This chapter aims to better understand the potential of de-risking instruments and risk mitigation strategies to increase the leverage of public finance for clean hydrogen projects. First, an analysis of the risks faced by these projects describes what can be the role of de-risking instruments, alongside other tools such as economic and financing instruments. Then, the chapter presents a selection of 13 de-risking instruments and their relevance for large-scale clean hydrogen projects. The results from an investor survey focussing on these 13 instruments outlines how these instruments could be prioritised and packaged to build project-level risk mitigation strategy. Finally, key learnings from 15 case studies on clean hydrogen projects as well as economic, de-risking and financing instruments provide evidence on successful strategies implemented to develop and support large-scale clean hydrogen projects in emerging and developing economies.
Leveraging De‑Risking Instruments and International Co‑ordination to Catalyse Investment in Clean Hydrogen
Abstract
The desk research, investor survey and case studies presented in this chapter point to the following main findings:
Based on other comparable sectors’ experience, de-risking instruments can have a better leverage than direct financing instruments to mobilise private capital.
Because clean hydrogen projects are capital-intensive, strategic use of de-risking instruments can reduce the total project cost, therefore reducing the need for direct support from public finance to make projects economically viable. This effect is particularly important in EMDEs, which face higher risks and therefore higher cost of finance than developed economies.
Based on the investor survey, offtake guarantees, political risk and foreign investment insurance, technology guarantees, and partial credit guarantees are particularly promising for clean hydrogen projects in EMDEs.
However, these instruments should not be deployed in silos, but should be integrated within risk mitigation packages to reduce the key risks faced by hydrogen projects.
Economic, risk mitigation and financing instruments all have a role to play to mobilise investment for clean hydrogen projects.
The OECD defines economic instruments as “a means by which decisions or actions of the government affect the behaviour of producers and consumers by causing changes in the prices to be paid for these activities” (OECD, 2008[1]). These can include subsidies, taxes, charges or fiscal transfers.
De-risking (or risk mitigation) instruments are defined as “instruments that help investors reduce or manage investment and project risks, typically in exchange for a fee, and thus, improve the perceived risk-reward profile of an investment“ (WRI, 2012[2]). They include risk-transfer instruments such as insurances, extended equipment warranties, ECA coverage, credit risk guarantee, technology performance guarantees and credit-enhancement instruments such as reserve accounts.
In this report, they are distinct from financing instruments, which are limited to loan, concessional loans and blended finance approaches, equity and quasi-equity products. The use of financing instruments and the investment approach vary according to the maturity of each step of the clean hydrogen value chain (AIIB and Castalia, 2023[3]).
While all these instruments may be needed to make a clean hydrogen project bankable, the categorisation used in this report is based on the different impact they have on projects. Indeed, economic instruments are primarily developed by governments to influence the behaviour and economic decisions of investors to align them with policy objectives. De-risking instruments aim to transfer some of the risks that investors face to public actors, equipment manufacturers, or insurance companies. The providers of these instruments do not necessarily disburse any funds, as it depends whether the risks that are covered materialise. Financing instruments are provided by investors to pay for the project development, capital operational and maintenance costs.
In this report, instruments relate directly to a measurable re-allocation of financial and investment risks between stakeholders. A wider range of measures can address and seek to remove the underlying barriers that are the root causes of various risks (UNDP, 2013[4]). Several reports provide guidance or stocktake on such measures and suggest ways to create a favourable environment for clean hydrogen development. They cover, for instance, national hydrogen strategies (World Energy Council, 2021[5]) (IRENA, 2024[6]), contracting (Green Hydrogen Organisation, 2022[7]), standards and certifications (IRENA and RMI, 2023[8]), innovation (Cammeraat, Dechezleprêtre and Lalanne, 2022[9]), as well as broader policy toolkits (Hydrogen Council, 2021[10]), (UNIDO, IRENA and IDOS, 2023[11]). The case studies from clean hydrogen projects developed by the OECD between 2022 and 2024 highlight the importance of these non-financial measures, often considered as a prerequisite to developing specific de-risking instruments (see Box 2.1).
Between 2022 and 2023, the OECD developed 15 case studies of hydrogen projects (see Figure 2.1), targeting primarily large‑scale projects that had reached or were close to reaching final investment decision in emerging markets and developing economies (EMDEs). Lessons learnt from these case studies highlight a number of non-monetary measures that are vital to improve the business model for clean hydrogen. These measures highlight a broad set of enabling conditions, not limited to economic, de-risking and financing instruments. Key learnings include the following items:
Standards and certification: common methodologies and interoperability of different hydrogen standards and certification schemes is paramount, notably to facilitate international trade of clean hydrogen and its derivatives for exports-oriented projects.
Access to infrastructure: the availability of power transmission lines, inbound and outbound logistics infrastructures and deep-sea harbours, especially for exports of ammonia, steel or e-fuels, has been decisive for some projects.
Green mandates: visibility on demand creation can be provided by national and regional mandates for specific products and sectors. Thus, business models based on hydrogen derivatives as final products also benefit from green mandates. For instance, synthetic aviation fuel derived from renewable hydrogen must make up 1.2% of all aviation fuel and 42% of the hydrogen used by industry must be renewable by 2030 in the European Union.
Partnerships: a strong network of partners is needed across the value chain as it is challenging for a single actor to cover all aspects. Several project developers rely on vertically integrated partnerships, for instance between a supplier of green electricity, green hydrogen producer and the consumers/offtakers of green hydrogen. For instance, linking power purchase agreements (PPA) and hydrogen sales agreements (HSA) prices can be important to avoid a scissors effect between the project’s costs and revenues. Several project developers emphasised the role of public-private partnerships, particularly to develop hydrogen hubs and to ensure common user infrastructures. Others highlighted the role of Joint Ventures (JV) and Special Purpose Vehicles (SPV) with multiple equity partners to better share the risks of the projects.
