In the initial phase, to mobilise the necessary capital to make Green Hydrogen bankable, the role of the government and multilateral funding agencies will be crucial
This year has undoubtedly been pivotal for green hydrogen. The Hydrogen Insights 2021 report by the Hydrogen Council is testimony to that. Over 30 nations have released hydrogen roadmaps, industry has declared over 200 hydrogen projects and aggressive investment plans, and governments around the world have committed over US $70 billion in public finance. It anticipates that if all projects are completed, overall expenditures in hydrogen spending would approach US $300 billion through 2030—the equivalent of 1.4 percent of global energy financing.
The momentum has been equally strong in India, as illustrated by the multiplication of hydrogen-centric projects, increasing commitments from the government and industry, and the ramp-up of government support to the sector. However, it is still in the take-off phase mainly because of several obstacles related to the high cost of producing hydrogen in its green form (US $3/kg-US $6.55/kg vis-à-vis US $1.80/kg for fossil-based hydrogen), technical and economic problems associated with its transportation and distribution, and considering the fact that hydrogen applications in a variety of industries are still in their infancy. By 2030, India is targetting to produce approximately 1 million tonnes of green hydrogen per annum. However, green hydrogen will continue to be seen as less feasible until its price becomes cost-competitive with that of fossil-based hydrogen. The production of green hydrogen has a good chance of eventually reaching cost-parity in India due to its high potential for renewable energy production.
This, however, will not happen on its own: Further support is needed to bridge the cost gap, build low-cost renewable capacity, and scale-up transportation and storage locations. This expansion will necessitate financing, and investors will play a significant role in building and advancing at-scale operations. Accelerating the pace of adoption and deployment of green hydrogen in India requires a supportive financial mechanism. As is true of all emerging sectors, early initiatives will need financial backing from governments, multilateral funding agencies, and important industry actors. Government support mechanisms will be indispensable at the take-off phase, but it will not be sufficient to cover the investments required for the massive deployment of various types of equipment across the length of the value chain, paving the way for the generation of economies of scale and a massive reduction in costs.
A robust hydrogen market would, thus, necessitate considerably greater collaboration amongst financiers, government agencies, technology providers, and the wider industry. In this emerging ecosystem, green finance can play a significant role. It can help in mobilising the collective savings available to finance the development of the sector and ensuring transparency in the use of private capital and building confidence in the investor base. Although we are already seeing substantial private investment, it is ultimately being led by governments in the form of specific policies, subsidies, targets, and strategies. Green hydrogen, like all other industries, will rely heavily on the government to supply the levers for private financing to get more involved in the sector’s evolution as the private sector is more inclined to invest in sectors with high returns and minimal risk.
The government is already creating an enabling ecosystem to attract investments. It has allocated INR 25 crore in this year’s Union Budget for R&D in hydrogen and aims to produce three-fourths of its hydrogen from renewable resources by 2050. The government is also planning to come up with a Production Linked Incentive (PLI) scheme for electrolyser manufacturing to expedite the uptake of green hydrogen. Multilateral development banks and the financial mechanism under the Paris Agreement can play a big role in this transition by supplementing the government’s efforts during this phase. It will be one of the key drivers that can help unlock significantly more investment in this sector, which is still at a nascent stage. However, the developed countries are yet to fulfil their initial commitment of US $100 billion per year.
Going forward, a combination of public and private financial instruments will be essential to provide significant and distinct advantages. For instance, grants can support innovation or early-stage projects. Equity ownership can allow venture capitalists to take the lead by investing in projects with significant growth potential. Other funding mechanisms can include project financing and green bonds. For standalone project financing, making green hydrogen bankable is crucial, and in this regard, offtake agreements can help boost confidence amongst investors. Green bonds can help in mobilising cost-effective global finance by opening a new pool of liquidity for these projects.
To decrease investment costs for hydrogen equipment with dedicated support, potential financing of hydrogen equipment through leasing or pay-per-use arrangements with equipment suppliers is an option. Putting a price on carbon can also help facilitate green hydrogen projects. Fiscal incentives such as tax breaks can be introduced at various levels of the green hydrogen value chain to limit the impact of high capital costs on the profitability of projects. Furthermore, technology sharing, and R&D public-private partnerships can also help in reducing costs, realising synergies, and exploiting complementarity.
India Hydrogen Alliance, an industry-led coalition, has recommended the creation of a national Hydrogen-themed Energy Transition Fund, with co-funding partnerships with sovereigns, multi-lateral agencies, and clean energy funds, with the aim to raise at least US $1 billion by 2030 for the deployment of national hydrogen projects of a certain scale, supported by fiscal and non-fiscal incentives and available to large project consortiums who invest in building hydrogen supply chains in India. These financial tools can help unlock large-scale projects and industry growth in the presence of an appropriate regulatory framework, which is being provided by the government.
Green hydrogen amounts to a vast value chain—from production to end use, and each link has its own set of problems and risk profile. Therefore, it is crucial to address and integrate these risks and concerns into the design of funding mechanisms and instruments. In a nutshell, to mobilise the necessary capital in the initial phase, the role of the government and multilateral funding agencies will be key. Then, as the industry begins to demonstrate a credible track record of returns within a reasonable time frame, a growing pool of financial players will enter the capital structure in the form of equity financing, asset-based financing, or a possible securitisation of the various credit instruments to institutional investors.
Source : orfonline
