Unlocking Private Investment in Low-Carbon Hydrogen
In a world that reaches its climate goals by 2050, international energy-related trade will no longer be dominated by oil and natural gas, but by minerals and hydrogen. With that end in mind, an increasing number of countries are devoting public funding to support the development of a low-carbon hydrogen market. But to establish real markets, public funding will need to catalyze private investments.
In the United States, the hydrogen hubs program, part of the bipartisan infrastructure bill of 2021, is supported by $8 billion and is expected to unlock tens of billions in private capital. In the European Union, hundreds of billions in private capital will be needed to reach the goals the European Union set itself in its 2020 hydrogen strategy (more if hydrogen is to play the planned role to reduce the European Union’s dependence on Russian natural gas). Investment activity, however, is still relatively low: out of the €130 billion of investment announced by project promoters in the European Union, only a small part has reached a final investment decision. This raises the question: What are the barriers to private investment in hydrogen and how can they be overcome?
The European Investment Bank (EIB) surveyed hydrogen investors in the European Union to find answers to this question. Its report provides valuable considerations not only for policymakers in the European Union, but also in the United States and elsewhere.
The most obvious challenge for investors is the increased cost of moving to low-carbon hydrogen applications for carbon-intensive alternatives, or the green premium. Among the potential public support mechanisms to bridge the gap, the investors surveyed for the report favor the concept of market-making platforms that create supportive market conditions for both hydrogen producers and users. For example, Germany’s H2Global mechanism will award long-term contracts to international green hydrogen production projects and short-term contracts to hydrogen users. The German government funds the gap between the higher production prices relative to the prices paid by the hydrogen users. This means that production projects get the offtake contracts they need to get started. And demand projects do not have to pay the full premium for green hydrogen and have some insurance that supply will be there. The platform could be expanded to a European scale.
Several further challenges identified in the report share one underlying theme: a lack of visibility and communication among stakeholders. For example, an end-to-end business model for hydrogen usually requires proximity to complementing projects. Projects need to find the value chain around them. A lack of visibility among project developers hence prevents projects from getting started. Insufficient communication between project promoters and finance experts prevents projects from finding the best combination of available financing options. And suboptimal information exchange between project developers and governments might be one of the reasons why there are investment risks due to a lack of regulatory clarity.
So how could communication among the growing number of stakeholders be organized efficiently? Getting digital might prove useful here. Governments could develop interactive online platforms, where the various groups of hydrogen project promoters (early-stage ventures, demonstration project developers, big infrastructure project promoters) can find all the information and contacts they need for matchmaking, financing solutions, and on regulatory frameworks. Online forums and comment functions could enable information exchange.
Both the United States and the European Union have already developed an online service for matchmaking. The U.S. hydrogen matchmaker and the European Union’s project pipeline database make hydrogen project developers visible to each other to address the challenge of value chain integration. Governments could build on the hydrogen project databases and existing offline platforms such as the European Clean Hydrogen Alliance to develop online services that further reduce the barriers to communication.
For example, an online platform could connect the various groups of project promoters (from innovation ventures to huge infrastructure projects) to their respective finance counterparts (innovation finance programs, project finance providers, etc.). The EIB report highlighted the need for financing providers to create dedicated initiatives to reach out to project developers. With an online tool, new players do not need to be identified to get information—they would know where to find it. Online forums on specific financing topics could lower communication barriers and allow project developers to find answers to questions peers might have already asked.
Governments could use the interactive online platform to provide information on the regulatory framework of hydrogen. Investors might then use a comment function to point out where a lack of regulatory clarity prevents projects from getting started. The comments could serve governments as an indicator of which regulations they want to address first. This could support reducing the regulatory risks for investors found in the report, such as the lack of clarity about what type of low-carbon hydrogen (green, blue, etc.) is eligible for public support or the need for a hydrogen certification system linked to the carbon content of its production to help monetize a green premium for low-carbon hydrogen.
If governments treat the development of a low-carbon hydrogen market as a national—or even international—project, then they can look to project management research that efficient communication with stakeholders is key to a project’s success. One could think of several further online services that connect players and could support private investment in hydrogen. Which forum or new function would be most useful for stakeholders? Ask them on the hydrogen online platform.
Isabelle Huber is a visiting fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2022 by the Center for Strategic and International Studies. All rights reserved.