Contractual strategy in construction phase: choosing highly experienced technologists and reputable engineering, procurement and construction (EPC) firms is essential, but so is the type of contracts, as they govern responsibilities of shareholders. Under an Engineering, Procurement and Construction Management (EPCM), the client has more control of the project, notably on change of scope, planning and associated financial decisions. In some projects, the use of an EPC wrap, where a single contractor is responsible for the entire Engineering, Procurement, and Construction, offers a solution where the EPC firms act as the single entity responsible for mitigating risk and ensuring technical and commercial viability. In this case, investors evaluate not only the EPC firm’s capability to deliver the project with the ability to select technology suppliers and contractors and manage interfaces between them, but also that is has a sufficiently strong balance sheet. For instance, Air Products is the primary EPC contractor and system integrator for the NEOM project in Saudi Arabia, and Black & Veatch are taking that role for large-scale projects with production scheduled to commence in 2025 (Merjaneh, 2022[12]).
Technical assistance: there is growing demand for technical assistance for project preparation, pilot projects, and associated financial operations in developing countries. The most commonly offered form of technical assistance to developing countries is awareness and capacity building, followed by the development of assessments and studies related to strategy and policy. At project level, funding for early analytics and diagnostics work can help prepare production cost tools, market studies, and risk assessments. Developing production cost tools, market studies and risk assessments during the development, construction and operational phases helps to give lenders an increased confidence in the project fundamentals.
Note: More information about the case studies is available in Annex C: List of OECD hydrogen case studies developed in 2022 and 2023.
In order to build a better understanding of the use of de-risking instruments for clean hydrogen projects in EMDEs, a three-step approach was followed, including:
Desk-based research to identify and pre-select a subset of risk mitigation instruments;
An investor survey to identify trends and collect insights from stakeholders active in that sector;
Case studies of large-scale hydrogen projects and of economic, de-risking and financing instruments.
The desk-based survey led to an initial screening of more than 50 de-risking instruments that could potentially be used for clean hydrogen projects. Based on the analysis of key risks for this sector, comparison with similar industries and identification of instruments that are available, 13 instruments were pre-selected. The survey, conducted with 41 representatives from industrial corporations, governments, development finance institutions, investment funds, private banks and export credit agencies, collected additional information and expert insights on these 13 instruments. The five case studies on large-scale clean hydrogen projects and 10 case studies on economic, de-risking and financing instruments (see Table 2.1) provide additional insights from actual implementation.
Note: previous OECD reports include 14 project case studies on clean hydrogen projects (Cordonnier and Saygin, 2022[13]), (Lee and Saygin, 2023[14]), and two case studies on economic, de-risking and financing instruments specific to clean hydrogen, led by H2Global and the Inter-American Development Bank (Cordonnier and Saygin, 2023[16]).
Source: Authors
Implication of risks
The risk profile of clean hydrogen remains unknown or high, given the nascent nature of the market and the limited track record of commercially and economically viable projects. EMDEs face higher actual and perceived risks than advanced economies, which contribute to increasing the weighted average cost of capital (WACC)1 of clean hydrogen projects. This in turn reduces the bankability of clean hydrogen projects and potentially hampers investment (see Figure 2.2).
Source: (Lee and Saygin, 2023[14])
Capital-intensive projects like clean hydrogen are sensitive to the cost of finance (Taghizadeh-Hesary et al., 2022[17]) (OECD/The World Bank, 2024[15]). Based on OECD case studies, the CAPEX of large-scale projects with an annual output of at least 20 kt of clean hydrogen ranges between 20-40 k USD per tonne of annual hydrogen production capacity. The breakdown of clean hydrogen projects at low-cost location shows that capital costs (including capital expenditures for electrolyser and renewable electricity generation assets) amount to 70-80% of the total levelised cost of hydrogen (LCOH).2 Therefore, a higher cost of finance has a significant impact on the LCOH. Holding all other production cost factors constant, an increase in the cost of capital from 9% to 20% can lead to a substantial increase of up to 73% in the LCOH (Lee and Saygin, 2023[14]). Indeed, the cost sensitivity of financing clean hydrogen projects can vary across countries, depending on factors such as infrastructure maturity, regulatory frameworks, political stability, and the availability of reliable EPC contractors (See Figure 2.3). However, the majority of high capital intensity projects such as renewable power generally shows significant sensitivity to the cost of capital in frontloaded structures. The IEA estimates that moving from a WACC of 5% (comparable to the WACC for utility-scale solar PV in AA to AAA credit-rating countries), to a WACC of 9% (comparable to the WACC for utility-scale solar PV in BB to BBB credit-rating countries) would see an increase of the levelised cost of electricity (LCOE)3 by 34% and 29% for utility-scale solar PV and onshore wind respectively, compared to increases of 10% for coal- and 11% for gas-fired power plants (IEA, 2021[18]).
Source: Hydrogen Council and McKinsey (2024)
The capital-intensive nature of clean hydrogen projects makes them more vulnerable to volatile investment climates. For instance, in times of high inflation, as central banks move towards tighter monetary policy, the increased cost of capital will tend to disadvantage high CAPEX projects (e.g. renewables) relative to high OPEX projects (e.g. fossil fuels), as financial costs related to repaying lenders and dividends to investors become one of the largest expenses once the project is built (Montague, Raiser and Lee, 2024[19]). This underscores the need to design and implement tailored de-risking4 mechanisms or instruments and direct public support measures to address the financing costs barrier (Steckel and Jakob, 2018[20]) (Sweerts, Longa and van der Zwaan, 2019[21]).
The capital structure, informed by the commissioning and operational risks inherent in a clean hydrogen project, is a key consideration to reduce financing costs. It usually comprises debt and equity financing and is determined primarily by debt sizing (i.e. the project finance model mechanics for determining how much debt can be raised for the project) (Firouzi and Meshkani, 2021[22]). Securing substantial debt is crucial to reducing financing costs, as the cost of debt is typically lower than the cost of equity. Debt financing typically involves funding from third parties who have priority in accessing the project's cash flow, beyond equity investors who have limited priority in project cash flow.
Most projects are structured with debt maturities that are shorter than the asset's lifespan or the concession duration. While cash flows during the tail risk aren't included in the collateral, projects with a longer tail are generally considered to have stronger credit profiles. This is because a longer tail can generate value beyond the debt amount, providing the project with greater flexibility to handle unforeseen challenges, negotiate more effectively with lenders, and secure better refinancing terms. Ultimately, this could result in higher recovery rates.
