Funding Green Hydrogen

Leading financiers discuss the emerging ecosystem

Green hydrogen is increasingly being considered the “fuel of the future”. However, the sector is still at the nascent stages of development. The high initial cost of green hydrogen production is one of the key factors for its low uptake. India has the potential to bring down the cost of green hydrogen by using low-cost renewable energy and setting up large-scale projects to reap the benefits of economies of scale. For the sector to grow to its full potential, the availability of finance will be a key driver. At the second “Green Hydrogen in India” conference organised by Renewable Watch, leading financiers shared their perspectives on green hydrogen financing, investor concerns and the future outlook. Edited excerpts…

Paritosh Garga

Paritosh Garga, General Manager, IIFCL

It takes a number of processes to get hydrogen energy to the end consumers. A key component of the supply chain is to store the hydrogen at a very high pressure. The final challenge is to deliver it to the site. If it is on site, there will be no need to pay for transportation, but for an off-site project, there is a need to pay for dis­tribution centres. As a result, when ex­am­i­ning a hydrogen project, a finan­cier must consider financing of the entire su­ppl­y chain. Any financier who provides only a part of the financing is always at risk of the entire chain not being implemented on time. Another risk for finan­ci­ers is that the technology is becoming more ad­vanced, with a lot of fresh developments expected going forward. Con­su­­mers are moving aw­ay from grey and brown hydrogen to­war­ds green hydrogen. Cost still remains an issue. How­ever, as gigafactories em­erge, the in-du­stry will witness a dramatic drop in elec­trolyser technology given eco­nomies of scale and more research and development on new technologies.

As a successful hydrogen project will need end-to-end financing, multiple de­part­ments in a bank or financial institution will need to work together to fund the en­tire chain. To this end, banks and financial institutions must now increase their capa­city in order to consider end-to-end finan­cing for hydrogen projects.

Currently, certain refinery pilot initiatives, such as those conducted by Indian Oil on its premises, are under way. There are also some hydrogen CNG pilot projects, as well as some hydrogen automobile pilots.

Overall, the use of renewable energy to produce hydrogen is beneficial, especially in regions where renewable energy is being curtailed. The excess renewable en­ergy can be stored as green hydrogen. We are waiting for the hydrogen energy market to reach a mature point so that we can start pushing projects forward and get funds for such projects as well.

We are willing to commit to green hydrogen investments as a lender, but we must con­sider the end-to-end financing of the co­mplete hydrogen chain, not just a single pro­­ject. Considering the growth in the Indian economy, energy demand is likely to sur­pass energy supply, going forward. So, on the energy front, pilot hydrogen st­o­rage projects should be promoted. Go­ing forward, there is a need to ensure that green funding does not miss the green hydrogen bus.

Alexander Hogeveen Rutter, Upstream Officer, Energy Storage, International Finance Corporation

 

Alexander Hogeveen Rutter

The International Finance Corporation (IFC) aims to align 85% of its projects with the Paris agreement by 2023 and 100% by 2025. It is moving to­wards financing cleaner fuels as it no lon­ger funds coal or oil-based projects, and is de-emphasizing natural gas, particularly in middle-income countries. There is now a greater focus on new and emerging technologies such as en­ergy storage and green hydrogen.

Taking a deeper look at future industry targets suggests that several industries and sectors such as steel, cement and marine transport, will be dependent on hydrogen to meet their energy demand. Hydrogen will be specifically cr­u­cial in segments that are currently difficult to electrify. Several projects are alrea­dy under way ac­ross the UK, the US, Den­mark and Germa­ny that are actively inves­ting in green hy­drogen. The Shell project in the North Sea is also an upcoming key project.

At present, economic opportunities provided by the hydrogen sector are very few within the Asia-Pacific region. Globally, the developments in green hydrogen are being driven by subsidies and government mandates. The role of the market is limited at present. In this space, investments are be­ing attracted in both developed and deve­loping markets. The IFC is actively inve­s­ting in and collaborating on projects in de­veloping countries to encourage hydro­gen and allied industries. For ins­tance, it is un­dertaking a project in Latin America that will produce green ammonia. This pro­ject will entail significant investment from the home country as well as from the government of Japan. In Costa Rica, the corporation is working on projects associated with fuel cell buses, under the to­urism mandate of the country. Battery ve­h­icles were not fo­und to be feasible in Costa Rica, as a result of which fuel cells are being promoted. The IFC is also in talks with market players for potential projects in Latin America and the Asia Pacific.

Another significant opportunity that the IFC is venturing into is remote grids. Since a remote diesel grid has a very high cost of power, remote grids fuelled by other cleaner sources are being explored. The­se re­mote grids would primarily cater to islands and other remote regions. Thus, finding the right power supply mix for these grids would be essential to establish efficient and cost-effective remote grids in these regions.

