Instruments and Assessment for Risk for Capital Provider (1-10, very low-very high)
As it stands, “the business model is not fully stabilised,” said Sybille Grandgeorge, executive director for industry banker, power and renewables at Natixis, in the ATA Insights webinar.
Renewable hydrogen customers and investors face two sources of risk, she said. One is that variations in the price of electricity could have a large impact on the cost of renewable hydrogen. The other is technology risk. “Electrolysis is not new,” she said, “but the scale of the projects is new.”
Despite this, Natixis remains bullish on the outlook for renewable hydrogen, predicting a global investment of $300 billion by 2030[ii].
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