The appropriate amount of debt is limited by a project’s ability to cover its capital expenses and operational costs while generating sufficient returns to repay its equity returns, principal, and interest. For projects perceived to be risky, not only are the interest rates higher, but the debt share will be lower, requiring a higher share of costlier equity financing. This balance is crucial for maintaining the project's ability to generate sufficient and predictable cashflow to maintain business operations during market fluctuations (Penev et al., 2024[23]). Therefore, for non or limited recourse projects, the appropriate amount of debt is limited by a project’s ability to cover its capital expenses and operational costs while generating sufficient returns to repay its equity returns, principal and interest. For riskier projects, higher interest rates often result in lower debt share ratios, requiring either more expensive equity financing or additional guarantee support, such as insurance or corporate guarantees.
A thorough estimation of risks during the construction and operational phases, and their impacts on the cash generation, is required to provide lenders with confidence in the project's ability to weather potential challenges over the useful life of the project. Therefore, optimal debt sizing also hinges on suitable de-risking instruments and mitigation strategies to improve the financial viability of the project. Because clean hydrogen projects in EMDEs are considered as highly uncertain, they often require a higher level of equity than more mature technology or clean hydrogen projects in advanced economies.
Overview of key risks related to clean hydrogen production
Key risk factors contributing to high financing costs in EMDEs, in particular offtake risk, political and regulatory risk and infrastructure risk (see Figure 2.4), can lead to a cost of capital reaching up to 24% for renewable hydrogen (Lee and Saygin, 2023[14]). Most of the top risk factors identified are influenced by the market's lack of clarity on clean hydrogen demand and traded price, which affects the cash flow forecasts for projects throughout their operation cycle.
Source: (OECD/The World Bank, 2024[15])
Note: Survey conducted of around 40 investors, financiers, and developers with clean hydrogen project advisory, investment or development experience. The survey focussed on the risks faced for investments in clean hydrogen production projects, but not on investments in other parts of the value chain (electrolyser manufacturing, end-uses, etc.).
Some sub-categories of risks are usually addressed through non-monetary measures. For instance, the lack of water-related infrastructure, power transmission lines, hydrogen storage facility and transmission pipelines, or ports, require the actual physical availability of such assets. In addition, clean hydrogen projects often require collaboration among multiple stakeholders, such as developers, technology providers, investors, and governments. This partnership is essential for addressing challenges related to knowledge-sharing, building project consortiums, and making strategic investments that balance financial and development risks (Hasankhani et al., 2024[24]). Permitting and licensing are usually mitigated by streamlining the permitting process, clarifying institutional responsibilities, reducing the number of process steps, and providing capacity building to programme administrators (Waissbein et al., 2013[25]). In addition, government support such as discount on the land concession fees, tax incentives, exemption of levies until production and offtake ramp-up, could also strengthen the project’s viability. On the other hand, financial derisking instruments such as insurance or guarantees, can address other sub-categories of risks throughout a project lifecycle, reduce the overall cost of capital and make the project bankable. These sub-categories of risks are primarily macroeconomic risks; political risks; offtake risks; design, construction, and completion risks; and technology, operational and maintenance risks.
The macroeconomic risks affecting the cost of financing include currency depreciation, high inflation, and interest rate spikes. Clean hydrogen projects are especially exposed to currency depreciation risks if their revenues are denominated in local currency and all or part of their debt is denominated in a foreign currency, usually dollars or euros. For example, the electrolysers that will be used in the first clean hydrogen projects will be imported from high-income countries, mostly from Europe, the UN and East Asia, with repayments to technology providers in foreign hard currencies. These initial projects will thus be exposed to currency risk if the revenues are in local currency. Macroeconomic factors impact the cost of debt financing in a country. As the cost of debt generally reflects the country borrowing rates and additional project risk, the latter being driven by technology maturity, clean hydrogen projects in EMDEs are prone to face high borrowing rates.
Political risks are changes in the legal and political order that may jeopardise the financial viability of clean hydrogen projects. They include modification of laws or regulations, expropriation, limitations in currency convertibility and transferability, and breach of contract, as well as war and civil unrest. Unscheduled changes in the legal framework may affect the financial viability of projects. This is particularly relevant in the nascent clean hydrogen sector, which depends on explicit regulatory supports such as tax incentives, public procurement or subsidies and premium prices, that directly influence the project costs and revenues.
Unscheduled changes in the legal and regulatory framework can significantly impact the financial viability of projects. This risk is especially pertinent in the emerging clean hydrogen sector, where projects rely heavily on regulatory support mechanisms like tax incentives, public procurement, subsidies, and premium pricing to influence costs and revenues. As the market evolves, governments may need to update regulations, a process investors are prepared to navigate, provided that changes are transparent, well‑co‑ordinated with industry stakeholders, and not applied retroactively.
Political turbulence can cause assets to decline severely in value or to be destroyed, confiscated or partially stranded. Therefore, businesses can be reluctant to operate in developing countries with above‑average levels of political instability that threaten their assets and their ability to operate smoothly. Large-scale clean hydrogen projects are especially prone to this type of risks, because of the capital intensity and the life span of these projects.
Offtake risks reflect the high uncertainty on price and volume, notably related to the growth of the clean hydrogen market in coming years. The lack of a merchant market for hydrogen makes that reliable price information is scarce and markets are fragmented. Certain derivatives such as ammonia are already mature markets where price information is readily available, although there usually is no specific index for renewable or clean derivatives to distinguish them from fossil-based ones. Moreover, only few potential offtakers are willing to sign long-term contracts that specify the volume and price of the hydrogen over at least 7-10 years5, which is often necessary to overcome the offtake risk in this nascent market. This notably stems from the first-mover risk, as clean hydrogen prices are expected to fall rapidly in the coming years, benefitting from a steep learning curve. Even in the case of an offtake contract, lenders require a careful assessment of the balance sheet of the offtaker to verify its creditworthiness.
Design, construction and completion risks can hamper the development of clean hydrogen projects, that bring together multiple stakeholders along an intricate supply chain. Construction and completion risks refer to the possibility of a project not achieving completion within the expected budget and by the expected date.
