Making low-carbon hydrogen more affordable and more bankable

Apart from technological advancements and tax incentives, borrowers should keep 4 considerations in mind.

Key points:
  • Low-carbon hydrogen could help solve some of the biggest decarbonisation challenges in hard-to-abate sectors such as cement manufacturing, heavy transportation, and refining.
  • Its production, however, is expensive and doesn’t readily lend itself to bank financing.
  • Technological advances, tax incentives and measures taken by borrowers could make production more economical and bankable.

Hydrogen has been used for more than a century as an industrial chemical in the production of alternative fuel, feedstock and fertiliser, as well as in the refinement of crude oil. More recently, it has been found to be an effective decarbonisation agent in industrial activities and sectors in which electrification has only limited application, such as chemical refineries, construction and transportation.

Hydrogen is the most abundant substance in the universe, yet the methods of producing it have — paradoxically — often entailed using more fossil fuels than the use of hydrogen itself would save. However, there is one production method that promises abundant hydrogen without challenging carbon-reduction strategies.

Green hydrogen as “the fuel of the future”

Often called “the Swiss Army knife of decarbonisation”, green hydrogen is versatile and comes from the electrolysis of water powered by renewable energy sources such as wind, solar and hydroelectric mechanisms. Since this process does not result in any harmful by-products, green hydrogen has the potential to provide the cleanest form of energy that can be used to power cars, ships, aircraft and homes. It could also help accelerate decarbonisation in hard-to-abate sectors such as cement and fertiliser production, and refining, where no other viable solutions exist.

As the technology for producing, storing, and transporting hydrogen matures, green hydrogen will become more accessible for power generation and heavy-duty transport. The potential applications are limitless — in utilities and off-grid power generation, in the fuel cells of vehicles (from cars and buses to trucks), or as a heat source for manufacturing cement and steel.

Recent project-finance transactions around the world have already highlighted green hydrogen’s potential as an alternative source of sustainable power to help reduce carbon emissions.

Examples include AES’s announcement of a US$4 billion green hydrogen plant in Texas; and the H2 Magallanes Complex — Chile’s largest green hydrogen project to date — which aims to produce 25 gigawatts of green hydrogen by 2030.

Making production more economical

Green hydrogen currently costs up to three times as much as other hydrogen production methods and access to renewables is critical for manufacturing it on a commercial scale.

The United States is poised to become a global leader in low-carbon hydrogen thanks to its largest renewable-energy sector and regulatory frameworks, including the Infrastructure Investment and Jobs Act (IIJA), which allocated US$8 billion over four years towards the development of large-scale regional clean hydrogen hubs; and the Inflation Reduction Act (IRA), which includes tax credits to incentivise the growth of low-carbon hydrogen supply.

Other countries in the Americas are also making progress with their production of hydrogen — and, more broadly, renewable-energy to position themselves as major exporters of low-cost green hydrogen. Notably, Brazil and Chile are emerging as major green-hydrogen players given their attractive low solar- and wind-energy costs.

“The reason why everybody’s so excited about hydrogen in the U.S. is because of the IRA tax credit,” says Ravina Advani, Head of the Low-Carbon Transition Group, BNP Paribas Americas. With that said, Advani notes that her excitement is tempered by the complexity of storage and transportation of H2, and by the absence of final regulations. Notable additional guidance on credit transfers was released in June 2023 and should lead to increased tax-credit transaction activity.

“Many clients are now looking at the U.S. because of the passage of the IRA and are investing in this market,” Advani adds. “The tax credit makes hydrogen projects much more economical and will help propel growth, so there’s a lot more focus on the U.S. as we think about hydrogen, which is meaningful.”

Ravina Advani

The tax credit makes hydrogen projects much more economical and will help propel growth, so there’s a lot more focus on the U.S. as we think about hydrogen, which is meaningful.

