Financiers are queuing up to look at clean hydrogen production proposals but will be reluctant to commit capital unless projects are underpinned by long-term offtake deals and certifiable sources of renewable power, senior financial players said this week.

Offtake agreements of 20 years or longer are likely to be the norm for projects in the early stages of the sector’s development, as providers of debt and equity investment will demand secure revenue streams from hydrogen production.

“At this stage of the hydrogen life cycle, absent any real [hydrogen] market or reference, projects must be underpinned by one very large, creditworthy offtaker to stand behind some of the risk,” Andrew Doyle, director of power and renewables at MUFG, Japan’s largest bank, told consultancy Aurora Energy Research’s spring forum. Doyle is working on a number of hydrogen projects in the Middle East.

Offtake agreements would not necessarily specify fixed prices over the contract period, but prices will be defined within certain caps and floors or other agreed ranges, Doyle tells Hydrogen Economist. However, others in the industry warn that project backers’ insistence on tying output to long-term offtake deals is likely to hamper the develop of a global spot market for hydrogen.

“You are looking at beyond 2025 before you see any appreciable volume,” Hunt, private investor

Doyle says the proof of renewable power usage is also crucial when assessing the bankability of green hydrogen projects.

Some projects include dedicated wind and solar generation assets, but in other cases developers may source power from outside to benefit from lower tariffs.

The question is then whether the power comes through a direct wire to the project or from the wider grid. In the latter case, certification such as guarantee of origin certificates will be required as proof, Doyle says.

Industrial hubs are emerging as the easiest route into the sector for investors, says Chris Hunt, a private investor and former senior executive at BP, defunct power company Enron and asset management firm Riverstone.

Hubs have the advantages of existing infrastructure and industrial offtakers. And Hunt says 10-15 industrial hubs around the world are attracting interest from “a lot of institutional investors”.

But he thinks projects are going to take time to fall into place, even when all parties involved are aligned. “Even if you have a project with everybody in concert, you are looking at beyond 2025 before you see any appreciable volume.”

In addition to hubs, there will be bespoke hydrogen projects which do not sit close to industrial customers. Hunt says there is already evidence of “landgrabs” as developers rush to secure permits for bespoke projects.

Renewable power shock

But Hunt cautions that some investors’ appetite for hydrogen may be constrained by size. “There is a lot of investment capital that wants to come into the hydrogen space but there is a pyramid and small pension funds, for example, do not have the capacity. It is too early to say how they want to play it.”

Hunts also says that many institutional investors “got burned” by their exposure to renewable power projects, which initially enjoyed large state subsidies but subsequently struggled when that support was withdrawn. This experience could make them more cautious about hydrogen projects.

He adds that many investors have a 5-10 year horizon, which is a very short period in terms of the development of the hydrogen sector.

In terms of investors’ appetite for green and blue hydrogen projects, Doyle says the need for carbon capture and storage (CCS) adds complexity to the investment case. But blue hydrogen can be attractive, he says, “if you can get the CCS component to work.”

However, Hunt is less bullish on blue hydrogen because of carbon price exposure, noting that investors have a “paralytic fear” of the CO₂ market.

But he is confident that investors will be keen to finance the buildout of hydrogen infrastructure—especially private equity players which have previously invested in natural gas networks. “They will invest the dollars, I think [hydrogen infrastructure] will be well financed,” he says.

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Author: Stuart Penson