These risks can result in cost overruns and delays. An accurate estimation of the costs of construction works and equipment6 to produce clean hydrogen at an early stage of the project is challenging, because of: (i) the limited experience of stakeholders, such as Engineering, Procurement, and Construction (EPC) firms, in large-scale clean hydrogen projects, combined with the lack of established project track records; (ii) consequently, EPC contractors are reluctant to provide comprehensive construction guarantees for these projects, leading to higher costs; (iii) suppliers of critical equipment, like electrolysers, have yet to deliver the required quantities, resulting in underdeveloped supply contract terms, warranties, and guarantees due to the absence of precedent; (iv) the complexity of project design and scope, notably about the renewable power required to operate the electrolysers and the balance of plant or ancillary infrastructure (KPMG, 2022[26]). Furthermore, the lack of infrastructure near the large-scale clean hydrogen project construction site can be challenging. The risk is particularly high in EMDEs, where ports, railways or roads are often not suited to transport heavy equipment, and where the timeline to develop the water and power infrastructure necessary to operate the plant can delay the entire project.
High technology, operational and maintenance risks are inherent to nascent sectors such as clean hydrogen, due to a lack of knowledge about the design and technology specifications, for instance for electrolysers. The growth of typical project size for clean hydrogen has been much faster than for batteries, wind or solar. Technical performance risk may become more important if technology or first-of-a-kind projects fail.
In particular, the lack of track record for large-scale projects of at least 100-MW raises questions about the technology performance, durability, and lifetime. This can cause delay in start-ups or business interruptions. On the operational side, partial load has proven to be a challenge for some electrolyser types. The often-harsh EMDE climate conditions can exceed those applied for standards and certification, another source of technology risk. Electrolyser manufacturers face risk of product liability claims if malfunction, defects or improper installation result in injuries (Swiss Re Institute, 2022[27]). Moreover, the electrolyser degradation, maintenance needs and downtime from equipment failure can lower their capacity factor and trigger a loss of revenue.
Environmental and social performance standards are crucial to project viability and operation. For example, clean hydrogen storage and transport involve high-pressure containers and pipelines, which could pose risks to nearby communities in case of leaks or explosions. Failing to assess these risks during the project appraisal phase can lead to significant issues later. The limited number and geographical concentration of suppliers, supply chain vulnerability, as well as the rapid evolution of technology, may also limit the availability and lead time to deliver electrolysers or spare parts. Finally, industrial plants are typically operated continuously and require operating and maintaining the equipment safely. The availability of a skilled workforce can be another limitation for clean hydrogen projects in EMDEs.
The risk of obsolescence also accounts as a technology risk. For instance, hydrogen as long duration energy storage competes with a multitude of other technologies. In such nascent markets and applications, governments’ approach may be to let the private sector weed out the least efficient technologies.
Investing in nascent technologies and markets such as clean hydrogen implies high risks. Therefore, it is likely that the performance of an investment will be different from expected. Because of this high uncertainty, investors typically demand what is known as a risk premium, which reflects and accounts for risk involved in an investment (Choi, Zhou and Lacton, 2022[28]). This risk premium directly affects the cost of capital. In other words, for a clean hydrogen project, lenders will charge higher interest rates, and equity investors will expect higher returns, compared to an investment in a more mature technology or market.
After having analysed the trends of the clean hydrogen markets and the key risks faced by project developers and investors, and before deep diving into the specificities of risk mitigation instruments, it is important to understand (i) how clean hydrogen projects are structured based on their business models and risk allocation, and (ii) who are the key actors that could provide or develop risk mitigation instruments.
Business models and risk allocation for clean hydrogen projects
The cash flow of clean hydrogen (and derivatives) projects remains likely to be difficult to predict. For instance, projects that are not vertically integrated with renewable electricity generation assets could be exposed to volatile power markets (Craen, 2023[29]). On the other side of the value chain, projects integrated with end-use application may secure the hydrogen offtake but would be exposed to price fluctuation of the markets of oil-derived products from refineries, fertilisers or steel. This can put project developers at risk, especially if most of their competitors do not use clean hydrogen, as the market price may then be decorrelated from the clean hydrogen project’s cost structure. Thus, lenders and investors could impose stricter financial terms to increase chances to achieve their expected return on investment. Blended and climate finance options, with objective key performance criteria set upfront to be met in future or at specific milestones can be incorporated to align incentives which seek to reduce the total cost of financing relative to the technology used and fuel feedstock for hydrogen over the medium to long term.
Several business models have emerged for clean hydrogen, with various project designs and scopes. Because project developers have different financing capabilities and risk appetite, and end-use markets have different dynamics, the project structure needs to be tailored according to several archetypes. This could be a challenge, especially for clean hydrogen projects that involve large-scale, non-recourse or limited recourse structures with multiple stakeholders. Table 2.2 presents four key examples of business models, building on a large number of case studies that provide in-depth information on individual projects: decarbonising existing processes (Model 1); exports (Model 2); utilities going downstream (Model 3); and hydrogen hubs (Model 4) (Cordonnier and Saygin, 2022[13]), (Lee and Saygin, 2023[14]), (OECD/The World Bank, 2024[15]). While these models do not provide a comprehensive overview, they serve to highlight how emerging clean hydrogen projects aim to address sector-specific challenges and provide a sound basis to understand how economic instruments, policy clarity, and risk mitigation strategies can enhance a project’s bankability.
A well-designed project can mitigate specific risks and unlock economic opportunities. For instance, as shown in Table 2.2:
Model 1: Decarbonising existing processes can create a large amount of hydrogen demand and supply with relatively small investments, notably by using existing assets and facilities. It may also limit the risk of stranded assets for companies operating fossil fuel-based plants7.
Model 2: Exports can mitigate at least partly the country risk, and benefit from contracts with creditworthy offtakers.
Model 3: Utilities going downstream enables power producers and original equipment manufacturers (OEMs) to secure an outlet for large-scale renewable electricity generation or for massive volumes of equipment, while diversifying their exposures.
Model 4: Hydrogen hubs is an option to reduce the exposition of single companies to infrastructure risk, and diversify the end-use for hydrogen production, thereby mitigating the uncertainties of clean hydrogen market uptake in specific markets.
Note: 1) OEM: Original Equipment Manufacturer; 2) Under Model 1, the reduction of the lifecycle emission reduction can vary greatly in the examples provided; many projects related to clean hydrogen use in fossil-fuel based industrial process only lead to partial emissions reduction. 3) the examples are not comprehensive.