Ravina Advani
Head of the Low-Carbon Transition Group, BNP Paribas Americas

The IRA includes a US$3-per-kilogramme tax credit, bringing the average U.S. cost of green hydrogen production down to US$2 per kilogramme this year, with costs expected to fall below zero by 2030. By the end of the decade, the United States could be the cheapest low-carbon hydrogen producer in the world.

Incentives on both the demand and supply sides will be valuable. “Funding and tax credits make the technology more economical, however for it to be viable, offtake agreements are necessary,” Advani says.  “If you’re taking hydrogen and converting it to methanol or green ammonia, there isn’t a global index for that, so clients need an offtake agreement. What’s unique about hydrogen is that it’s not like the power sector, where if a PPA falls through, you’re selling into the spot market, which is more liquid.”

As bigger and well-capitalised players in the energy sector scale up their investments in green hydrogen, technologies such as electrolysis for production will eventually become more economical. Major U.S. oil and gas producers, utilities, and infrastructure funds are already starting to invest in it.

What does it take to make green-hydrogen energy bankable?

Financing is obviously a critical aspect of advancing the economics and availability of green hydrogen for widespread use. Yet in the United States, bankable green hydrogen projects are currently few and far between, mainly because of the technology’s complexity and the need for established offtake agreements.

Those seeking bank financing for hydrogen-fuelled energy and infrastructure projects should therefore consider the following:

  • Location: Most of the areas where large low-carbon hydrogen projects are emerging (such as in the United States, Latin America, Europe) have abundant wind and solar resources and already have significant renewable energy production as well as industrial infrastructure in place.
  • Construction: Is there an Engineering Procurement and Construction (EPC) contract in place or an alternative partner with experience and a successful track record?
  • Contractual obligations: Does the contract for the energy or infrastructure project stand up to scrutiny by banks? Who is providing asset management? Has the proper due diligence been conducted on project sites? How to account for project-on-project risk across the green-hydrogen value chain (given that renewable power needs to dovetail with an electrolyser and be transferred into a storage or transportation mechanism thereafter)?
  • Demand-side incentives: How to incentivise buyers when there are currently cheaper alternatives to green hydrogen? Would there be a carbon tax, for example?

Notably, without an offtake agreement or PPA, it could be difficult to secure financing. The tenor of the offtake agreement needs to be significant enough to mitigate the risk, and it should also be established with a reliable partner of investment-grade credit quality.

“Lining up offtakers is going to be a key determinant of which projects are able to move forward, and we’re seeing our clients focus on these commercial arrangements,” says Aashish Mohan, Co-Head of Energy, Resources and Infrastructure, BNP Paribas Americas. “The IRA addresses the supply side, but demand-side incentives for users to procure hydrogen will be the critical next step.”

Aashish Mohan

The IRA addresses the supply side, but demand-side incentives for users to procure hydrogen will be the critical next step.

Aashish Mohan
Co-Head of Energy, Resources and Infrastructure, BNP Paribas Americas

The way forward for low-carbon hydrogen

Green hydrogen is the missing ingredient that could help decarbonise many CO2-intensive industries, and the key to growing a low-carbon economy is through financing and advisory services, in which banks can play a role and also provide counsel on risk management, local regulatory frameworks and capital raising across debt, tax equity, and equity.

But for green hydrogen use to take off at scale, all pieces of the value chain — from infrastructure and transportation to storage and related manufacturing equipment — need to come together. Tax incentives, investments and technological advancements are moving green hydrogen in that direction, and prospective borrowers should consider a host of factors — logistical, financial and technological — when pursuing financing.

About the BNP Paribas Low-Carbon Transition Group

BNP Paribas’ Low-Carbon Transition Group is a dedicated organisation to support its corporate and institutional clients around the world in accelerating their transition to a sustainable and low-carbon economy.

Building on our leadership in capital markets and sustainable finance, this group combines more than 250 experts to support clients on targeted sustainability advisory and financing solutions across regions and business lines, with areas of expertise including clean energy, mobility and environmental solutions.

For more information, contact:

Ravina Advani
Head of Low Carbon Transition Group — Americas
Phone: +1 212.841.3953

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