Green hydrogen: 

Attractive opportunities for investors?

Efforts to produce sustainable energy sources by electrolysis and processing them to make synthetic fuels such as methanol are being brought to the fore. Major new projects demonstrate that the hydrogen economy is a lucrative, future-ready opportunity for investors and banks.

 

By Marc Engelhardt

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The world’s biggest climate-neutral refinery is currently being built at the southern tip of Chile: In 2022, the installation in Haru Oni should already produce 130,000 liters of green fuel using wind power and water. By 2026, the facility will be supplying 550 million liters of green hydrogen derivative annually – enough to fuel the cars of a million people for a year. Siemens Energy is a co-developer of the project. The German Federal Ministry for Economic Affairs and Energy (BMWi) is funding Haru Oni to the tune of around eight million euros on the basis of a Bundestag resolution.

 

 

 

 

“Without the further expansion of carbon pricing in Germany, Europe, and worldwide, the whole hydrogen business won’t get off the ground.”
Thorsten Herdan, Director-General for Energy Policy, Federal Ministry for Economic Affairs and Energy

This type of start-up financing on the capex side is necessary to create the necessary economies of scale, explains Thorsten Herdan, head of the BMWi department responsible for energy. Eventually, however, the aim should be to set up an overall framework that would ultimately allow the emergence of fundable projects. The most important component of this framework is the carbon price. “Without the further expansion of carbon pricing in Germany, Europe, and worldwide, the whole hydrogen business won’t get off the ground.”

 

There are positive signs in terms of the political will, especially in Germany. On 1 January 2021, Germany’s federal parliament adopted the amended version of the Renewable Energy Act (Erneuerbare-Energien-Gesetz, EEG), which regulates the continued preferential rollout of renewables in support of the energy transition. Among other measures, the revision allows clean hydrogen to be exempted from the surcharge that all electricity customers must pay to finance incentives needed to achieve government targets of carbon-neutral electricity supply by 2050 and 65 percent renewable energy sources by 2030.

 

One of the reasons the Haru Oni project is so important is that cooperation between an industrialized country such as Germany with partner nations all over the world is seen as fundamental to the success of the hydrogen economy. There are many countries that like Chile are set to emerge as suppliers of hydrogen thanks to their rich sun or wind resources. This has prompted the BMWi to work on a completely new approach to supporting businesses: “The idea behind H2 global is to contractually regulate the purchase of hydrogen and derivatives with selected countries,” says Herdan.

 

The concept is designed to promote global hydrogen partnerships, including via a foundation that could be endowed with up to 1.5 billion euros. A special feature is that the entire value chain is covered. As Herdan explains, this means that the participation of German companies is just as much a subject of negotiation as delivery terms and the concrete infrastructure. “This is an area where you always have to consider economic, energy, and climate policy together.”

Integration of economic, energy, and climate policy

Boris Tramm, commercial head of the New Energy Business Division at Siemens Energy, is also pleased to note that pilot projects such as Haru Oni have shown just how far the hydrogen economy has already come. “Pilot projects of this sort that are the first of their kind need support – also to secure Germany’s position. But at the end of the day, the whole thing will also manage without support, just like solar energy and wind power today.”

 

Tobias Behringer, responsible for project finance at Siemens Energy, shares this conviction. Replacing fossil fuels with green hydrogen and its derivatives requires resilient business models. “Especially at the project finance level, this means having stable, long-term purchase agreements in place plus a reliable technology and the right regulatory framework,” explains Behringer. After all, when financing new plants, commercial banks naturally look at the expected revenues that will be needed to repay the loan. Because the politically desired green hydrogen is still more expensive than conventional hydrogen produced from fossil sources, a framework is also needed to convince commercial lenders.

Transnational hydrogen economy

Herdan can also imagine a giga-factory for electrolyzers to stimulate capex funding. “Here, we could also set up a value chain in Germany spanning everything from the manufacture of individual components to turnkey electrolysis systems.” If the green hydrogen produced by the electrolyzer is to be competitive, start-up finance is also needed on the application side, for example to stimulate the use of green hydrogen in the petrochemical industry.

 

Herdan thinks this will probably be more complicated in other industries such as steel. “It will depend on the EEG surcharge being removed for green hydrogen – and then we’ll have to see how much need remains for capex funding, and whether even more opex funding is required.” Herdan believes exempting hydrogen is the right step. And ultimately, climate-neutral hydrogen will have to be recognized as climate-effective across the board, including in transport, where hydrogen in fuel cells or synthetic fuels like the methanol from Haru Oni could and would have to contribute to the achievement of climate targets. “We’ll also be implementing this with the European RED II Directive.”

 

As commercial director Boris Tramm explains, political backing minimizes the risk for providers of capital, as does the technical expertise and reliability of an experienced plant manufacturer like Siemens Energy. He believes that there are currently too few projects of this type, while banks and funds are desperately looking for them. “Pilots such as Haru Oni create momentum, and in the next six months, we’re going to gradually be seeing more projects,” he predicts. “But the rules need to be clear. At the moment they aren’t.”

Promoting innovation and managing risks

One approach to offsetting the higher cost of green hydrogen compared with gray fossil-derived hydrogen involves so-called contracts for difference, under which the government covers the price difference. “We’ve seen very positive developments in the UK offshore wind market thanks to these approaches,” says Tobias Behringer. “So to make these projects competitive in the medium term, it would be good to have similar arrangements for hydrogen and the power-to-X sector.” Investors are already showing a great deal of interest, he notes.

 

Brussels already has a number of funding instruments up its sleeve to boost the hydrogen economy. They include IPCEIs (Important Projects of Common European Interest), as well as mechanisms that are part of the European Green Deal. As Herdan points out, under the German EU Council presidency the role of hydrogen in these has been given particular emphasis. There’s also an important role for development banks such as Germany’s national development bank KfW and the European Investment Bank, especially for projects located in countries that are considered high-risk; the same applies to export credit insurers such as Euler Hermes.

 

But Boris Tramm is convinced that the potential has long outweighed the risk; as demonstrated, for example, by the involvement of MunichRe, the world’s largest reinsurer, in the first Power-to-X Finance Day organized by Siemens Energy. According to MunichRe, there is trust in Siemens Energy’s products, and insurance solutions can also be used to significantly reduce the project risk for investors – which also improves the fundability of the project.  

March 3,  2021

Marc Engelhardt reports from Geneva on the UN, international organizations, and global developments in the economy, science, politics, and energy. He has worked as a correspondent for numerous media outlets including Neue Zürcher Zeitung, ARD, and Die Zeit.

 

Combined picture credits: Siemens Energy, Getty Images

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