Low-carbon hydrogen: a crucial clean energy source

What is the situation on the European hydrogen market and what developments lie ahead? 

Hydrogen has been singled out in the EU’s hydrogen strategy and the REPowerEU plan as a key building block of the EU’s net zero strategy. Its development will be crucial in decarbonising many energy-intensive processes, in sectors ranging from steel to shipping, aviation, and fertilisers. 

Substitution of existing so-called grey hydrogen uses – in the refining, ammonia and methanol sectors – will also provide a solid foundation for the development of a low-carbon hydrogen market in Europe. 

Of course some use cases will take more time to develop, either because this could compete against another low-carbon technology or as the adoption of hydrogen would require significant downstream capex and investment, but overall hydrogen offers strong potential to drive the energy transition.  

How is the European Union supporting the emergence of the low-carbon hydrogen market and what are the potential challenges? 

The European Union and its Member States have set ambitious targets for hydrogen deployment in Europe, aiming to achieve 20 million tonnes per annum, or Mtpa, of low-carbon hydrogen demand by 2030. This aim is fuelled by the vital need to decarbonise industry and transportation on the one hand, and the need to ensure energy sovereignty and gas supply independence on the other. 

The recent Renewable Energy Directive III also set goals for renewable fuels of non-biological origin, so-called RFNBO fuels, which are derived from green hydrogen. It targets 2.3 Mtpa for industry and 0.62 Mtpa for transportation by 2030, and confirms the future development of a hydrogen market in the European Union. 

However, switching to more expensive energy could dent competitiveness for EU industry, and the carbon border adjustment mechanism (CBAM), designed to create a level playing field with imported goods and materials, will also add to the costs of certain European industries. For instance, fertilisers are likely to continue to rely on natural gas and imported grey ammonia for some time.

There have been some project cancellations and few Final Investment Decisions despite an impressive pipeline of projects in the development stages. Can these targets still be achieved? 

The roll-out of green hydrogen in Europe has been delayed for a number of reasons. Firstly, stringent compliance requirements for renewable fuels of non-biological origin (RFNBO) add to the cost structure of green hydrogen. Secondly, more infrastructure is needed to connect supply – where cheap green electricity is available – to demand at industrial centres. Additionally more subsidies will be required to equalise the costs for 2030 target volumes, with sources estimating that the EU Hydrogen Bank budget would cover only 15% of demand. Lastly, we are seeing the usual challenges faced by a developing industry, such as a weak electrolyser supply chain and integration risks, particularly the lack of EPC solutions, although we are seeing improvements in the supply chain with engineering firms developing EPC solutions. As a result, off-takers are broadly putting decisions on hold, despite the mandatory targets and decarbonisation mandates.  

However, we are still seeing a great deal of movement in the sector, with a large wave of projects targeting Final Investment Decision within the next 12 months. Auction awards are finally being announced: this not only helps the economics for certain projects, it also paves the way for others to follow once these first projects are built, as they draw on shared infrastructure and greater confidence from investors and capital markets. In addition, progress is being made on rolling out infrastructure, especially the first segments of the EU hydrogen backbone. 

So overall, the 2030 targets appear ambitious and the market needs to accelerate to reach them. This also paves the way for a larger share of imports, on condition that import infrastructure is also developed in time. 

In practical terms, what makes a successful hydrogen project? 

Project developers that effectively connect green power supply on one hand with demand for hydrogen or one of its derivatives on the other hand will be the most successful, and in our view three strategies in particular will be key: firstly, initiatives that integrate renewable power development to facilitate the securing of green power supply; secondly, those that integrate downstream to offer a product that can be sold into a more mature market and for which transportation and logistics are facilitated; and lastly, strategies to locate close to demand, literally on site, and develop in smaller phases so that it is technically and economically easier for the off-taker to absorb gradual increases in hydrogen supply.  

Can you tell us how BNP Paribas is addressing its clients’ needs in the energy transition space? 

BNP Paribas created the Low Carbon Transition Group – or LCTG – about two years ago to support and accelerate our clients’ energy transition. LCTG is a global team of over 100 bankers covering all investment banking products – from project finance and debt advisory through to equity placement, M&A and strategic advisory. It brings together all our sector experts under one roof, with backgrounds across all these areas of expertise to offer our clients the most relevant advice and the best-suited pool of capital for each individual situation. 

We focus on sectors that have the most critical role to play in the energy transition. This particularly covers renewable energy, low-carbon fuels which include hydrogen and its derivatives but also biofuels, carbon capture utilisation and storage and also transition minerals and metals which include the battery manufacturing value chain.  

Some of these sectors are mature and can access deep pools of liquidity – this is the case for renewables for example – but other sectors are still in the earlier stages of development and carry complex technology, market and regulatory risks. We support our clients in a range of different ways tailored to each one’s stage in their transition journeys and their varying degrees of development and maturity. We offer a full range of solutions, raising sizeable amounts of debt and equity capital for large scale offshore wind farms, as well as for the acquisition or divestment of renewable energy development platforms, while in less mature sectors, we help raise equity capital for innovative companies, in particular project developers, and provide project finance advisory to large infrastructure assets and help our clients devise bankable project structures.