French investment bank Natixis decided last year to strengthen its expertise in hydrogen in order to better support customers and to seek out investments that could help the sector grow. As part of its strategy, Natixis joined the Hydrogen Council with a view to improving its knowledge-sharing and collaboration.

Hydrogen Economist spoke to Natixis head of hydrogen Antoine Trieux and Ivan Pavlovic, senior energy research specialist, about how the next few years might look for the sector.

Tell us broadly about how Natixis is looking to contribute to the development of the hydrogen sector?

Trieux: We have a strategy in hydrogen based on three main pillars. First, we have a working group of 15-20 individuals globally who are responsible for identifying debt and equity opportunities for the bank. Second, we have  a strong institutional commitment to the sector as a member of the Hydrogen Council and the European Clean Hydrogen Alliance. The third pillar—and the most important—is the strategic dialogue that we are having on a daily basis with the leading players in the sector.

“We are currently helping small companies raise capital and helping the big guys invest in the sector” Trieux

Who are the leading players?

Trieux: They come in three groups. The big energy and industry firms such as Air Products, Air Liquide, Total and Shell. Second, the financial investors who are absolutely critical to the emergence of this sector—because a massive amount of private capital is going to be needed to be injected on top of government support. Third, the small-to-mid cap players, startups that have €2mn ($2.4mn) of revenues or so. They are interesting because they have been in the industry for years but have not been in the spotlight until now, when they have first-mover advantage and are able to capture the growth that is coming. Our role in the short-term is to support these small companies in their growth, help them raise capital, and team up in the M&A space with bigger players.

So it is currently an equity play for Natixis?

Trieux: Our perception is that the sector is currently an equity business play which is progressively shifting towards an equity and debt play. We are currently helping small companies raise capital and helping the big guys invest in the sector. But we are also seeing some mid- to large-size projects emerging that means we are progressively evolving towards more of a debt business play with capital financing requirements.

Probably the first deal we will see like that will be Neom [in Saudi Arabia], as a starter, but what we are seeing is some other more regional deals that are emerging in Europe and Australia for mid-size electrolysers that we are considering with smaller debt amounts, projects of around €70-80mn, with €40mn debt. We are keen to embark on these opportunities, but we think the large types of opportunities of over €250mn ($305mn) in terms of debt size will start to happen from 2023 onwards.

And is that shift inevitable, or does it require government and policy support?

Pavlovic: What I think is quite interesting is that there is a mounting consensus that, if you want to raise all the capital that is needed to undertake the necessary investments by 2030—and the Hydrogen Council mentions $300bn as the amount needed to deploy the assets to bridge the cost gap with fossil fuel activities—well you need to attract private capital on top of public capital. From what we have seen thus far, public capital is likely to be in the region of $70bn so the rest has to be financed privately. How are we going to do that? Moving gradually from the financing of projects at sponsor level or through public spending to projects that will be financed at the asset level. That's where the involvement of public bodies, the nurturing of regulation and supporting mechanisms for the development of the sector will provide considerable help, just as we have seen over the past 15 years with the development of renewable energy.

When countries set feed-in tariffs, that is clearly helping simply because with guarantees provided by governments on the price of the hydrogen offtake we are entering a world where there is enough cashflow visibility from the assets to onboard debt financing and non-recourse financing from commercial banks. But I am cautious about saying this. We are gradually entering this world because the contractual structuring of hydrogen-centric projects can be complex, and we have some technological issues that need to be tackled during the finance structuring phase.

Another example I can take is development at EU ETS level, where we expect a strengthening of the existing carbon market in Europe, the extension to buildings and mobility, and greater constraints for industry. We expect mounting carbon prices to act as a sort of implicit subsidy for the use of green hydrogen in these industrial and mobility sectors. The demand basis is key for banks as well—strengthening demand will facilitate the involvement of long-term investors.

There is a difference there between hydrogen and the example of the renewable sector isn’t there? Because with the renewables sector, demand was always guaranteed.

Pavlovic: There is one major difference between renewables and hydrogen, and that is that renewable energies have priority injection into the grid. So with the new mechanisms in place since 2017 this rule creates permanent demand. So when you are developing a renewable energy project in Europe you have a renewable premium, a guaranteed price over the asset’s lifespan, and on top of that you enjoy priority injection. So volume risk and price risk are covered. Green hydrogen is slightly different because, if we take the example of the feed-in premium in France that was announced last February, what you have is a price support that, in practice, will work as a sort of subsidy to bridge the cost gap between the production of green hydrogen and the production of grey hydrogen to satisfy industrial demand.

$300bn – Investments required in hydrogen sector

So you theoretically cover the price risk but not the volume risk. Governments and the EU have to act to support the industry in order to cover the volume risk, given there is no priority injection for hydrogen. And that is where all the mechanisms aimed at boosting long-term demand for green hydrogen are helpful, because you need to create incentives to use hydrogen in its low-carbon form. The EU ETS is clearly the number-one tool in our view. But guarantees of origin (GOOs) should complement the role of the ETS to support long term demand for low-carbon hydrogen.

With a strong EU ETS price signal in place does it then follow that Europe is going to remain the focus of your activities ?

Trieux: We think hydrogen is essentially a sector that can develop in economies where there is strong planning capacity, economic and political stability, stable institutional and legal frameworks, and some experience in the energy sector. When you tick all these boxes you are looking at Europe, North America, East Asia and the Middle East.

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Author: Tom Young