Hydrogen policymakers around the world are pinning their hopes for 2024 on a sharp rise in the number of proposed production projects reaching FID, as 2030 supply targets start to look increasingly challenging.

Only about 4% of announced projects have so far entered construction or hit FID as lenders and investors hold back because of uncertainty around long-term demand, production costs, availability of state subsidies and the lack of a transportation and storage infrastructure.

This reluctance to finance projects has left a “funding gap” of about $380b through 2030, according to some estimates.

Much faster progress is needed in 2024 to mature hundreds of proposals into bankable projects and to get the industry on track to meet governments’ targets, which in total call for production of 27–35mt/yr by 2030. The ultimate goal is to grow hydrogen’s share of the global energy mix to 12-15% by 2050 as part of the push for net zero.

4% – Share of announced projects reaching FID or construction

Assuming all announced projects are realised, low-carbon production of more than 20mt/yr could be online by 2030, the IEA says.

Some argue the industry is at a tipping point and that the next 12-18 months will see a surge of projects advancing to FID. However, the headwinds that hampered projects in 2023 are expected to spill over into 2024 against a backdrop of fragile economies and geopolitical tensions. Higher costs of capital, elevated energy and capital equipment costs, and supply chain bottlenecks are all expected to weigh on the sector in the months ahead.

Offtake challenge

Aside from the immediate cost pressures, one of the sector’s biggest long-term challenges is persuading industrial consumers to sign up to long-term offtake agreements at prices that reflect a “green premium”. Price is not the only concern for consumers—many also worry about the reliability of supply from new production facilities without a long track record of operation.

Projects without the security of a contracted buyer for their output are seen as too risky for many, if not most, lenders. Given the risks involved, projects may be more likely to secure equity finance than debt in the near term.

One very large project has solved the offtake conundrum: the 2.2GW NEOM project, which reached financial close in 2023, will produce both green hydrogen and ammonia in the planned Saudi city of Neom from 2026. The project is backed by a 30-year offtake agreement with one of its three shareholders, US industrial gases company Air Products.

The success of Neom has lifted sentiment across the industry, but it remains to be seen if its unique offtake and financing structure offers a repeatable template for other projects.

Policymakers have woken up to the offtake issue amid growing criticism that their support for the hydrogen sector has been too heavily focused on the supply side. Uptake of low-emission hydrogen remains “very limited”, accounting for only 0.6% of total hydrogen demand, the IEA warned in its 2023 review of the sector. It urged governments to clarify their targets for demand and to increase them in line with production targets.

In July, the US Department of Energy (DOE) announced plans for a $1b funding programme aimed at “jumpstarting” the hydrogen economy by stimulating demand, as it acknowledged a lack of offtake deals was hampering the progress of production projects.

America beckons

Despite concerns over the demand side, and some policy uncertainty ahead of presidential elections, the US is expected to remain a big draw for hydrogen project developers in 2024. It is expected to build on the momentum gained in 2023 on the back of highly competitive tax credits offered under the Inflation Reduction Act (IRA) and will continue to erode Europe’s early lead in terms of project numbers.

Many details around the implementation of the IRA have still to be clarified but developers are impressed by features including direct payments of tax credits and the ten-year duration of support for projects starting construction before 2033. Bloomberg New Energy Finance reckons $137b is expected to flow to eligible projects over the next ten years, mainly via tax credits offered by the IRA.

The Biden administration further demonstrated its commitment to driving forward the hydrogen economy in October when the DOE allocated $7b to support the launch of seven multi-state regional clean hydrogen hubs across the country. The progress of the hubs, which have the combined potential to meet 30% of the government’s 2030 target, will be watched closely in 2024.

This article was published as part of PE Outlook 2024, which is available for subscribers here. Non-subscribers can purchase a copy of the digital edition here.T

---

Author: Stuart Penson