Even though India has not officially ann­oun­ced mandates, the country is an att­ractive market for green hydrogen projects. The green hydrogen premium is low in India. Blending licences is an area that can be looked at in the coming months. Furthermore, sectors that already use hydrogen such as natural gas, fertilisers and steel, can be boosted. Safety and re­gu­latory standards will also be important in India. Long-term power storage should be another target area for future investments and research.

Finally, the financing of hydrogen projects can be open to different strategies such as debt, equity and green bonds. How­ever, they must be bankable and economic. A measure of certainty, such as guaranteed offtake agreements, will help boo­st confidence among financers regar­ding in­vesting in future hydrogen projects. Currently, it is crucial to first analyse what steps need to be taken and what projects ne­ed to be established, which will make us ready for a future where hydrogen pla­ys a key role in the economy.

 

Chintan Shah

Chintan Shah, Director (Technical), IREDA

Since its inception, the Indian Renewable Energy Development Agency has sanctioned over Rs 900 billion for renewable energy projects. Hydrogen is a different ball game for the future. In recent years, the renewable energy sector has witne­ssed a tremendous increase in project sizes. Starting from the earlier scale of 50 MW to 100 MW, newer projects now ra­nge in the 500 MW to 1,000 MW or above scale. Hydrogen projects can also aim for larger economies of scale with a target of 1,000 MW to 1,500 MW. Instead of creating smaller infrastructures or grids, a central infrastructure can be created for hydrogen. Infrastructure will also play a major role in establishing a green economy using hydrogen in India.

The majority of India’s energy portfolio is based on primary energy. So, the primary energy sector may initially be the key sector to target for a green economy. For India, three sectors are extremely crucial: refineries, fertilisers and steel. The majority of grey hydrogen is created in the re­finery industry, while the fertiliser industry uses ammonia as a raw material. Am­monia is a crucial segment in the hydrogen economy, as it uses natural gas and can be used as an energy carrier for hy­dro­gen. Coking coal produced in the steel industry is also significant. With hy­drogen, the future can see a shift towards commodities such as green steel, green ammonia and green fertilisers. While electricity is regulated, th­e­­se three commodities – coking coal, am­monia and natural gas – are deregulated in the market as their prices are determined by market forces. Thus, a hydrogen economy can also be expected to be bas­ed on a market framework. Coking coal, am­monia and natural gas are dollar link­ed, so money can be raised on both the equity and debt side without hedging. This can reduce the cost of generating hydrogen in India by a sizeable amount.

Electrolysers may be a major bottleneck in the hydrogen economy, as they have to be created and are not a market commodity. How­ever, electrolysers can eventually be developed to achieve economies of scale. Since electrolyser technology is a known technology, its basic know-how may not be an issue. Furthermore, pushing the fuel cell market will also give a push to electrolysers. Demand for hydrogen will be further boosted due to greater demand for green ammonia and green steel. Exports may also be undertaken with­out the need for transmission lines, un­like in the case of electricity.

It is also essential to establish an enabling investment environment in India. As no single banker can finance hydrogen projects, a consortium type of model would be more suitable. Hydrogen participants in the Indian market are expected to be larger market players. As a result, financing may not be a big concern, as large co­mpanies can be aided by banks to fin­ance large-scale projects. As traction to­wards hydrogen has only developed very recently, governments are also putting their respective hydrogen action plans in place. These plans must be based on the type of economy that a country has. India, for instance, is a consumption economy. Therefore, the hydrogen plan must focus on consumption in sectors such as steel and fertilisers. There also exist many countries that shall primarily focus on the export of hydrogen. More financial structures can be expected to evolve over the next few years.

In the future, the hydrogen market in India can expect large-scale hydrogen projects and stand alone hydrogen parks without the need for grid substations. Grid-connected projects may be few. The manufacturing of hydrogen would primarily be dependent on the market, as well as port and land availability. Transportation can be undertaken using ammonia or me­th­a­nol, or using natural gas pipelines ins­tead of the electricity grid. While it is too early to determine standards for hydrogen, am­monia and methanol standards are available in India.

Ultimately, adequate control over the hydrogen supply chain would have to be achieved through a domestic manufacturing base. Accordingly, incentives to propel the domestic manufacturing eco­no­my would be crucial. The sector can expect greater investment by 2025-26. With continued progress by 2030, green hydrogen may even become cheaper than grey hy­drogen. Thus, in the coming few years, hy­­drogen can be expected to be a ga­me changer for the renewables sector.

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