The transition to a cleaner energy future is a global imperative, particularly in Emerging Markets and Developing Countries (EMDC), where the financing of hydrogen projects is of utmost importance. The recent Financing Forum held during the World Hydrogen summit in Rotterdam convened stakeholders from various sectors to deliberate on the challenges and opportunities in this emerging market.
A joint report by the World Bank, OECD, Hydrogen Council, and Global Infrastructure Facility has underscored the critical need for approximately US$100 billion annually for hydrogen investments in EMDC between now and 2030. Despite the recognition of the potential of clean hydrogen to contribute to achieving climate targets, current investment levels are significantly below the required amount.
The report categorises clean hydrogen into low-carbon hydrogen and renewable hydrogen, with the latter being more costly to produce due to the use of renewable power sources. The high capital intensity and production costs present substantial challenges for the widespread adoption of renewable hydrogen, underscoring the need for innovative financing solutions.
A key insight from the Finance Forum was the significance of risk mitigation strategies in financing hydrogen projects. Governments, investors, banks, and insurers all have a role to play in addressing the risks associated with hydrogen projects. Additionally, policy de-risking mechanisms and financial de-risking instruments, such as subsidies and guarantees, can help reduce the weighted average cost of capital for such projects.
The report also highlighted the role of blended financing, wherein concessional debt/equity, concessionally priced guarantees/insurance, project preparation or design-stage grant funding, and technical assistance grant funding can play a crucial role in mobilising private capital for hydrogen projects. However, it was noted that the use of blended finance has not proven to be scalable and requires a well-coordinated approach.
The forum also addressed the importance of demand policies in stimulating the uptake of renewable hydrogen and the role of innovative financing instruments in driving down technology costs. The 10 GW Lighthouse initiative, led by the World Bank Group, aims to advance a significant number of mid-size hydrogen projects in EMDC to a Final Investment Decision (FID) in the coming years. This initiative, alongside supportive policies and technological advancements, can play a crucial role in accelerating the development of clean hydrogen projects.
In conclusion, the financing of hydrogen projects in EMDC presents both challenges and opportunities. Nevertheless, by leveraging innovative financing solutions, de-risking strategies, and international collaboration, it is feasible to bridge the financing gap and expedite the development of clean hydrogen projects. It is crucial to foster cooperation among MDBs, DFIs, and local and international partners to ensure the full participation of EMDC in the global energy transition.