Significant challenges need to be addressed to create the conditions for the financing of large-scale hydrogen projects, according to a report from the European Investment Bank (EIB).

Economic and regulatory conditions must improve to mobilise the financing needed to meet the ambitious EU targets of 20mn t/yr of hydrogen use by 2030, the report says.

Some of the report’s recommendations—including the introduction of carbon contracts for difference and the harmonisation of existing regulations—have already been proposed in the European Commission’s RepowerEU legislation.

The Commission has also proposed using funding for hydrogen projects under the Innovation Fund. But this funding must be adequately focused on hydrogen technologies via careful definition of the eligibility criteria, says the EIB report, titled Unlocking the Hydrogen Economy.

20mn t/yr – EU’s targeted hydrogen use target for 2030

“Another way to provide early-stage support would be to allocate dedicated equity resources for venture capital intermediaries to encourage indirect financing of hydrogen ventures and the setting-up of dedicated hydrogen venture capital funds or strategies within established generalist funds,” it adds.

For hydrogen demonstration projects, the EIB could provide enhanced demonstration financing instruments funded by quasi-equity investment from the private sector. Quasi-equity investment is a form of debt that allows the investor and the recipient of the investment to share the risks and rewards of projects more flexibly.

Credit-enhance chance

Project finance providers are still wary of providing financing to hydrogen projects. This problem could be addressed by the establishment of credit-enhancing mechanisms that reduce lender risk on hydrogen deployment projects until market conditions become mature.

An example of such a mechanism could be a first-loss guarantee—where the European Commission or the EIB would be required to meet a certain percentage of any potential losses from a project.

A conditional grant from the EIB could also be designed to cover certain agreed costs for hydrogen projects, helping reduce the overall amounts needing to be financed by debt.

“This could follow the model of the Connecting Europe Facility programme’s blending facility, where eligible mobility projects can apply for a portion of the costs of mobility assets to be financed if approved for a loan by the EIB or another implementing partner,” says the report.

Outreach initiative

Targeted initiatives to develop the financing ecosystem for hydrogen could help connect lenders and projects, as well as inform them as to the blended finance options available.

A similar initiative promoted by the EIB in the space sector has helped that sector access funding from more mainstream financiers, the report says.

In a related recommendation, targeted support from finance experts could help lenders understand the evolving opportunities for investment in the sector.

“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,” says the report.

Advisory support packages could make it possible to explore how demand could be aggregated around hydrogen production centres, how hydrogen could be integrated into renewable energy projects as a power storage solution, or how mobility ecosystems could be structured.

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Author: Tom Young