Source: Authors, based on (OECD/The World Bank, 2024[15]), complemented by (UNIDO, 2023[30])
In the absence of a risk management package designed to stabilise the project’s cash flow, clean hydrogen projects may struggle to reach final investment decision. Diversifying the risk allocation or utilising risk mitigation solutions to those best able to manage them, whether it be sponsors, insurers, financiers, or governments, is vital to stimulate investment in clean hydrogen. Yet, even when the general risk allocation is adequate and the macroeconomic environment is favourable, a project may still not be financially viable, particularly if the sector or the technology is nascent. There are two main cases for this: first, when a project is unable to generate sufficient revenues to recoup its costs and requires subsidies even without risk or uncertainty; second, when despite an optimal risk allocation, the expected revenues of the project still do not offset the expected risks. Therefore, even when risk mitigation instruments and strategies are being deployed, investment decisions remain fundamentally guided by the market dynamics.
The sector's maturity should also be taken into account when allocating risks. In many mature capital-intensive projects, such as infrastructure or renewables, the private sector bears these risks. However, for clean hydrogen projects, where market transactions are not yet well-established, significant risks typically borne by the private sector should be shared by the public sector (government or DFIs/MDBs) by either co-financing the project or offering financial risk mitigation instruments, notably through Public-Private Partnerships (PPP) (see Box 2.2).
Public-private partnerships (PPPs) combine the deployment of private sector capital and, sometimes, public sector capital to improve public services or the management of public sector assets. By focusing on public service outputs, they offer a more sophisticated and cost-effective approach to the management of risk by the public sector than is generally achieved by traditional input-based public sector procurement (Gerrard, 2021[31]).
Notes: 1) The summary matrix identifies a typical risk allocation. However, there are often exceptions or deviations from this typical risk allocation at individual projects level. 2) For water desalination plant, the matrix describes the common risk allocation for a build, own, finance, operate, maintenance and transfer (at the end of the PPP contract) to a contracting authority of a new water desalination project where the potable water is sold to a state-owned single buyer.
Source: Authors adopted from (Global Infrastructure Hub, 2020[32])
In the context of clean hydrogen projects, identifying the right de-risking instruments and determining who is well positioned to bear the associated risks is more complicated. Indeed, the clean hydrogen value chain covers water desalination plants, renewable power generation assets, equipment for the electrolysis, infrastructure to store and transport hydrogen to the end-users, and industrial plants which consume hydrogen. Investment is not limited to greenfield assets, but can also include brownfield ones, such as the retrofit of a natural gas pipeline for hydrogen transportation. While hydrogen project developers are mostly private actors, public actors are often involved in projects as minority shareholders and/or through PPP in part of the value chain, such as infrastructure. In order to de-risk early-stage projects, governments can assume a larger share of upfront development risks by taking a more proactive approach. In a traditional PPP scheme, the public sector typically assumes the offtake risk, while the private sector handles development and operational risks. However, given that hydrogen offtake depends on market conditions, it is necessary to reassess and potentially realign the risk allocation between the public and private sectors.
The complex value chain of clean hydrogen creates a multiplicity of approaches, with a varying level of risks transferred to private actors. As an example: in management and lease contracts in which a private company assumes the management of a public asset for a fixed period but the public authority retains the ownership and investment decisions, limited risks are transferred to the private partner; but when a private company or a public-private joint venture builds and operates a new facility for a period specified in the PPP (long-term) contract, the private partner bears most of the financial and operational risks. In the context of public investment or PPP, an effective risk allocation is essential for delivering great Value for Money (VfM)8 (Hovy, 2015[33]).
Role of international finance institution, Export Credit Agencies and private actors in providing risk mitigation instruments
In a mapping exercise to better understand the landscape of guarantees for EMDEs, the Climate Policy Initiative identifies four main types of providers: Multilateral Development Banks (MDBs), Development Finance Institutions (DFIs), Export Credit Agencies (ECAs) and Specialised Institutions. The latter are “entities that operate similarly to private sector organizations but are funded by governments and development institutions, generally focusing on guaranteeing specific types of risks in specific situations” (Climate Policy Initiative, 2024[34]).
Existing guarantee facilities with a mandate for climate investments in EMDEs can be scaled with additional capital. Examples include MIGA, GuarantCo, The Currency Exchange Fund (TCX) and the Green Guarantee Company (Systemiq, 2023[35]). In July 2024, the World Bank Group announced pivoting from primarily being a lending institution to also being a mobilising one. The guarantee platform, housed at the MIGA, will be a one-stop shop for all the institution’s guarantee business. The platform has three product families: credit guarantees (for loans to the public or private sector); political risk insurance (for private sector projects or public-private partnerships); and trade finance guarantees for public sector risk (Bjerde et al., 2024[36]).
ECAs can be government institutions or private companies that operate on behalf of governments. Such support can take the form either of “official financing support”, such as direct credits to foreign buyers, refinancing or interest-rate support, or of “pure cover support”, such as export credits insurance or guarantee to cover credits provided by private financial institutions. In 2023, participants to the Arrangement on Officially Supported Export Credits have agreed to allow more generous and flexible financing terms and conditions for a wide range of climate-friendly projects, including clean hydrogen and ammonia. This includes for instance adjusting the minimum premium rates for credit risk for longer repayment terms and obligors with a higher credit risk rating. For Stegra (previously H2 Green Steel) project in Sweden, Riksgälden (Swedish National Debt Office) provided a green credit guarantee and Euler Hermes an export credit cover for EUR 1.2 bn each. Furthermore, ECAs’ tied and untied loans provide competitive interest rates and increase lender confidence in the project. This “anchoring” effect is deemed critical in large-scale projects.
Private investors shall also make use of comprehensive insurance products and guarantees and take some commercial risks on years not covered by government backing to strengthen the de-risking strategy by providing stable cash flows for clean hydrogen projects. New technologies and industrial processes carry risks and uncertainties that can inhibit the affordability of insurance. Thus, businesses need to work with insurers from the earliest stages of development to ensure a match between the available insurance and the risk profile of new initiatives (Howden and BCG, 2024[37]). (Re)insurers can play a key role in the development of the hydrogen economy by providing risk management knowledge and risk transfer options at select points of the value chain. In the short-term, these actors are likely to cover risks that can be mitigated through existing instruments in the construction and supply side, replicating what already exists in other sectors. This includes physical loss during construction, delay in start-up, or operational damages and natural peril causing business interruption risks (Swiss Re Institute, 2022[27]).
