As the clean hydrogen market evolves, a series of barriers have emerged, slowing the growth of high-impact industrial decarbonization projects. These challenges, ranging from a lack of performance data to mismatched expectations between developers and investors, have prompted new initiatives aimed at accelerating financing in this critical sector. A recent “hydrogen project finance roadshow,” organized by RMI and the Mission Possible Partnership (MPP), sought to identify and address these gaps. The event brought together top financial institutions (FIs) and U.S. hydrogen developers, sharing insights to foster a more efficient and scalable market for clean hydrogen technologies.
RMI’s Industrial Transition Finance team, which leads this initiative as part of the Clean Industrial Hubs program, works alongside the Bezos Earth Fund to create synergies between financial institutions, policymakers, and project developers. The roadshow, focused on the hydrogen sector, provided an invaluable opportunity for the industry to explore solutions for bridging five critical gaps that hinder the growth of the hydrogen market.
Here’s a breakdown of the gaps identified and potential market-based solutions to address them:
1. The Performance Data Gap
The clean hydrogen sector, especially within industrial applications like ammonia production, faces a significant information gap. Only two “clean” ammonia plants currently operate worldwide, and only a handful of others are nearing construction. The urgency to scale these projects is evident, with the energy transition requiring at least 60 new plants to be online by 2030. However, the lack of reliable performance data on technology efficiency, feedstock usage, and plant output poses a serious challenge for investors, many of whom are wary of funding projects that lack the performance data typically required for large-scale infrastructure investments.
Developers argue that some perceived technology risks are exaggerated. For instance, certain electrolyzer designs used for hydrogen production may not be as risky as financiers assume. Furthermore, modular electrolyzer technology allows for scaling without significant increases in size, reducing uncertainty. To tackle this issue, the hydrogen market could adopt lessons from the Enhanced Rock Weathering (ERW) sector, where data-sharing platforms like the ERW Data Quarry help enhance trust and transparency.
2. Mismatched Offtake Expectations
Traditional project finance models, often based on long-term contracts, struggle to meet the needs of first-of-a-kind hydrogen projects. Unlike well-established industries like renewables or natural gas, hydrogen and its derivatives, such as ammonia, don’t yet have reliable offtake agreements that align with conventional financing models. Current offtake contracts in the ammonia sector, for example, tend to be short-term—1–2 years—while investors expect longer-term commitments (10–20 years).
To close this gap, solutions must be both tactical and structural. Tactical approaches could include adjusting loan terms to allow for shorter offtake periods or incorporating mechanisms like interest rate step-ups if projects fail to renegotiate contracts. Structurally, both investors and developers need to recognize the added value of climate impact from hydrogen projects, which could influence the pricing and structuring of offtake agreements. Encouraging major institutional investors to push for procurement reforms could help align corporate policy with the long-term needs of clean commodity contracts, a shift that would benefit both investors and offtakers.
3. Divergent Return Expectations
As clean hydrogen projects begin, developers must focus on scaling decarbonization efforts rather than seeking immediate high financial returns. These projects require significant upfront investment, but the returns are often relatively modest due to the emerging nature of the technology. Government subsidies, philanthropic support, and innovative financial structures will play crucial roles in de-risking these investments and improving project economics.
However, for project developers expecting returns similar to those in the software industry, the reality may be sobering. Most financial returns are expected to materialize through refinancing once the sector matures—likely 3-5 years after the initial project phase. In the meantime, creative financial structuring will be necessary to meet investor return thresholds, including the use of blended capital stacks and novel deal syndication models.
4. Insufficient Risk Management Solutions
Managing risk is one of the largest hurdles in emerging climate infrastructure projects. Unlike traditional infrastructure, where risks are more standardized and measurable, clean hydrogen projects often involve new technological risks and uncertainties around energy supply, regulatory issues, and market complexity. In the hydrogen sector, developers face difficult choices about whether to overbuild storage capacity or pay a premium for firm power contracts, both of which increase project complexity and costs.
Innovative risk management strategies are still in the formative stages. One solution to this challenge is greater transparency in how risks are addressed in project agreements. Sharing insights from early-stage deals could help refine risk management models, especially for projects that may involve complex cross-border supply chains or emerging technology. As the first hydrogen projects begin to close in 2025, lessons learned will inform the broader market.
5. A Lack of First-Mover Investors
While many financial institutions have publicly committed to supporting the energy transition, developers often struggle to find investors willing to take the first step in financing high-risk hydrogen projects. Mainstream investors tend to be cautious, relying on traditional investment criteria and focusing on less risky, more conventional energy projects. As a result, developers often face difficulties securing the flexible terms required to scale early-stage hydrogen markets.
There is also a disconnect between the terms investors seek and the terms developers need. For example, private equity funds often look for risk-return profiles similar to those seen in stable, long-term infrastructure projects like wind farms or toll roads, while venture capitalists expect rapid scaling through proprietary technologies. Bridging this divide will require innovative deal structures and a mindset shift among financial institutions to embrace the value of high-impact, climate-focused solutions.
Bridging the Gaps: Four Key Developments
To accelerate the hydrogen finance market, four key developments could help scale the sector more quickly:
Creative Deal Syndicates: By forming syndicates of diverse investors, developers can spread risk more effectively and align different stakeholders’ expertise to enhance the de-risking process. For example, large strategic investors or original equipment manufacturers (OEMs) could provide performance guarantees to supplement data gaps.
Innovative Capital Stacks: Incorporating various types of capital, from government funding to philanthropic grants and impact investment, can help balance risk and return expectations. The use of non-dilutive capital, such as tax abatements and regional incentives, could reduce financial pressures for developers.
Engaging Institutional Investors: Institutional investors, especially pension funds and insurance companies, have a pivotal role to play in financing clean hydrogen projects. By expanding their investment strategies to include industrial decarbonization, these investors can lower the cost of capital for high-impact projects and help create long-term offtake agreements.
Involving Insurance Early: Insurers can play a proactive role by helping shape project designs from the outset, offering risk advisory services during pre-FEED stages. Early involvement from insurers can help mitigate technology and regulatory risks, making projects more attractive to investors.
Looking Ahead: A Year of Action in 2025
The clean hydrogen market stands at a critical juncture. In 2024, industry players identified innovative ways to tackle the challenges of industrial decarbonization, but 2025 must be the year when these solutions are fully implemented. With rising momentum in sectors like sustainable aviation fuel financing and green ammonia, the hydrogen sector can follow suit. If the financial community embraces these strategies, the clean hydrogen market could rapidly scale, bringing us closer to a carbon-free industrial future.
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