Reuters: Hydrogen 2021 Digital Conference & Exhibition

Over the two days the event connected key industry stakeholders, taking a deep dive into existing hydrogen projects and examined the hydrogen business model of the future.

On day one of the event, V&E partner Alan Alexander moderated a discussion with banks, funds and alternative investors on ‘The Capital Needed to make Green Hydrogen Succeed’ alongside panelists from the International Partnership for Hydrogen and Fuel Cells in the Economy (IPGE), the European Investment Bank (EIB), BNP Paribas, and FiveT Hydrogen.

Read a summary of the discussion from that panel below

On May 20, 2021, Alan J. Alexander, a partner in the Houston office of Vinson & Elkins LLP, moderated an insightful and exciting forty-five minute panel, “The Capital Needed to make Green Hydrogen Succeed.” Alexander, whose practice focuses on large infrastructure and energy project finance, led the panel consisting of banks, funds and alternative investors who shared why they are delving into hydrogen and what they view as the immediate and long-term returns. The session was part of a two-day webcast “Hydrogen Event 2021” sponsored by Reuters. Panelists included Noé Van Hulst, Chair of International Partnership for Hydrogen and Fuel Cells in the Economy (“IPHE”), Shiva Dustdar, Head of Division forInnovation Finance Advisory at the European Investment Bank (“EIB”), Astrid Behaghel, Energy Transition Expert and Hydrogen Coordinator at BNP Paribas, and Pierre-Etienne Franc, Co-Founder and CEO at FiveT Hydrogen.

To set the stage, Alan noted that the Innovation Finance Advisory at EIB recently undertook an investor outreach study to gauge the risk appetite for participating in transactions in the green hydrogen value chain and asked Shiva Dustdar, EIB’s Head of Division for Innovation Finance Advisory, if there is anything from that study that could be shared.

Shiva explained that while the findings are yet to be formally published, the initial findings show that the main concerns for investors include:

• hydrogen not being price-competitive due to the “green premium”;
• a lack of regulatory clarity and coherence around which types of hydrogen fall within which taxonomies and global harmonization (or lack thereof) of these taxonomies;
• the perception that there is a lack of a value-chain approach, which investors view as one of the largest risks; and
• the need to create visibility for where demand could be secured on a longer-term basis (e., how to secure long-term offtake agreements for green hydrogen).

Shiva further explained that the study, which was requested by the European Commission as part of the EU’s Green Deal, aimed at to assess how the public sector could provide more support (both in the form of financing and advisory support) in order to ameliorate these risks. Shiva identified that, from a financial standpoint, the necessary public support may include mechanisms such as government guarantees and risk-bearing instruments that work alongside the private sector in those parts of the value chain which are viewed as the highest risk, including technology funds.

Shiva explained that while EIB has been involved in the hydrogen space, their financing of hydrogen projects has been relatively modest (about USD 2 billion in the last 10 years). EIB therefore intends to use this study to consider how to best position their own instruments so as to best work alongside products and investors to get hydrogen technology off the ground.

Noé Van Hulst, Chair of IPHE, agreed with Shiva that governments need to take into account the entire value chain when they are putting into place new regulatory frameworks and support frameworks.

Noé noted that, with respect to the supply side of the hydrogen value chain, governments need to speed progress in providing adequate operational expenditure (“OPEX”) and capital expenditure (“CAPEX”) support mechanisms in order to bridge these cost gaps, given that cost of producing hydrogen is still relatively high. In the past, governments provided such OPEX and CAPEX support for about 10 to 15 years for both solar and wind power, which in turn helped to bring down costs by enabling the industry to scale up. The same needs to be done (at a faster speed than is currently being done) for hydrogen production, and these supports need to be made clear to the private sector.

With respect to the demand side of the hydrogen value chain, Noé noted that investors need a clear sign that there is a defined market for clean hydrogen. Governments may facilitate this by, for example, introducing a requirement for a certain percentage of grey hydrogen to be turned green by 2030 or an obligation for a certain percentage of clean hydrogen to be put into the gas grid by 2030 (either physically or virtually).

Finally, with respect to the infrastructure and storage side of the hydrogen value chain, Noé noted that the first scaling up is likely to happen in industrial ports. To facilitate this, governments need to ensure that local networks and local infrastructure are put in place, so that industrial areas are equipped with a “hydrogen backbone.” Storage also needs to be developed.

Alan asked Astrid Behaghel, Energy Transition Expert and Hydrogen Coordinator at BNP Paribas, what she views, as part of the financing community, are some of the perceived risks associated with green hydrogen projects, and what BNP Paribas would look for in a bankable green hydrogen project in order to mitigate those risks.

Astrid explained that in order to make a green hydrogen production project bankable, the project would need to have a low, fixed cost of electricity and a long-term (at least 10 years) offtaker who is reliable and low-risk. One of the biggest issues Astrid is seeing at the moment are projects requesting loans with a 10- to 15-year tenure, but which have only secured a 3- to 5-year fixed offtake agreement. Of course, guarantees can help to mitigate these risks to a certain extent; however, for BNP Paribas, the focus is not only on ensuring that the project makes sense economically, but also locally and environmentally.

Pierre–Etienne Franc, Co-Founder and CEO of FiveT Hydrogen, added that, in order to deal with these risks at FiveT Hydrogen, he focuses on identifying key partners that are able to share the risks with FiveT Hydrogen and accept lower cashflows at the start. Deploying capital at scale is going to be the most important factor in creating the “new normal” of green hydrogen.