The potential of risk mitigation instruments for clean hydrogen remains uncertain
Risk mitigation instruments are currently seldom deployed to support clean hydrogen projects in EMDEs, compared to direct financing and economic instruments such as grants, viability gap funding or tax incentives. Yet, as guarantee instruments and insurance products typically do not require any immediate outlay of capital, and subsequently only in a proportion of cases for the same amount of funding, a larger number of projects can be supported than through other instruments (International Development Finance Club, 2019[38]). The analysis of MDB climate finance mobilisation ratios shows that guarantees show the highest mobilisation ratios, on average mobilising USD 1.5 of private capital for every dollar of MDB capital and outperforming the average mobilisation ratio of loans and equities by six times. However, guarantees represent just 4% of total commitments in the analysed data (Systemiq, 2023[35]). A recent OECD evaluation found that guarantees leveraged 26% of all mobilised private finance between 2018-2020 and were among the preferred risk mitigation tools of private investors (OECD, 2022[39]).
The effectiveness and efficiency of de-risking instruments to mitigate specific risks related to clean hydrogen are yet to be demonstrated. Designing tailored de-risking instruments to address priority risks based on the market context and understanding their leverage can help to increase the cumulated capacity of low-carbon projects deployed for a given amount of public finance spend. Therefore, these instruments (i.e. H2Global to address offtake risk) could accelerate decision-making of investors and help crowd-in more private finance.
This can be instrumental to meet the Breakthrough Agenda’s priority action to “co-ordinate and facilitate access to increased finance and support mechanisms that address obstacles to investment, with the goal of mobilising private investment at scale in emerging and developing economies”. Furthermore, a strategic use of tailored risk mitigation instruments can stimulate investment and reduce the cost of capital, thereby reducing the total amount needed to deploy and deliver the 10 GW initiative of the World Bank.
The 10 GW Lighthouse Initiative seeks to accelerate the deployment of renewable hydrogen in EMDEs by ensuring that a project pipeline representing 10 GW of hydrogen electrolysis capacity reaches final investment decision (FID) by 2030. This goal will be achieved through co-ordinated efforts by multilateral development banks (MDBs) and development finance institutions (DFIs). As of September 2024, ten financing institutions and government entities from Europe, Asia and Latin America have expressed their interest to join this effort.
The 10 GW Lighthouse Initiative will facilitate a joint discussion among relevant actors on how to close the existing financing gap and ensure that limited amounts of concessional and development financing are used to achieve their maximum effect, notably for projects that are moving from early stages of development to FID. Therefore, this activity will facilitate the dialogue between MDBs, DFIs, commercial financial institutions, governments and project developers.
A global project pipeline is currently being mapped to identify projects between 100 MW to 1 GW of electrolysis capacity in EMDCs that can reach FID in the coming years. This activity also encompasses identifying key project barriers and risks hindering the development of clean hydrogen projects. Next step will consist of supporting selected projects on the development of a through package of enabling measures and financing solutions, as well as de-risking mechanisms granted by MDBs and DFIs.
The 10 GW Lighthouse Initiative will document project characteristics and development process to allow future replication and identification of best practices. This activity will also include awareness and outreach actions to disseminate lessons learned.
Source: Authors
Selection of relevant risk mitigation instruments
Since clean hydrogen projects are not yet deployed at scale, it is challenging to observe frequently utilised de-risking financial instruments and assess their effectiveness. Furthermore, current clean hydrogen projects cannot progress without substantial economic instruments and policy measures from the public sector. As argued in (Lee and Saygin, 2023[14]), (OECD/The World Bank, 2024[15]), (Craen, 2023[29]) and Fitch, clean hydrogen asset profile present similarities both with energy projects (specifically offshore wind, but to some extent to thermal power plants) and/or LNG projects. Therefore, a comparative analysis of their characteristics can provide valuable insights for clean hydrogen (see Table 2.4).
Clean hydrogen is similar to LNG and offshore wind projects in terms of large project size, long-term capital intensity and technologically complex project structure. Both offshore wind and clean hydrogen projects are in the early stages of development and involve long lead times and complex project structures. This results in high perceived risks during the design, construction, and completion phase. Ownership of offshore wind projects, similar to large-scale clean hydrogen projects, is often concentrated among energy companies (including from oil and gas sector) or large-scale industrial companies (Đukan et al., 2023[40]).
While it is possible to draw analogies between sectors, the asset risk profiles are not fully equivalent:
The project design for clean hydrogen can be more complex than in these other industries, as it depends on the project's archetype and structure. For example, a co-located module, where renewable electricity is generated and used at the same location as the hydrogen end-users, presents different risks compared to a distantly located module, where renewable electricity is generated in one location, transmitted to power an electrolyser for hydrogen production, and then transported to end-users (OECD, 2024[41]). On the contrary, even though offshore wind farms and LNG plants are complex projects, the projects’ design is quite standard in each of these sectors.
The LNG industry has built a significant transaction track record over the last decades, while the clean hydrogen sector is still nascent. Moreover, cost transparency and competitiveness of clean hydrogen remains challenging, and a clean hydrogen trade market has yet to emerge, whereas the LNG market is valued around USD 100 billion, and it can be traded on multiple natural gas markets worldwide.
Offshore wind and clean hydrogen projects are both exposed to significant financial risks related to intermittency of production and market price fluctuation (merchant risk). For offshore wind, this is driven by the often highly volatile power markets and curtailment risk, and for clean hydrogen, by the uncertainty and lack of transparency of clean hydrogen price. However, offshore wind projects face a lower demand risk, especially when they are connected to power grids, as their marginal cost of production is limited and some jurisdictions prioritise the offtake of variable renewable electricity over (fossil fuel-based) dispatchable power sources.
A standalone clean hydrogen project using proven technology could have in principle a similar profile to that of thermal power assets, in particular in terms of technical risk, or in terms of supply risk for natural gas-based power plants. However, health and safety risk for new hydrogen production facilities can be perceived as much higher, notably because of the flammability range, invisibility and explosive characteristics of hydrogen. This would result in overall higher operation risk.
