This chapter provides a brief overview of the role of clean hydrogen in net-zero emission scenarios. It provides a snapshot of the current status of clean hydrogen financing, highlighting the investment gap against what is needed to achieve climate targets, and underscoring the key risk factors preventing clean hydrogen projects from reaching a final investment decision. Furthermore, the chapter introduces the key stakeholders active in clean hydrogen financing, and their role to unlock investment. Finally, the chapter highlights how this report aims to bridge the knowledge gap and provide a better understanding of the priorities to unlock financing for clean hydrogen projects in EMDEs.
Leveraging De‑Risking Instruments and International Co‑ordination to Catalyse Investment in Clean Hydrogen
Abstract
“Clean hydrogen”1 – and especially “renewable hydrogen” – is emerging as an essential low‑carbon technology to realise a net-zero emission energy system by mid-century, aligned with the goals of the Paris Agreement and the UAE Consensus’ call to transition away from fossil fuels. The International Energy Agency (IEA) states that in order to achieve a net-zero emission energy system, hydrogen production should grow by a factor 4 to 5 by 2050, from current levels of around 100 million tonnes (Mt) per year (IEA, 2023[1]). In IEA’s net-zero emission scenario, nearly all the hydrogen produced in 2050 is clean hydrogen, whereas it represents less than 1% of the hydrogen produced in 2022. According to the latest estimates by the World Bank and the Organisation for Economic Co-operation and Development (OECD), around 20 Mt of clean hydrogen would be produced by 2030 in emerging and developing economies (EMDEs) excluding the People’s Republic of China (hereafter “China”) - i.e. half of the estimated 40 Mt global clean hydrogen production in the same year (OECD/The World Bank, 2024[2]).
Several EMDEs endowed with large renewable energy potential, and with access to sufficient water resources and land, are well positioned to become renewable hydrogen producers or exporters. Renewable hydrogen can help these countries improve energy security (e.g. through enabling the integration of renewable power to the grid), develop green industrial processes, create green jobs, and improve their trade balances.
Clean hydrogen is also crucial for advanced economies to achieve net-zero emissions. This is already outlined in national and regional decarbonisation and industrial strategies such as REPowerEU of the European Union and the Inflation Reduction Act of the United States (European Commission, 2022[3]) (The White House, 2022[4]). Several advanced economies also benefit from favourable conditions such as abundant renewable energy sources to produce clean hydrogen at low cost. Others may become large demand centres, relying on partially or fully imported clean hydrogen to decarbonise their manufacturing industry, transportation, and power sectors. As 25% to 31% of hydrogen production is expected to be regionally or globally traded by 2050, most countries have an interest in pursuing regional and international collaboration to create hydrogen commercial routes and ensure the success of global decarbonisation efforts (OECD/The World Bank, 2024[2]).
Hydrogen is currently consumed mainly by the manufacturing industry as feedstock in chemical processes. Around 95% of hydrogen production is based on fossil fuels (coal and natural gas) and “consumed where produced” on-site in petroleum refineries, ammonia, and other chemical plants. With new markets and production routes, total clean hydrogen demand in the industry sector could reach around 320 Mt per year by 2050 (IRENA, 2022[5]).
By 2050, clean hydrogen is projected to have a large market share in several sectors and countries, with more than 1 400 large hydrogen projects already announced globally as of December 2023, in particular in the following sectors (Hydrogen Council; McKinsey & Company, 2023[6]):
Ammonia and methanol: to substitute the current fossil fuel-based hydrogen in current production processes.
Iron and steel: to replace natural gas in direct reduced iron (DRI) production. This process could supersede traditional ironmaking in coal-based blast furnaces.
Note: DRI = direct reduced iron; HVC = high-value chemicals; Int = international; NG = natural gas
Source: (IRENA, 2022[5])
The transport and power sectors offer emerging opportunities for renewable hydrogen. In the transport sector, ammonia, methanol and electrofuels2 produced from renewable hydrogen could provide clean solutions for shipping or aviation. In the power sector, renewable hydrogen can help integrate variable renewable energy sources into the grids, alongside other solutions such as battery storage (IRENA, 2022[5]). For instance, even though this is not done yet at large-scale, hydrogen could be stored seasonally in geological storage and subsequently be used to produce electricity during times of low solar and wind output or high demand.
Despite all these opportunities, clean hydrogen is not a silver bullet, and it is key to prioritise its use where it is the most effective, or when other low-carbon alternatives such as direct electrification are not feasible or less economical. Indeed, producing renewable hydrogen requires water and renewable electricity, and producing it should not divert these resources from other critical applications, such as the decarbonisation of the power grid or agriculture. As an example, the round-trip efficiency of the power to hydrogen to power transformation is typically around 20 to 42% (Escamilla, Sánchez and García-Rodríguez, 2022[7]).
