Hydrogen projects in Asia-Pacific will need to rely on equity markets to bridge a funding gap in the short-to-medium term until the industry matures to a point where financial investors are willing to provide debt cash for projects, delegates heard at a recent industry conference.

Most new funding for hydrogen last year and much of this year was raised by publicly listed companies such as ITM Power, Plug Power and Sunfire, as they issued new shares to investors to secure capital for expanding manufacturing facilities, according to the IEA’s Global Hydrogen Report, released in October.

In contrast, there have been few financing deals for green and blue hydrogen projects on the ground. Some financial institutions believe these types of deals may not start to happen until later in the decade.

“Equity markets understand risk, and more importantly know how to price risk” Hirjee, ANZ

The IEA has warned that global cumulative investment in hydrogen must increase to $1.2tn by 2030 and $10tn by 2050 for the world to zero out greenhouse gas emissions by mid-century. Governments and the private sector together have so far committed some $337bn of investment.

“Whether you believe the hydrogen economy is currently investable will depend on your risk appetite. You will find that equity markets understand risk and, more importantly, know how to price risk, particularly in industries in the early stages of forming,” said John Hirjee, executive director for resources, energy and infrastructure corporate finance at Australian bank ANZ Banking Group.

“Bankers usually want lower risk, and they do not take equity risk typically, so I think the equity markets will play a significant role in kickstarting this industry, as they have done with many other industries such as lithium,” Hirjee said on a panel at the Asia-Pacific Hydrogen Summit last week.

Projects will be able to secure finance only when they have offtake agreements from firms in the mobility, industrial and shipping sectors. This demand has not fully emerged, however.

Technical difficulties

Technological risks are also giving bankers pause, according to Hirjee. He notes that current electrolysers typically have a service life of only 7-8 years, and while the technology has been around for several decades, electrolysis has not been proven to operate at scale and for ten years of continuous service.

“Financiers would need the commercial life of the unit to be a little bit longer, with appropriate OEM warranties associated with that. That would be the key element that bankers would need to see… that these units could operate for a long period of time,” says Hirjee.

Lenders are also unlikely to get on board until the cost of green hydrogen is competitive with gas.

“This would really enable project sponsors to earn a suitable return. That is when I think we could start to see the large-scale replacement with hydrogen as a major energy source,” Hirjee adds.

$1.2tn – IEA estimate of cumulative investment required in hydrogen sector

Equally as important as offtake contracts in Asia-Pacific will be appropriate long-term regulatory frameworks, which the region lacks at the moment as only Australia, Japan and South Korea have adopted national hydrogen strategies.

Regional and international strategies are vital in establishing a global market, according to Barbara Jinks, programme officer for green gas delivery and use at the International Renewable Energy Agency (Irena).

“It is absolutely essential to do what the EU has been doing, and that is to collaborate between the different nations and have a regional approach,” she says, citing the European Green Deal as a piece of joined-up policymaking that provides long-term visibility for hydrogen’s role in the energy transition.

“We know what the challenges are. It is time to stop talking about the problems and actually start talking about how to implement the solutions. The Asia-Pacific region can learn by maybe not spending years and years talking about barriers, but accepting the information and the data.”

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Author: Shi Weijun