Hydrogen subsidies set to unlock finance

Hydrogen production, as a commercial industry, is still nascent. However, interest in financing is ramping up in line with EU, UK and US subsidy processes.

European observers say some of the best hydrogen engineers at EU companies have moved to the US in the wake of the US IRA offering subsidies for hydrogen production. Guidance for financial players related to key points of US IRA tax credit transferability destined to kick off the hydrogen gold rush is expected in the second half of 2023. 

Panellists discussed the European Hydrogen Bank, a hydrogen subsidy initiative of the EU. It is largely handled by the EU’s development bank, the European Investment Bank and will ultimately give out a subsidy to qualifying hydrogen-related projects, observers say, through a process set to be running by the end of the year. 

Some market players predict that when all these regions finally launch subsidies for hydrogen, debt finance will become more favourable. 

One investor speculated that the Middle East will be a hydrogen hub after a smart city in north-western Saudi Arabia, Neom, announced last month it had reached financial close on an $8.4 billion deal to build what it termed the world’s largest green hydrogen production facility. But asset managers active in hydrogen finance suggest pre-financing the development work and pre-construction with equity. Typically projects with debt finance like Neom’s are the exception. Banks with experience in renewable PPAs suspect that they will be able to innovate structures for hydrogen projects along the way.

Further subsidies for hydrogen may soon be available in the UK. Last December the country opened a consultation on the Heads of Agreement which would be signed by developers in a proposed CfD-style hydrogen subsidy auction. That agreement was dubbed the low-carbon hydrogen production business model. The proposed hydrogen subsidy auction will follow offshore wind CfD designs.

Proposed UK hydrogen subsidies are designed to support both blue hydrogen (produced from natural gas) and green hydrogen (produced from renewable sources such as wind power) production. They will also require the use of a bid price. Some international investors criticised the emergence of UK hydrogen subsidy rules which are seen as “less simple” for hydrogen investors than proposed US rules.

In places where there is a lot of planned wind power generation, like Scotland, there are network constraints on delivering offshore wind to demand centres. A delivery alternative that could co-exist with the needed grid development is subsea hydrogen pipelines.