Over the last years, the number of announced projects across the clean hydrogen value chain has increased rapidly. In 2023, projections based on projects at the feasibility stage or beyond indicated that global installed electrolyser capacity by 2030 could reach 175 GW, a 30% increase compared to the previous year’s projection. This capacity corresponds to around 15 Mt of clean hydrogen that could be produced by 2030, potentially increasing to 40 Mt if early-stage projects are also considered. However, the potential global demand for clean hydrogen by 2030 remains limited to 14 Mt, which is even below the 20 Mt target initially set by the European Union for its domestic demand only. This suggests that stimulating demand creation will be critical to help projects move forward (IEA, 2023[8]). Many private companies are aiming to further develop end-use applications, for instance the 60 renewable ammonia plants (including technology demonstration plans) announced in 2020 and 2021, and the approximately 40 Mt of DRI production capacity expected to be commissioned by 20303 which could run on renewable hydrogen (Agora Industry, Wuppertal Institute and Lund University, 2021[9]). Developing a global hydrogen market also relies on infrastructure to store and transport hydrogen and its derivatives. While there are still uncertainties on the best technological options and routes, more than 200 hydrogen infrastructure projects covering pipelines, underground storage and ports are currently under development or in operations (IEA, 2023[8]).
A cumulative investment of USD 1 trillion in production capacity and USD 1 trillion in hydrogen infrastructure and end‑use equipment is needed between now and 2030 in order to reach 40 Mt of clean hydrogen global production capacity (OECD/The World Bank, 2024[2]). A quarter to half of these investments are expected to take place in EMDEs. All sources of finance – international, national, public and private – will contribute to close the investment gap. Most of the financing is expected to come from private investors, as for clean energy investment in EMDEs more generally, for which 60% of the finance will need to come from the private sector (IEA, 2023[10]).
The range of current production costs of renewable hydrogen varies from USD 3/kg to USD 10/kg (see Figure 1.2) (OECD/The World Bank, 2024[2]; Lee and Saygin, 2023[11]). The production costs vary notably depending on the capital expenditures (CAPEX) and capacity factors of renewable power generation assets and electrolysers, as well as on the cost of capital. Despite the growing project pipelines for clean hydrogen, it remains uncertain when cost parity with blue hydrogen or unabated fossil-fuels based hydrogen will be achieved. Beyond technology costs, the competitiveness of clean hydrogen will increasingly be determined by the costs of electricity, natural gas, carbon and financing. Future renewable hydrogen production costs are also expected to vary by region, depending on local renewable electricity costs or prices, supply chain specifications (such as grid-connected or off-grid electricity and transport costs), and technological developments.
Note: In this chart, “low-carbon hydrogen” corresponds to hydrogen produced from natural gas with carbon capture and storage (CCS)
Source: (OECD/The World Bank, 2024[2])
As a consequence, a limited number of projects have already reached Final Investment Decision (FID).4 Despite the proliferation of announced projects, the development of hydrogen production is slower than the pace needed to meet net-zero targets. Currently, between 5 and 10% of all announced projects are reaching final investment decision, driven by high risks faced by investors, such as offtake risk, political and regulatory risk, infrastructure risk, technology risk, or construction and completion risk (Lee and Saygin, 2023[11]; IEA, 2023[8]). In the clean hydrogen project pipeline through 2030, only USD 29 billion of investments are at or beyond the FID stage, compared to a total investment pipeline of USD 319 billion. On average, the projects are less advanced in EMDEs than in other country groups, where a 90% share of investment is only announced at the feasibility stage (see Figure 1.3).
Note: 1) Investment numbers exclude the renewable power component. 2) EMDC: Emerging Markets and Developing Countries; FEED: Front End Engineering Design; FID+ refers to any project at or beyond the FID stage; 3) the numbers in the dark blue labels should be read as follows: 43% of all investment in EMDCs are only announced; 47% of all investment in EMDCs are at feasibility stage; etc.
Source: (OECD/The World Bank, 2024[2])
Governments, industry actors and financial institutions take action to scale the clean hydrogen market across many countries. As of May 2024, more than 50 national and regional strategies and roadmaps on hydrogen have been drafted or published (IRENA, 2024[12]; Columbia CGEP, 2024[13]). Many stakeholders are developing their activities towards hydrogen across various dimensions: research and development, definitions and certification mechanisms, project development and implementation, policy making, finance and investment, co-ordination and dissemination of projects and initiatives. A key area of interest is how financing, business models, and better cost and pricing data and models could help to create and grow hydrogen markets. This is especially significant because hydrogen is poised to become a globally traded commodity and cost-competitiveness will dictate supply dynamics. Yet, front-loaded project capital structures and country- and sector-specific risks in EMDEs hinder the mobilisation of the urgently needed private capital. Creating and growing markets require improving the enabling investment conditions and the strategic use of limited public finance combined with a suite of risk mitigation measures to leverage private capital.
In some sectors, early movers are likely to reap the benefits of risk-taking by getting higher market share or technological leadership, as the learning curve enables them to achieve quicker cost reduction and secure contracts with customers (Marvin B. Lieberman, 1988[14]). This can lead investors to accept lower returns for first projects (both financed through balance sheets and through special purpose vehicles), when projects are primarily driven by strategic interests and positioning of the companies or sponsors in a new market. However, in many innovative climate change related sectors such as clean energy, innovations and markets have been strongly driven by regulation (Cleff and Rennings, 2012[15]). This is the case when development costs are high compared to the expected market share, market uncertainty is high, and when few actors are ready to bear the risks based on market conditions, which makes the public support indispensable. Therefore, in the clean hydrogen market, in particular in EMDEs, there is an important “early mover risk”. In this regard, it is vital to support the first large-scale clean hydrogen projects in these countries.