Source: Authors, based on (Craen, 2023[29]), (Fitch, 2023[42]), (Natixis, 2021[43]), MIT Energy Initiative
Note: In this table, supply risk refers to potential challenges or uncertainties that may disrupt the availability of essential resources, materials, or components necessary for the project's operations. For example, in LNG projects, supply risks may involve issues such as natural gas availability, disruptions in transportation and shipping, or infrastructure challenges, including problems with liquefaction plants, pipelines, and storage facilities. In renewable energy projects, supply risks might include delays or shortages of key components like solar panels and wind turbines, as well as variability in natural resource availability.
Literature and data on de-risking instruments that have been deployed in renewables, LNG, as well as in green infrastructure projects provide information on the effectiveness of these instruments to enhance the bankability or financial performance of projects. When available, the following criteria were considered to pre-select the most promising de-risking instruments: (i) overall amount of private investment mobilised, and leverage ratio of public finance used; (ii) proven track record of implementation (where data on single instruments was preferred, as it gives a better understanding of their replicability potential, compared to complex packaged risks which may be specific to a given project structure); (iii) proven impact on financing costs if project-level information is available (e.g. in a very few cases, the improvement of the debt-service coverage ratio (DSCR) and its positive on debt sizing has been considered).
Most instruments have a direct cost and a transaction cost when they are applied. These costs must be compared with the potential benefits in order to assess their usefulness in a specific case. The desktop research provided insights on typical assumptions to evaluate the efficiency of de-risking instruments for clean energy projects (see Table 2.5). However, as information about cost and benefits is often case specific and even proprietary, it is difficult to conclude whether the values and assumptions from the literature actually apply to clean hydrogen projects in EMDEs.
Note: 1) the cost efficiency of de-risking measure is defined as the difference in the project’s net present value (NPV) after implementing the instrument over the cost of the instrument. An efficiency below 1 means that the cost of the instrument is higher than the NPV gains. 2) due to the lack of data on clean hydrogen projects, the values only reflect examples of assumptions for clean energy projects; they would vary depending on the instrument provider and specific projects’ conditions, and probably be higher for clean hydrogen, which is less commercially mature than other clean energy technologies. 3) the list is not exhaustive; for instance, in addition to Debt Service Reserve Account, lenders may require a letter of credit to cover short-term payment obligations.
Source: Authors with inputs from (Deloitte, 2024[44]; Munich RE, 2024[45]; Waissbein et al., 2013[25])
Finally, the instruments have also been selected based on their a priori suitability to address the main risks faced by clean hydrogen projects (see Figure 2.4). While doing so, the final selection also aims to cover the project lifecycle, including both pre-FID and post-FID salient risks, and present instruments relevant across the clean hydrogen value chain. The final selection of instruments covered in the investor survey is provided in Table 2.6.
Source: Authors
Description of selected risk mitigation instruments for clean hydrogen investor survey
Interest rate swaps
Interest rate swaps are forward contracts in which one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps can exchange fixed or floating rate payments to reduce or increase exposure to fluctuations in interest rates.
Large-scale clean hydrogen projects are likely to be financed through project finance structure, securing a loan amounting to at least 60% of the total project cost (Lopez Rocha, Gielen and Govindarajalu, 2024[46]). Long-term loans in project finance, which depends on the project’s success to be repaid, are particularly vulnerable to interest rate fluctuations that may be triggered by inflation and economic cycles. An interest rate swap can provide greater cash-flow predictability and protection from rising rates (Frost Brown Todd, 2023[47]).
For instance, for a clean hydrogen project contracting a EUR 600 million loan structured with a fixed margin plus a floating interest rate linked to the 6 months EURIBOR, a rise in EURIBOR from 2% to 5% could increase annual interest payment from EUR 12 million to EUR 30 million. This would increase the cost of the loan and may put the project in financial distress. However, if the project had contracted an interest rate swap agreement to fix the interest rate at 3%, the annual interest payment would remain stable at EUR 18 million, which would facilitate budget management and increase project’s viability.
Foreign currency guarantee
A Foreign Currency Guarantee is designed to protect borrowers from the exchange rate fluctuations, by allowing an obligor to repay funds in the same currency as its revenue stream, or at a pre-determined rate regardless of prevailing market exchange rates over the agreement period (EXIM, 2024[48]) (WRI, 2012[2]).
Clean hydrogen projects in EMDEs can create revenue streams in local currency or in hard currency, depending on the market(s) they are targeting. The expenses in local currency typically include the repayment of the loans contracted to purchase locally manufactured assets, as well as construction costs, and most operational costs. The expenses in hard currency would in principle mainly include the repayment of the loans contracted to cover capital expenditures for imported goods, which can represent the lion’s share of the project costs, especially in countries that have a limited industrial base. Therefore, there could be a discrepancy between the share of revenues and expenses in local and hard currency.
For instance, a clean hydrogen project selling 50% of its production to export markets but having 70% of its expenses corresponding to the repayment of a loan in hard currency, a devaluation of the local currency may hinder the loan repayment. While in advanced economies, currency hedging can be done on the financial markets, currency hedges have significant tenor limitations in most EMDEs. Therefore, a foreign currency guarantee could be needed to mitigate the exposure to exchange rate volatility.
Political risk investment insurance and foreign investment insurance
Political Risk Insurance (PRI) protects against borrower failure to repay in case non-commercial risks materialise, such as expropriation, political violence, currency inconvertibility and transfer restrictions, and breach of contract (MIGA, 2011[49]). If such an event occurs and repayments are disrupted, political risk insurance/ guarantees pay out all or a portion of the losses that arise due to the event (WRI, 2012[2]).
In addition to providing compensatory value in the event of claims, PRI can help investors access finance. Investors in EMDEs are often required to get this insurance in order to obtain financing from banks. For lenders, PRI can provide regulatory relief from country risk-provisioning requirements. It can also be used to protect equity investors for termination events that the sovereign may need to compensate for. PRI can be provided by Export Credit Agencies (ECAs), Multilateral Development Banks (sometime through specific branches or agencies), private insurance companies and re-insurers (MIGA, 2011[49]).
Given the large potential of clean hydrogen production in EMDEs, notably in countries suffering from political instability, PRI could be a pre-requisite to help these projects reach Final Investment Decision (FID). Even when it is not necessary, PRI can help project access to better financing conditions. PRI has already been deployed in relatively similar areas as clean hydrogen project, notably for project finance and foreign direct investment, particularly in the oil and gas, mining, and infrastructure sectors (Marsh, 2024[50]).
