2023 Could Bring a Wave of Green Hydrogen Project FIDs

The green hydrogen sector has reached a pivotal juncture. In the European Union (EU), an extended period of policy gridlock concluded in March with the European Parliament’s de facto approval of a controversial set of definitions for green hydrogen under the Renewable Energy Directive. Developers now know what they need to do to ensure a project will be eligible for EU subsidy support. In the US, debates are still ongoing, but the Treasury Department is expected to provide a clear set of definitions in the coming months.

This means that policy uncertainty should no longer be the main impediment to project development going forward. So far, only a handful of final investment decisions (FIDs) have been made for large-scale hydrogen production projects. The remainder of 2023 will reveal whether the conditions are in place for the industry to deliver on the hundreds of gigawatts of pre-FID projects that are currently planned.

Guidehouse Insights recently published a report that explores the project financing outlook in detail: The State of Play for Green Hydrogen Project Financing in Europe and the US. This blog summarizes some key takeaways from the report.

Partnerships Can Help Address Technology Risk

To date, few examples exist of green hydrogen projects that have been operational for more than a couple of years, especially at larger scales. While many electrolyzer manufacturers advertise lifetimes of more than a decade and degradation rates of around 1% per annum, these estimates are based on limited operational data. Technical uncertainties present a challenge to developers that need to be able to anticipate equipment performance over the lifetime of a project.

Consequently, partnerships between developers; manufacturers; engineering, procurement, and construction companies; and other stakeholders will be key to reducing risk prior to project financing. Project sponsors will favor manufacturers that have a demonstrated the ability to provide support during the execution phase of a project and the capacity to quickly replace defective equipment. Some developers may also wait to see which technologies and manufacturers are selected for other projects before nominating their own supplier.

Identifying a Suitable Offtake Model Is Key

A variety of offtake models are likely to be pursued as the green hydrogen industry scales, determined by the type of end use and the capabilities of the project partners. Sales and purchase agreements—under which the asset owner is responsible for procuring renewable electricity and water inputs before selling hydrogen to the offtaker—are sometimes treated as the default option.

However, developers may also look toward tolling agreements, in which the sales price only reflects the additional costs imposed by electrolysis. Under this arrangement, the offtaker sources the electricity and water consumed by an electrolyzer themselves. Tolling agreements leverage the electricity procurement capabilities of large industrial offtakers and reduce project developers’ exposure to variable price risks.

For projects in which the end product is a green commodity—such as green ammonia or direct reduced iron—a key consideration for financing is securing offtake agreements for the end product. These types of projects may allow for a balanced portfolio of smaller offtake agreements, with consumers willing to pay a green premium for commodities with reduced lifecycle emissions—as has been successfully demonstrated with the H2 Green Steel project in Sweden, which looks likely to reach the FID stage later this year.

State Aid Rules Are Still a Sticking Point in the EU

Although the policy outlook for the EU is more certain now, funding for green hydrogen under the Hydrogen Bank and other EU-level schemes may still be insufficient to drive a significant scale-up. The European Commission has indicated that it intends to reform or relax its guidelines on state aid for climate, environmental protection, and energy, known as CEEAG, which currently constrain member states’ ability to directly subsidize green hydrogen production. Such reforms could be a key enabler of project financing if implemented effectively.

In summary, 2023 could be the year that the FID wave finally breaks—but only if the industry takes a collaborative approach to problem-solving and risk sharing. For electrolyzer manufacturers, this may mean providing more transparency around performance, costs, and manufacturing capabilities. For debt and equity providers, it may require firms to develop in-house expertise on the emerging green hydrogen value chain.