Focus on financing and risk mitigation is especially important in EMDEs where the high cost of capital affects the competitiveness of renewable hydrogen projects. While close to 40% of clean hydrogen projects are in EMDEs globally, only six large projects above 100 MW have reached FID in these countries. Furthermore, many projects experience delays driven by financial and non-financial hurdles.
Currently, there is a growing number of international initiatives aiming to accelerate the financing of clean hydrogen projects in EMDEs. As such, enhancing co-ordination and collaboration among incumbent actors can help to better identify risks associated with clean hydrogen projects and ultimately facilitate risk and cost sharing among investors.
The report Scaling Hydrogen Financing for Development, prepared by the World Bank jointly with the OECD, the Global Infrastructure Facility (GIF) and with support from the Hydrogen Council released in February 2024, proposes an action plan to expedite the deployment of clean hydrogen in EMDEs, emphasising four key building blocks: (i) Lighthouse projects; (ii) Policies and institutional framework; (iii) International co-ordination, governance, guidelines and agreements; and (iv) Capacity-building and knowledge sharing (OECD/The World Bank, 2024[2]). Specifically on lighthouse projects, the report presents a 10-gigawatt (GW) initiative to develop lighthouse projects in EMDEs with size ranging from 100 megawatt (MW) to 1 GW, corresponding to around 1 Mt of new renewable hydrogen production capacity before 2030. This initiative could demonstrate viability for all stakeholders and pave the way to scale up clean hydrogen development by unlocking and mobilising private capital (The World Bank, 2023[16]).
This report’s primary aim is to provide a better understanding on the financial risk mitigation strategies and instruments to crowd in private capital for clean hydrogen projects in EMDEs, with a primary focus on renewable hydrogen. The report draws conclusions relevant to projects in OECD and non-OECD member countries. Additionally, the report outlines the landscape of international initiatives around clean hydrogen financing and suggests co-operative mechanisms to strengthen investment in the sector.
The report builds on the expertise developed by the OECD through its Clean Energy Finance and Investment Mobilisation (CEFIM) programme that supports selected EMDEs in the development of policies and instruments to help scale up a pipeline of bankable clean energy projects. It complements three previous publications on clean hydrogen developed under the CEFIM programme: (Cordonnier and Saygin, 2022[17]), (Lee and Saygin, 2023[11]) and (OECD/The World Bank, 2024[2]). Based on desk research, clean hydrogen stakeholder surveys and case studies, the report focuses on two main areas that can help projects to progress:
Reducing risks and mobilising private capital will be crucial for the establishment and expansion of clean hydrogen markets. Risk mitigation instruments tailored to clean hydrogen project characteristics and specific risks across their value chain have a strong potential to unlock private capital and diversify the capital pool (Chapter 2).
Embracing risk mitigation and financing of clean hydrogen requires a well-co-ordinated governance framework. Strong co-ordination and collaboration between international initiatives can notably help to improve mutual knowledge, streamline the identification of promising projects and their appraisal, and incentivise joint financing. Reaching co-ordination firstly requires creating a detailed mapping to identify the current landscape of international initiatives across the clean hydrogen value chain (Chapter 3).
References
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[2] OECD/The World Bank (2024), Scaling Hydrogen Financing for Development, OECD Publishing, Paris, https://doi.org/10.1787/0287b22e-en.
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[16] The World Bank (2023), World Bank Proposes 10 GW Clean Hydrogen Initiative to Boost Adoption of Low-Carbon Energy, https://www.worldbank.org/en/news/press-release/2023/11/17/world-bank-proposes-10-gw-clean-hydrogen-initiative-to-boost-adoption-of-low-carbon-energy.
← 1. There is no international consensus on the wording to be used to designate hydrogen based on its emissions or its production pathways. In this report, we call "clean hydrogen” (also known as low-carbon or low-emission hydrogen) hydrogen that is produced with low greenhouse gas emissions, compared to conventional pathways from coal and natural gas. Clean hydrogen can be produced from various sources, including hydrogen production from fossil fuels with carbon capture and storage (CCS) (also known as “blue hydrogen”) and from water electrolysis using renewable electricity (known as “renewable hydrogen” or “green hydrogen”). While considering all these pathways, most of the work undertaken in this monograph will mostly relate to renewable hydrogen.
← 2. Electrofuels (or e-fuels) are hydrocarbons synthesised from captured carbon dioxide together with hydrogen, such as methanol or jet fuels. They are chemically identical to their fossil counterparts and are therefore a fully inter‑changeable substitute.
← 3. Corresponding to around 2% of the global steel production.
← 4. Final Investment Decision is a crucial milestone in the development of a major project, especially in industries like energy, infrastructure, and large-scale construction. It represents the point at which a company or investor commits significant financial resources to proceed with the project's execution.