Unlocking the hydrogen economy — stimulating investment across the hydrogen value chain

Investor perspectives on risks, challenges and the role of the public sector

European Investment Bank, European Investment Bank

• Publisher: European Investment Bank
• Year: 2022
• ISBN:
  9789286150739
• Topic: Business
• Subtopic: Corporate Finance
• Index: Business

Green hydrogen, sourced from water and renewable energy, has – by replacing fossil fuels – enormous potential for the reduction of global carbon emissions in hard-to-abate industrial sectors. Yet, like many early stage technologies past and present, a complex interplay of economic, regulatory, industrial and operational challenges still need to be overcome before hydrogen can play a large-scale role in the modern industrial economy. The shift towards hydrogen is expected to require investment in the hundreds of billions of euros over the coming decades and will require substantial amounts of private financing alongside public funding. In this report, the European Investment Bank's advisory services summarise the results of an investor consultation to get to the heart of these challenges, and offer recommendations for an accelerated development of the hydrogen sector.

RECOMMENDATIONS

Unlocking the hydrogen market requires action to improve the market and regulation, access to finance, and value chain integration with ecosystem support.

The key findings of the consultation of 46 investors can be summarised in terms of four main forces that could improve the conditions for accessing finance for the innovation and deployment of hydrogen technologies: economic competitiveness, clear and streamlined regulation, a value chain approach, and ecosystem support — as summarised in Figure 5 below.

Figure 5: Key forces required to increase investor funding for hydrogen innovation and projects

Feedback from the participating investors included a number of recommendations for improving access-to-finance conditions for the hydrogen economy, which have been structured along the lines of the key themes in Figure 6 below.

Figure 6: Summary of recommendations across the regulatory, access-to-finance and advisory support dimensions

Note: The market feedback around recommendations 1 and 2 on economic and regulatory aspects has been shared with the European Commission. Given the extensive scope and complexity of these aspects, and the rapidly evolving policy landscape, these particular proposals have not been fully fleshed out in the context of this report. Rather, this document focuses in more depth on recommendations 3-7 which apply directly to the financing community, and therefore also the European Investment Bank, as well as those hydrogen projects seeking finance.

IMPROVING MARKET AND REGULATORY CONDITIONS

ECONOMICS

Recommendation 1

Introduce volume- and price-based incentive mechanisms to bridge the economic gap and create an enabling environment for investment during a transition phase.

Given the economic pressure on hydrogen projects, the hydrogen industry needs targeted programmes to ensure a reasonable return on investment for initial commercial projects, especially during the early stages of the hydrogen market’s development. Ideally, mechanisms should evolve as the market develops and ultimately be phased out as market conditions improve.

Early projects will provide the market with experience and help accelerate learning curves and cost reductions, which over time would reduce the need for market support mechanisms. In the medium term, a transparent, pan-European market would require more ambitious tools that target new sectors and innovations.

Potential support mechanisms discussed with investors include the following:

•Carbon contracts for difference

•Guaranteed offtake (potentially combined with a price floor at the end of commercial contracts)

•Feed-in tariffs

•A European clearing house or market-making mechanism

•Auctions

•Green public procurement.

Among the various initiatives or support measures proposed, the concept of market-making platforms stands out in particular for its potential to create supportive market conditions for both producers and users of hydrogen. For example, the H2 Global funding instrument launched in Germany received positive feedback from many participants. Through it, producers of hydrogen may be able to obtain more visibility on offtake over time and in terms of volume and price. Users requiring price visibility and stability in supply would also benefit from the platform. Such market-making or “switchboard” mechanisms could also be considered on a European scale to provide support for the emergence of producers and users of green hydrogen across the continent.

REGULATION

Recommendation 2

Adapt and harmonise existing regulations to promote the role of hydrogen and encourage the development of a European energy system featuring hydrogen.

Improving the regulation of hydrogen is a complex yet critical issue to facilitate investment and the development of the sector. While the full extent of potential regulatory improvements could not be derived from this consultation, the following topics were raised in investor interviews:

•Need to finalise efforts of defining a hydrogen taxonomy that removes the uncertainties surrounding what type of hydrogen may be considered compliant and/or eligible for public support

•Opportunity for market regulations to promote the use of excess renewable energy for electrolysers

•Potential for a guarantee of origin or virtual pan-European certificate market

•Potential hydrogen blending quotas for midstream infrastructure

•Need for enabling standards and legal frameworks for midstream and storage (e.g. safety and pressure standards)

•Opportunity to promote the deployment of hydrogen and CO₂ pipelines through consistent third-party access to regulated infrastructure with standardised contracting across Europe

•Potential for regulated asset base model for midstream infrastructure, and facilitating market trading mechanisms (equivalent to gas clearing houses)

•Potential sectoral consumption quotas for large hydrogen consumers (e.g. ammonia, petrochemicals) in the short term and for new sectors in the medium to long term

•Exploration of how future EU ETS allowances could enable investment

•Potential for carbon border tax

•Potential relaxation of state aid rules during market launch phase and eligibility for state aid rules

IMPROVING ACCESS-TO-FINANCE CONDITIONS FOR HYDROGEN PROMOTERS

INNOVATION

Recommendation 3:

Enhance access-to-finance conditions for hydrogen innovators by launching hydrogen-tailored financing envelopes within key direct and indirect innovation finance programmes.

Innovation is critical to market development. Therefore, it is important for innovators to obtain funding so that an established market can form and the technology to scale up can be developed. Some recommendations for financing frameworks for hydrogen innovators, informed by market feedback and the EIB’s own experience, are described below.

European Innovation Council

The first step to improving access to finance for innovators would be to increase the availability of funding for early-stage ventures involved in hydrogen. This could be achieved, for example, by launching hydrogen-related calls under the European Innovation Council (EIC) programme, which would provide a combination of grants and equity to eligible candidates. EIC blended funding would also help protect Europe’s strategic interests in this innovative sector.

Innovation Fund

Similarly, leveraging the Innovation Fund will be key to promote the rollout of further innovation in the hydrogen sector. The Innovation Fund is already seen by players as one of the key tools to promote new technology deployment. Maintaining sufficient focus on hydrogen technologies in the scope of eligibility criteria will be important. Aligning potential grants, in terms of quantity and structure, to the needs of individual promoters may be another factor to consider. Finally, maintaining sufficient project development assistance for projects requiring support to obtain the grants will also contribute to overall potential impact.

Fund-of-funds

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. The latter solution could draw on les...