Pilot hydrogen production projects offer a different risk profile to commercial projects and therefore require different ways of managing that risk, according to panellists on a PE Live webinar titled De-risking Hydrogen Investments, held in association with professional services firm EY.

Many companies in the nascent hydrogen space are deploying pilot projects as they look to demonstrate technologies before commercial rollout. With most national hydrogen strategies only recently released, it is likely to be the middle of the decade before large commercial-scale projects start to be widely deployed.

Some projects are emerging in Europe, the US and the Middle East for mid-size electrolysers, but many UK developments are still in the pilot phase, according to Richard Hulf, managing partner with London-based HydrogenOne Capital.

“We are an early-stage investor prepared to take development risk, but it is still hard to find projects that are big enough,” he says. “The risk from an investor perspective is not to get trapped in a project that has not got sufficient scale to be sold on.”

“The risk from an investor perspective is not to get trapped in a project that has not got sufficient scale” Hulf, HydrogenOneCapital

This is why many firms pursuing pilot projects are not raising debt but instead looking for equity partnerships with other firms or private investors.

The goals of the two types of project are very different, according to Simon Collier, associate partner with EY.

“There is a significant difference between what is needed for success in an early-stage demonstration project and a commercial project,” he says. “In an early-stage demonstration project it is really often about not much more than learning enough to justify your R&D spend.”

A study by the Scottish government of offshore green hydrogen production found the total capital expenditure for a 14MW hydrogen project would be £46mn ($63mn), whereas for a 500MW commercial project it would be £1.1bn, illustrating the different types of financial risk involved.

Bankable projects

Although investors such as hydrogen funds are keen to invest in commercial-scale projects that they can sell on, there are a few key factors in ensuring that a project is bankable.

“You need to get offtake in place,” says Hulf. “Getting electricity pricing agreed is also one of the big drivers.”

Wholesale electricity costs are often cited as forming around half the operational expenditure costs of green hydrogen projects. Some projects are likely to have their own dedicated renewables supply, but others might look at accessing grid electricity. These projects might buy a certain amount of energy through a power-purchase agreement in conjunction with renewable energy certificates, which guarantee that any purchased power is low-carbon.

In terms of offtake, one solution for commercial projects could be having an agreement with transmission system operator National Grid to sell hydrogen to be blended into the national gas network, according to Antony Green, hydrogen director with the National Grid.

“The major UK industrial clusters can start to scale up to blue, then green, hydrogen production and we can take that away and put it into supply,” he says.

National Grid can safely blend hydrogen at 20pc volume into the gas distribution network and hopes to eventually move that figure up towards 100pc by investing in the network.

Overall, the main goal for commercial projects and for regulators looking to develop a hydrogen economy is getting all the pieces in place simultaneously, according to Tim Calver, executive director, energy and infrastructure advisory, EY.

“The key challenge with hydrogen is developing production, storage, logistics and end-use all at the same time,” he says. “One of the other challenges is how do you ensure it is not too complex. Investors need simplicity, particularly when they might be thinking about investing in various different regions.”

 

The PE Live webinar, De-risking Hydrogen Investments, held in association with EY, can now be viewed on demand.

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Author: Tom Young