Pierre-Etienne noted that, as society moves into a green world, the price for hydrogen will naturally decrease while, simultaneously, the willingness to pay for hydrogen increases; however, this will only be the case once hydrogen use has been scaled up. Therefore, those countries which are putting contract-for-difference schemes in place and similar regulatory frameworks which support cost differences between grey and green hydrogen are the countries that FiveT Hydrogen targets to identify its customer base. Similarly, FiveT Hydrogen targets customers who are likely to move their existing grey hydrogen supply to green hydrogen and those which may be facing external pressures to deploy the use of green hydrogen. As an example, large companies (such as Amazon and Walmart) are being pressured to update their forklift fleets to green hydrogen-powered forklifts through reputational pressure. Such companies are often willing to pay significantly more for green hydrogen in order to capitalize on the reputational benefit of deploying hydrogen to lower the carbon intensity of their operations.

Building on this, Alan noted that the “Amazons and Walmarts” beginning to power their forklifts off hydrogen brings up one of the exciting areas where we are already starting to see hydrogen really take off — the heavy mobility sector. Alan asked the panel what some of the key factors are to make an attractive green hydrogen.

Shiva noted that heavy mobility may be considered some of the “low hanging fruit,” as a large number of municipalities worldwide have already made or are making public-sector investments into powering hydrogen-fueled buses, trains and other heavy vehicles, which has created a microcosm in the value chain. On the heavy transport side, ships and airplanes are key items which would benefit from shifting from traditional fuels to hydrogen; however, large-scale de-carbonization would make a larger impact.

Noé added that Switzerland is an excellent example to show that the shift to hydrogen in heavy mobility can be accomplished. Switzerland has plans for over 1,000 Hyundai hydrogen-fueled trucks to hit the roads in the next couple of years. However, this was not done in a vacuum — Switzerland has been heavily taxing diesel trucks for years, which has, naturally, built the business case for investment in hydrogen trucks.

Having touched on the heavy mobility industry, Alan noted that if green hydrogen is to expand its role in decarbonizing the environment, it will need to expand out of transportation and into other uses. Alan asked the panel what other industries might be ripe for the adoption of green hydrogen and what hurdles will need to be overcome to see capital deployment into those industries and uses.

Astrid noted that industries which she views are likely to shift into using green hydrogen in the coming years include steelmaking, the shipping industry and power generation.

Pierre-Etienne agreed that those industries are likely to shift; however, he noted that the complexity of shifting is not the same for all of them. For those industries already using grey hydrogen, the shift is a “no-brainer,” but the difference in price between grey and green hydrogen is a huge impediment. If regulatory measures increased the price of grey hydrogen, then those sectors which are not necessarily tied to their locations would threaten to move to less regulated locales. In the case of the chemical and steel industry, for example, developers of new projects in these sectors can relatively easily decide to develop their projects in a jurisdiction that does not impose regulations that increase the price of grey hydrogen. On the other hand, carbon-taxing the transportation industry would be (and has been, as in the case of Switzerland) quite successful because transportation is needed everywhere, so pushing green hydrogen in a specific location would leave the transportation industry in such location with no choice but to comply.

With respect to steelmaking, Pierre- Etienne noted that the shift to green hydrogen would not be as simple as simply shifting to the use of green hydrogen, as certain structural changes would need to be made to the process, such as changing the burners currently used. Ammonia is an industry which would be more easily able to shift to green hydrogen. The ammonia industry has already indicated that there is some virtue in moving into green ammonia; and the green ammonia market has already become a new market, being used not only as a fertilizer, but also as an energy vector.

Having discussed the regulatory framework needed to stimulate the hydrogen industry, Alan asked the panel how else, other than through government regulations and subsidies, green hydrogen could be scaled up.

Pierre-Etienne noted that there are two main components to consider in scaling up green hydrogen: price of electricity and price of CAPEX. Pierre-Etienne previously worked with Air Liquide on a project in Bécancour, Quebec that was fully green, delivered on budget, on time, on performance and that met all reliability goals. The project was successful in part because it used relatively low cost electricity from Hydro-Québec (driving down the price of electricity) and in part because it used ancillary equipment to lower engineering, procurement, and construction (“EPC”) costs for the plant (driving down the CAPEX cost).

Pierre-Etienne added that he does not view the green hydrogen industry as needing to continue to “fight” the price of grey hydrogen. Instead, fully green hydrogen will only need to compete against the price of blue hydrogen (grey hydrogen coupled with carbon-capture technology). As such, while the price of green hydrogen does need to be reduced, it does not need to be reduced as far as the current price of grey hydrogen but instead to the price of blue hydrogen. Additionally, Pierre-Etienne noted that there is likely to be a value premium placed on green hydrogen as, at first, demand is likely to outweigh supply.

Noé agreed with this point; however, he noted that the uptake of green hydrogen will differ by region, depending on the pricing and production of renewables. Eventually, green and blue hydrogen are likely to become global commodities, but only once we are able to adopt the technology to be able to produce and transport green and blue hydrogen at scale everywhere, which may take decades.

Alan agreed, noting that the Gulf of Mexico, where the development of the offshore wind industry will be producing significant capacity in the coming years, could develop into a green hydrogen industrial hub due to the low price of renewable electrons.