The progression to FID of the $8.5bn Neom green hydrogen and ammonia project in Saudi Arabia demonstrates investor appetite for the sector, and more mega-projects are likely to materialise in the Middle East. Interest is also growing in North Africa as a production location as developers seek the perfect blend of wind and solar, says Andrew Doyle, Emea energy project finance specialist at Japanese bank MUFG, in an interview with Hydrogen Economist.

Reaching FID on the Neom project was a significant breakthrough, but how has the broader hydrogen investment landscape evolved over the last 12 months?

Doyle: In some ways, we have taken a massive leap forward—Neom has got to signing and is expected to close fairly soon. Given this is really the first of a kind and also of significant scale, it just shows the appetite for lending into such projects.

But in other ways, I do not think we are too much further along the road in terms of seeing a truly bankable hydrogen project finance market developing beyond what has been put in place around Neom.

If you look around Europe, we are still having lots of conversations but there is still a lot of uncertainty about what the support regimes will look like, how those are going to get put together, and when we are actually going to start requiring investment decisions and subsequent financings.

There has been a pause. Some of the early gains that Europe had around the development of its hydrogen economy have actually started to take a bit of a back seat.

Where do you think the next big breakthroughs will be in terms of getting large hydrogen projects to FID?

Doyle: For those mega-projects, the Middle East is going to be the most likely. There is ambition to continue to do projects in Neom. I am aware of projects in Oman, and there is also quite a lot of talk around projects in North Africa, so Egypt and Morocco.

You want to do transactions that are in the best regions, where you have high degrees of solar radiation coupled with wind. But that is not going to be feasible in the majority of European jurisdictions. I think that is why people are looking to the likes of Saudi Arabia, Egypt and other North African countries—as well as Oman, Chile and Australia—because they feel they can get a good blend of solar and wind yields.

Some of the early gains Europe had around the development of its hydrogen economy have actually started to take a bit of a back seat

The challenge in some of those markets will be around the total financing required. If you look at Neom, with around $6bn project debt, a significant amount of that came from Saudi and local sources.

There was good uptake from the international market, but the size of the liquidity challenge was definitely helped by the fact you had Middle Eastern financial institutions that are incentivised and highly cash-rich at the moment, so able to put down big tickets.

If you move to more challenging jurisdictions, you probably need to bring in export credit agencies and multilateral agencies to help bridge some of that liquidity.

Have recent hydrogen support measures announced by the EU helped to make it more competitive with the US or is the Inflation Reduction Act (IRA) still a bigger draw for developers?

Doyle: The US seems to have progressed a lot further forward and that is attracting people's attention away from Europe. The US has still got the initiative, largely because the parameters are probably better defined under the IRA. People know exactly how much subsidy they are going to get on top and they feel confident they will be able bring projects forward based on those numbers.

In the EU, where we are starting to see a little bit of hesitancy is around the fact that, if you look at how much they are proposing to subsidise—€800mn ($884mn) for the first tranche—if you spread that over the ten-year tenure of the support regime, that is €80mn a year. That does not buy you an awful lot of hydrogen—potentially as little as 20,000t, when the EU is looking to procure 20mn t by 2030. That is not really moving the needle too far.

What is the outlook for projects in Europe?

Doyle: I expect projects will likely stay small in the initial stages, but as more clarity comes in terms of the support structures, the EU’s Hydrogen Bank and subsidy regimes, I am confident we will start to see 500MW plus projects starting to come to fruition in Europe.

Are you a potential lender to blue hydrogen projects as well as green?

Doyle: Yes, we are working on a couple of advisory mandates in the CCS space. One of those is linked to a blue hydrogen project, so it will be accepting the carbon stream from the producer. I do not think there is anything that necessarily would stop us looking at those projects as a matter of course.

We are definitely seeing more appetite for CCS projects. There is definite policy support in the likes of UK and Denmark, and we are expecting it in the Netherlands as well. We are also starting to see interest in the Middle East.

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Author: Stuart Penson