Commodities trader Trafigura expects to make FID on a 20MW green hydrogen facility at Milford Haven in South Wales very shortly, an all-too rare example of a project making it all the way from draft proposal to bankable asset.

So what are the ingredients needed to de-risk a project and make it happen? The Milford Haven project has “known bankable customers”, an existing grid connection, access to renewable power and support from the UK government, Margaux Moore, head of energy transition research and venture investment for Trafigura, told the FT Hydrogen Summit in London.

Statistically, Milford Haven is an outlier in the green hydrogen sector, where less than 10% of announced projects have made it to FID. This is partly down to the sheer amount of time needed to bring together the multiple aspects of a project. But it is also because developers, renewable power suppliers, hydrogen offtakers and financiers are struggling to agree who takes on the various risks across the value chain.

“We are marrying two different industries that do not know each other well—the power industry and the chemical industry” Mussat, Atome

Trafigura, which has its eyes on the margins to be made trading hydrogen as an energy commodity, is keen for this “risk allocation puzzle” to be solved as quickly as possible, in order to “bridge the gap between financiers and offtakers”, Moore said. Risk allocation needs to become a more efficient process, enabling the development of “replicable” projects to build up critical mass, she said.

From Trafigura’s perspective, one of the key areas that needs to be addressed is pricing. A lot of the project funders and developers come from the renewable power sector, where fixed price contracts lasting 20 years are the norm. In the traded fuels markets, where hydrogen will end up being bought and sold, this type of contract is “unheard of”, Moore said.

Marriage of convenience

Olivier Mussat, CEO of project developer Atome, also pointed to the need to bridge the gap between the different sectors straddled by the new green hydrogen supply chain. “We as an industry have been under-estimating that we are marrying two different industries which do not know each other well—the power industry and the chemical industry,” he said.

“Never assume the people across the table have the same view as you, especially when it comes to risk,” he added.

Leverage

Difficulties securing offtake are often cited as the main barrier to making projects bankable and capable of moving forwards to the FID stage. After all, offtake represents a project’s revenue. Again, this comes down to the proportion of the risk that financiers, developers and offtakers are prepared to take on.

“Frankly, I could lend money to a project without offtake—it is just about how much debt you want. If you are comfortable with only 5% leverage, yes,” said Ignacio de Calonje, chief investment officer for energy, green hydrogen, metals and mining at the International Finance Corporation, part of the World Bank. “But if you come to us expecting 80% leverage, that is a completely different conversation in terms of what type of level of offtake you need and who the counterparty is.”

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Author: Stuart Penson