The global adoption of GH2 faces immense financing needs, with an estimated requirement of $700 billion by 2030 (see figure below). While governments are essential for providing initial financial assistance and establishing the regulatory framework, private sector finance will be indispensable in scaling up the sector.1 Despite the availability of various financing instruments with a proven track record in renewable energy technology, innovative financing mechanisms are necessary to overcome the uncertainties surrounding GH2 demand.
Announced and required direct investment into hydrogen until 2030, $ billion
Challenges
By 2030, approximately $240 billion is pledged for 534 hydrogen projects worldwide, resulting in an investment gap of approximately $460 billion.2 With only $70 billion of public funding committed to date, private finance is expected to play a critical role in bridging that gap and enabling the GH2 transition.
GH2 presents unique peculiarities and risks for investors, challenging traditional project finance due to its evolving technology and infrastructure.3 Moreover, GH2 encompasses a vast value chain, integrating three major business lines: manufacturing of upstream and downstream equipment (such as hydrogen injectors or fuel cells), hydrogen production, and infrastructures for hydrogen end-uses (such as compression and storage sites). Each of these lines has its distinct challenges and risk profiles.
Successfully attracting private investment for the GH2 take-off requires instruments which are adapted to the challenges and risk levels of the assets financed across the value chain. The recent example of renewable energy deployment offers a good illustration of the trigger role private finance plays in shaping an industry that was technologically immature at the onset, but in receipt of public support.
Public financing mechanisms
Public interventions through fiscal policies, including direct subsidies, can help make GH2 projects bankable and support commercial deployment.4 For example, through the Inflation Reduction Act, the US offers a production subsidy of $3 per kg of GH25 to try and stimulate hydrogen and its downstream industries. Direct public project funding, co-funding, and government-backed loans are established mechanisms that alleviate financial burdens for industrial projects and prevent GH2 initiatives from entering the so-called "valley of death", when demand creation policy alone is insufficient to make them bankable.6 These instruments are typically introduced at the onset of an industry's decarbonization efforts, assisting early movers and minimizing the impact on government budgets.7
The GH2 transition necessitates long-term finance that can attract other investors, as business investments respond to future opportunities. Governments can move beyond de-risking by taking risks themselves and potentially earning returns on their investments through equity shares in early movers. Conditions, such as required reinvestment of profits and restrictions on share buy-backs, are crucial to ensure that public investment aligns with public objectives. Government support can achieve a multiplier effect, tipping the balance in favour of private investment and leading to spillovers.8
Blended finance, combining public and private funds, is a powerful tool to bolster impactful investments that may not have proceeded on strictly commercial terms. One of its most compelling aspects is that relatively small amounts of donor funding can rebalance a project's risk profile, making pioneering investments attractive to private investors, especially in emerging markets where investment risk perceptions are higher.9
Private financing instruments
Enabling the uptake and scale-up of GH2 technology requires the mobilization of significant financing for infrastructure projects, beyond what can be derived from public tax-based sources (see figure below). Instruments like equity participation enable venture capitalists, funds and banks to play a leading role by investing in early-stage companies with high growth potential. To secure funding under a project finance model, GH2 projects must demonstrate commercial viability. For that, they need a secure revenue stream from creditworthy long-term offtake contracts, backed by a collateral package that may include assets or insurance-backed manufacturer warranties.10 Such financing security may be expensive for first-mover projects.
Greening existing hydrogen uses, such as ammonia, offers financeable opportunities due to their clear offtake prospects.11 Long-term, fixed-price offtake contracts with creditworthy purchasers are considered the gold standard for project financing. In the industrial sector, major corporate manufacturers of steel or concrete could be counterparts in bankable offtake arrangements for GH2.12 GH2 industrial clusters facilitate end-to-end financing, reducing co-dependencies between different financing entities along the GH2 value chain and preventing potential delays in revenue generation.
The global bonds (debt) market, with a market value of $100 trillion (twice the size of the $50 trillion equity market), presents significant potential for GH2 financing.13 Green bonds, designed specifically for environmentally sustainable projects like GH2 production, have recently gained prominence. Their issuance is forecasted to reach $5 trillion by 2025, making them an attractive option for hydrogen investments.14 Major green bond issuers maintain a good risk ratio, which reduces financing risks and instils confidence in GH2 projects, making bonds a powerful tool for redirecting capital towards sustainable projects.15
As GH2 financing mechanisms mature along with the sector’s commercial viability, institutional investors and commercial banks will increasingly get involved. Eventually, this will enable financing based on the credit quality of assets: secured senior debt instruments for green electrolysis and hydrogen-centric ecosystems, as well as lease/pay-per-use financing for hydrogen-powered equipment.16
Conclusion
Successfully transitioning to GH2 requires an immense financing volume that draws from a wide array of sources. While governments play a crucial early-stage role, a combination of public and private finance can provide unique benefits, as demonstrated in the success of renewable energy technologies. As GH2 projects deliver credible returns, the reliance on public support will decrease, attracting an increasing pool of financial players and funds to participate in the industry's growth.17
This opinion piece is a snapshot of the GH2 policy toolkit for developing countries being developed by UNIDO, IRENA and IDOS and to be launched at COP28.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
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