Energy Investors Split on Future of Hydrogen Market

-European private equity firms alongside institutional investors and pension funds are emerging as key investment partners of the European Investment Bank (EIB) to support funding for hydrogen projects. However, the market is split on whether hydrogen is the right place to put money to support the energy transition.

In support of hydrogen investment, European private equity firm Ardian foresees a multi-billion opportunity by 2030, Mathias Burghardt, head of Ardian Infrastructure, told ICIS.

“hydrogen is expected to play a key role to accelerate the energy transition as it opens new business opportunities for renewable energy producers, and it will be ‘greening’ the natural gas and mobility markets.”

NEW FUNDING PLAYERS

Institutional investors and pension funds are joining the EIB and Hydrogen Council to cooperate and invest in hydrogen projects, several project finance bankers told ICIS.

“We have new players as pension funds, private equity, and insurance companies looking to fund hydrogen projects across Europe. Investment banks and equity firms are setting up advisory units in hydrogen funding as the technology becomes popular,” a project finance head told ICIS.

Two European pension funds and two institutional investors are ready to fund future hydrogen projects across Europe and Middle East, representatives of the companies told ICIS.

“We are setting up our hydrogen team now and will look for projects to invest. We will work with Hydrogen Council to identify projects to support,” said a funding official at a European pension fund.

Over the past few years, liquidity from commercial banks for sustainable projects including hydrogen has surged, with sustainability becoming a key focus.

“Some hydrogen project sponsors have actively sought to involve banking partners in their early-stage projects to familiarise them with the sector, test initial financing parameters and identify any bankability concerns. This will serve to prime the potential liquidity pool for future financing and sponsors will benefit from the establishment of bankable project structures and documentation packages and relationships with lenders who will become familiar with the underlying technologies, markets, and associated risks,” said ING in a recent project finance report.

This comes as The EIB and Hydrogen Europe, an umbrella association representing European industry, research, and national and regional associations in the hydrogen and fuel cell sector, signed an agreement for consultancy services in July. EIB will provide financing advisory support for hydrogen projects introduced by Hydrogen Europe.

EU and EIB foresee between €180bn-€470bn will be required for production capacities in the European Union by 2050.

The European Council has to date approved 16 member state recovery and resilience facility (RRF) funding packages, amounting to €10bn of funding for hydrogen, with all but two countries focusing exclusively on green hydrogen initiatives, ICIS analysis shows.

SPLIT MARKET

One market participant, Laurent Segalen of Megawatt-X Ltd told ICIS he felt investment in hydrogen was “absolutely not” the right place for investors to be engaging for the energy transition.

He said instead that “biofuels, long-duration energy storage, pumped hydro, interconnectors, networks and digital,” were better alternative technologies to invest in.

When asked whether policy support could instead help with the progression of the hydrogen market, Laurent replied saying “policy support is a nice way to say massive subsidies. Subsidies should be directed for H2 [hydrogen] in steel, not H2 [hydrogen] as a fuel where there are much cheaper alternatives.”

Laurent did note potential for a regional pricing index for hydrogen, however stated that an index wouldn’t work on a global level due to high transportation and storage costs.

He also showed scepticism about future cost reductions in hydrogen, such as the region of €1 per kg of hydrogen. “Of course not. That would mean dirt cheap excess power and gas. And when you see the current prices of those inputs…”

Green hydrogen cost is expected to drop towards 2050, according to ICIS models. This is due to widespread expansion of renewable capacity, which can act as a bearish driver for power markets during periods of high generation.

For example, in countries such as Ireland, power generation is expected to exceed demand by the 2030s, placing green hydrogen as an ideal means of capturing renewable power for dispatchable generation, market participants told ICIS.

HYDROGEN INVESTMENT CASE STUDY: ARDIAN

Ardian is an example of a private of a private equity firm focusing its investments on capitalising on new opportunities coming out of efforts towards decarbonisation in Europe.

“We are seeing a massive shift towards decarbonisation that will require significant capital. This translates into a lot of opportunity in converting assets that currently have fossil fuel exposure. With $18bn assets under management, at Ardian Infrastructure we have three investments verticals: energy, transport, and telecom. We have a meaningful pipeline of hydrogen projects, increasing every week. We are currently working on H2 [hydrogen] projects through companies in which we are shareholders or with whom we partner, like Italian utility A2A,” added Burghardt.

On 26 November 2020 Ardian and A2A signed an agreement to jointly explore opportunities in green hydrogen. According to the agreement, both firms will identify the most suitable sites to integrate existing or planned renewable power plants and hydrogen production units.

“Of course, investment in hydrogen production plants will be part of this partnership. We already identified the wind farm in Ardian Infrastructure’s portfolio best suited for installation of an electrolyser and are actively working on making this happen,” Burghardt told ICIS.

Ardian currently manages about 5GW of renewable assets globally, of which 500MW are in Italy. It has also lined up several hydrogen projects in Europe.

“For example, our subsidiary, Geosel, (business storing around 40% of France’s national strategic hydrocarbon reserves) is currently working on building a large hydrogen ecosystem taking advantage of the large surface of its brine reservoirs to accommodate a 600MW solar farm directly connected to a 120 MMW electrolysis plant. Geosel project is a great industrial hydrogen model including green production, distribution with direct access to industrial clients in the vicinity of the site,” said Burghardt.

Hydrogen technology is becoming mature, and prices are decreasing as electrolysers and hydrogen refuelling stations (HRS) economics are on the path to competitiveness, added Burghardt.

“On the upstream side, today we are roughly at 50% of the electrolyser capex cost compared to ten years ago. On the downstream side, HRS see a decline in cost as well, due to product improvements when it comes to efficiency and durability, advancing technologies and really a scale up in manufacturing,” he explained.

Source: I.C.I.S.

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