Commodities

Commodities 2024: Hydrogen developers hope funding support will unlock financing queue in 2024

The nascent European clean hydrogen market has faced significant challenges in the past 12 months, but observers say conditions are now in place for more project approvals even as the sector faces higher capital costs and supply chain disruptions.

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Less than 10% of the low-carbon hydrogen capacity in S&P Global Commodity Insight’s Hydrogen Production Asset Database with commissioning targets in the coming two years has reached final investment decisions (FIDs).

“Inflationary pressures on cost of production and [capital expenditure], delays in publishing regulations around clean hydrogen production and offtake challenges are some of the issues that projects are facing over the near-term,” S&P Global hydrogen analyst Matthew Hodgkinson said.

Lenders require consistent cash inflows to back hydrogen projects, and some developers are willing to offer hydrogen under long-term agreements on a cost-plus-premium basis. Still, a gap remains between production costs and offtakers’ willingness to pay for cleaner alternatives, and securing offtake agreements remains a challenge.

Consumers such as refineries that use natural gas for captive hydrogen production are waiting for support schemes with an expectation that low-carbon hydrogen will be available at the price of natural gas.

Platts, part of S&P Global Commodity Insights, assessed the cost of producing renewable hydrogen via alkaline electrolysis in Europe at Eur6.00/kg ($6.6/kg) on Dec. 29 (Netherlands, including capex), based on month-ahead power prices, compared with below Eur3/kg for unabated fossil-based production.

“We need long-term offtake agreements for project bankability, but buyers are not able to commit without clarity on support schemes,” an India-based green hydrogen project developer looking to export to Europe told S&P Global.

However, recent public funding commitments such as the Danish Energy Agency’s hydrogen auction and the UK’s Hydrogen Allocation Round 1 will help to bring some of these projects to market, Hodgkinson said.

Auctions for the EU’s second tranche of its Eur3 billion European Hydrogen Bank fund are to open in spring 2024, and the UK’s second Hydrogen Allocation Round closes in the second quarter.



Project scale matters

Hydrogen projects are facing rising costs for capital and materials as with other parts of the renewables sector, further complicating the ramp-up of the nascent industry. Larger developments of 100 MW and more are better placed to weather those increases, delivering economies of scale and lower hydrogen production costs per kilogram.

At the same time, many projects in Europe’s pipeline have been launched by smaller pure-play developers.

“Many of those aggressive new project developments are a little bit like the renewables industry 20 years ago,” often being pushed by smaller pure-play developers rather than big players, investment fund Hy24 CEO Pierre-Etienne Franc said.

“So of course, they are fragile, less capable in terms of balance sheet, but they are the ones daring to take the risks that are going to put in place the large projects,” Franc said in a November interview.

Policymakers should favor “a mix of financial strength, the backing of funds and the competence, the knowledge and the skillset of the team” when weighing eligibility criteria for access to funding programs, Franc said.

Progress on large ventures

Hy24, a joint venture between investment manager FiveT Hydrogen and private equity firm Ardian, is among the backers of Sweden’s H2 Green Steel hydrogen project, one of the first in Europe to reach FID with agreed loans now in the administrative phase.

The green steel project in Boden, Sweden, will be supplied with electrolyzers from Thyssenkrupp Nucera, which is ramping up its manufacturing with an eye on more large-scale projects, especially those developed with a “whole ecosystem” approach, including an integrated offtake solution.

Such projects typically do not need third-party funding from either public or private entities and, as a result, can progress more quickly toward FID and construction, executives said during the German industrial’s December earnings call.

Other large projects are also progressing and booking electrolyzer manufacturing capacity.

Shell booked 100 MW of capacity at ITM Power’s factory for its Refhyne II green hydrogen plant at its Rhineland refinery in Germany, though the project is yet to reach FID.

Some projects unsuccessful

While some clean hydrogen projects progressed in 2023, others have faced setbacks or even been canceled.

In December, green hydrogen company HyCC canceled a 40-MW electrolyzer order for its H2eron project in Delfzijl, the Netherlands, citing the slower development of the hydrogen market and rising project costs. The company has pushed back the planned startup to 2028 at the earliest, having previously expected first hydrogen in 2026.

And in November, the Heide refinery in Germany canceled a 30-MW project because of rising costs, while in the UK, the 100-MW Gigastack project was shelved earlier in 2023 after electrolyzer manufacturer ITM halted production of the 5-MW units it was set to use.

Although announced manufacturing capacity growth is expected to be sufficient to meet growing demand, some concerns over kit persist.

“What we think about that keeps us awake at night is how the [electrolyzer-makers] scale to be able to meet the demand,” Mark Page, CFO of green hydrogen project developer HH2E, said at the FT Energy Transition conference in November.

“It is great if they achieve, say, a 20% reduction in unit costs for electrolyzer plus stack, but that can probably be wiped out by one month’s delay in commissioning and the financing costs we have,” Page said. Cost is important, but “right now it’s about having product and having availability and security of delivery.”

HH2E is looking to take an FID on a 100-MW plant in Lubmin, Germany, in early 2024, and is developing several projects across the country with ambition to reach gigawatt scale.

Politics pivotal in 2024

The market is also watching the outcome of EU elections in June set to shape an upcoming period of energy policy implementation as economies approach near-term climate targets for 2030.

Voters will be weighing higher energy bills and other impacts of clean energy policies on their lives, such as transport and heating.

The EU’s hydrogen agenda was conceived and developed under Ursula von der Leyen’s commission, and the European Commission president has not yet revealed if she will run for a second term.

“The big issue is going to be the politics,” Hy24’s Franc said. “What is going to be the European landscape after the elections? What I hope is that you have got enough and rapid FIDs the first part of [2024], so that the dynamic is good and then the European agenda can continue.”


S&P Global Commodity Insights reporter Camilla Naschert produces content for distribution on S&P Capital IQ Pro.

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