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How easy will it be for green hydrogen projects in developing nations to export to Europe? Part 1: Getting financed

High cost of financing and potential pitfalls in byzantine EU regulations could make it difficult for projects with otherwise cheap renewable H2 to get off the ground

A rendering of the 3GW Hyphen project.
A rendering of the 3GW Hyphen project.Photo: Hyphen Hydrogen Energy

Green hydrogen has often been touted as having the potential to change the fortunes of developing countries with a combination of high wind and solar resources and vast swathes of greenfield land.

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The EU alone has pledged to import ten million tonnes a year of renewable H2 by 2030 to meet half its demand — which could provide substantial revenue to cash-strapped nations in the Global South.

But the first hurdle for export-focused projects to clear is to actually secure financing and begin construction, which may be easier said than done.

First, the cost of capital is just much higher in developing economies than in Europe.

“When it comes to the financing package, the levelised cost of hydrogen is so sensitive to the cost of financing,” said Marco Raffinetti, CEO of Hyphen Hydrogen Energy (which is developing a $10bn project in Namibia), at last week’s Investing in Green Hydrogen conference in London.

While he anticipates that “the cheapest projects with any resource will always get developed first”, he added that whether facilities end up concentrated in specific countries or diversified between different high-potential countries will “come down to the financiers and the offtakers”.

A fellow panellist, Justo Alejandro Algaba, head of infrastructure finance for the Middle East, North Africa and Turkey at bank HSBC, confirmed to Hydrogen Insight on the sidelines of the conference that a project in Namibia or Egypt would not receive the same interest rates as a facility in Europe, which “could affect the price” of hydrogen.

This means that development bank finance — generally backed by governments in order to provide preferential interest rates — will be key for many projects in developing economies to secure capital without massively increasing the price of their volumes of hydrogen.

But drawing on the benefits of development bank finance could have a hidden cost when it comes to the renewable energy projects that will power green H2 production.

The EU’s Delegated Acts’ rules around additionality — ie, the principle that green hydrogen is produced by new renewables projects — do allow for state aid to fund renewable energy assets built alongside an electrolyser, or with a direct connection.

However, the acts prohibit electrolysers from drawing on renewables projects previously built with state aid “in the form of operating aid or investment aid”, even if they otherwise meet the Delegated Acts' criteria of coming on line within three years of the electrolysers (albeit with some loopholes for repowering or subsidies that are paid back).

The European Commission has confirmed to Hydrogen Insight that if a development bank draws on member-state funds and offers preferential interest rates to developing nations, that would indeed count as state aid.
“In general, a measure constitutes State aid where: i) there has been an intervention by the State or through State resources which can take a variety of forms (e.g. grants, interest and tax reliefs [our italics], guarantees, government holdings of all or part of a company, or providing goods and services on preferential terms, etc.); ii) the intervention gives the recipient an advantage on a selective basis, for example to specific companies or industry sectors, or to companies located in specific regions; iii) as a result, competition has been or may be distorted; [and] iv) the intervention is likely to affect trade between Member States,” a spokesperson said.

It is very unlikely this will impact projects that already plan to build vast swathes of wind and solar to power their electrolysers — particularly in countries that already lack sufficient grid infrastructure, let alone existing renewables.

But this state aid rule could mean extra care needs to be taken during project development to prevent a situation where the H2 is being produced outside the EU’s definition of a renewable fuel of non-biological origin (RFNBO), and therefore ineligible for future auctions or counting towards upcoming industrial use mandates.
Part 2, centred on auctions hurdles, is due to be published on Friday.
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EuropeAfricaAsiaAmericasGreen H2
Published 21 September 2023, 07:29Updated 21 September 2023, 12:13