Low Cost of Green Hydrogen Depends on Right Project Finance Program
The financing model can be based on available precedents
January 9, 2023
Development of the green hydrogen industry will require substantial capital and the financing for such projects will have to borrow more from the precedents of offshore wind and LNG undertakings, the Oxford Institute for Energy Studies said in its latest study.
It said that substantial capital will be required to develop this new industry. Estimates range from $80-300 billion from now until 2030 with very much larger numbers through to 2050 (the IEA estimates $2,500 billion for low-carbon hydrogen production alone).
The report said that in some cases, lenders to green hydrogen projects might prefer completion guarantees from sponsors as is usually the case in LNG projects.
However, if there are robust contracting structures like in offshore wind projects, a completion guarantee may not be required.
Further, the report said, most lenders and investor groups are highly incentivized to invest in energy transition projects.
“Critical to achieving the lowest cost of capital, and consequently the lowest cost of hydrogen will be maximizing the level of debt throughout the life of the project. This is best done by achieving the highest possible initial debt: equity ratio (DER) and minimizing the rate at which the debt must be repaid,” the report said.
One of the solutions to keep the cost low is to secure debt with a long maturity (15+ years) and by ensuring that it can be refinanced one or more times over the life of the project.
The Oxford Institute study said that achieving low-cost loans will not be easy to begin with as lenders are expected to be conservative in the early transactions especially if completion guarantees are not offered.
“Additionally, projects will be able to choose from several different types of lenders to optimize their financing. Concessionary lenders, typically owned by the importer country, may be willing to offer long maturities at concessionary pricing while export credit agencies can offer both mitigations of host country political risk,” the report added.
However, the good news is that both debt and equity investors have a substantial appetite to invest in the hydrogen sector. As an indication, just five of the leading U.S. banks have together stated commitments to raise $5.75 trillion by 2030 for the energy transition in general.
Further, infrastructure fund investors similarly report strong investor demand with one leading fund reporting sustainable investments doubling to over $500 million in 2021 in their funds alone with ongoing strong investor demand, the report said.
The study is based on the project financing cost of what it called an ‘archetype’ project wherein 1 GW of solar power is used to make green hydrogen, which is converted to 250,000 tons per annum green ammonia for export with a capital cost of $2 billion.
The IEA has forecasted the global green hydrogen market to grow from almost zero in 2021 to 9-14 metric tons per annum (mtpa) in 2030 and 125-300 mtpa by 2050. Exports are expected to account for 12 mtpa of low-carbon hydrogen by 2030, of which approximately 90% is expected to be green hydrogen.
To meet the growing demand and become a green hydrogen hub, India has approved the National Green Hydrogen Mission to facilitate demand creation, production, utilization, and export of green hydrogen with an initial outlay of ₹197.44 billion (~$2.3 billion).
Mercom India is hosting its annual Renewables Summit in April 2023, which will have informative sessions on green hydrogen – the critical piece in the decarbonization puzzle.