Given both the large upfront CAPEX and extended tenors of these projects, engaging either a regional or global MDB financing brings a distinct halo effect on the project financing. This may also help alleviate long-term geopolitical stability risk concerns.
Partial credit guarantee
A partial credit guarantee (PCG) is a credit enhancement mechanism for debt instruments such as bonds and loans. It is a promise from the guarantee provider to pay the principal and/or interest up to a pre-determined amount. The guarantee amount is usually expressed as a percentage of principal. Its main objective is to improve the credit profile of borrowers, by decreasing perceived and actual risks of investment losses and that way increases the confidence among investors. Thus, it helps borrowers to diversify their sources of funding, extend maturities, and obtain financing in their currency of choice, hard or local (IFC, 2023[51]). Given the long lifetime of clean hydrogen assets, extending financing tenors using a PCG can be a critical benefit in this sector.
PCG is a well-established mechanism, with over 2 000 such schemes implemented in nearly 100 countries. These schemes typically target specific sectors, regions, or categories of firms or individuals that are considered underserved by the private financial sector (Green, 2003[52]). For instance, according to Marsh & McLennan Companies’ Asia Pacific Risk Center database of 10 years of projects in Asia, an estimated 55 to 65 percent of infrastructure projects are not bankable without government or MDB guarantees, because lenders would not be willing to finance the project on a non- or limited-recourse basis (Lu, Chao and Sheppard, 2019[53]).
(Carbon) Contracts for Difference
A Contract-for-Difference (CfD) is a mechanism to incentivise investment in low-carbon technologies by providing stability and predictability to future revenue streams over a long period.9 It is based on a difference between the market price10 and an agreed “strike price”. The strike price is typically fixed but can also be indexed. CfDs have been widely used in electricity markets, usually based on transparent and liquid indices. However, this approach cannot be directly replicated for clean hydrogen, where no clear price index nor liquid market exist. To address this, an arbitrary reference price can be set, or the natural gas or electricity market prices can be used as a reference. In addition, the market design of hydrogen needs to be strengthened, notably to ensure that there will be sufficient offtake for the clean hydrogen production that benefits from the CfD. More generally for decarbonisation projects, Carbon Contracts for Difference (CCfDs) are being considered, that would use a carbon price level as a reference for emissions reductions below a benchmark baseline (Richstein et al., 2021[54]).
CfDs are usually symmetrical. If the “strike price” is higher than a market price, the CfD provider must pay the clean hydrogen producer difference between the “strike price” and the market price. If the market price is higher than the agreed “strike price”, the clean energy provider must pay back the CfD provider the difference between the market price and the “strike price” (IEA, 2019[55]) (Florence School of Regulation, 2023[56]). As such, while it aims to de-risk revenue streams, CfD inherently have a subsidy nature.
CfDs have been proven effective in providing price support for emerging technologies and encouraging desired behaviours by offering stability and predictability of future revenue streams (Ason and Poz, 2024[57]). However, CfDs can come with a high cost for public finance and bias market signal. Thus, the CfD design can be adapted or the scheme can be removed to transfer the risk to the project developers when a technology or industry has become mature enough (Energy Systems Catapult, 2022[58]), (Bouacida, 2023[59]). Currently CfD or similar to CfD models are considered in different jurisdictions including Canada, Germany, Japan, Korea, South Africa (BMWK, 2024[60]; Government of Canada, 2023[61]; S&P Global, 2023[62]; South African Government, 2023[63]).
Offtake guarantee
An offtake agreement is a contract between a buyer and a seller outlining the conditions under which a buyer will purchase a specified quantity of a commodity at a predetermined price. An offtake agreement guarantee is a financial security, such as a letter of credit which is issued by a third party to ensure that obligations under the agreement will be fulfilled, even in case of unforeseen circumstances.
Financial institutions require reliable revenue streams as part of their bankability assessment for a project. Given the low maturity of the clean hydrogen market, long-term (more than 7 to 10 years) hydrogen offtake agreements11 with creditworthy offtakers, possibly at a fix price, remain the main measure to address the fundamental offtake issue. Including a take-or-pay (or take-and-pay) clause in the agreement further reduces the uncertainty on demand. The role of offtake guarantees, which can be provided by guarantee facilities such as MIGA, is mainly to increase the credibility or backstop these sovereign/SOE agreements. For instance, in clean hydrogen projects involving non-investment grade offtakers, an offtake guarantee can enhance the project’s credit profile and improve its bankability assessment. This may be relevant in developing countries which do not have an investment grade rating (for example, where a state-owned utility or company intends to enter into a hydrogen offtake agreement with a producer) (Green Hydrogen Organisation, 2024[64]).
Credit default swaps
Credit Default Swaps (CDS) designed to insure counterparties against the default of a corporate or sovereign debt issuer (Henricot and Piquard, 2022[65]). In a credit default swap contract, the buyer makes a periodic payment similar to the payments on an insurance policy. In exchange, the seller agrees to pay the security's value and interest payments if a default of bankruptcy of the asset owner occurs. The legal terms of credit default swap agreements are highly standardised and have been so for a long time. It has played an important role in the development and increasing liquidity of the CDS market (Bomfim, 2022[66]). While credit default swaps are written on both sovereign and non-sovereign entities, more than 85% of contracts reference non-sovereign entities (Bank for International Settlements, 2024[67]).
For clean hydrogen projects, CDS can be particularly useful in addressing counterparty risk. A CDS allows sponsors, developers, or financiers to transfer the risk of default by a counterparty (e.g., an offtaker) to the CDS seller. Lenders and investors might be more willing to finance the project if they know that default risk is mitigated through a CDS, which could also contribute to securing better financing terms. Additionally, by providing security against default, the project's forecasted cash flow can be stabilised, thereby reducing the overall risk profile of the project. However, given the highly unique nature of clean hydrogen projects and early-stage risk, it may be difficult to obtain a suitable CDS proxy.
Loan loss reserve
Loan loss reserve (LLR) funds are a type of credit enhancement used to improve the credit risk profile of a lender or its investors to obtain better terms of debt repayment. It provides partial risk coverage to lenders, meaning that the reserve will cover a pre-specified amount of loan losses (US DOE, n.d.[68]).
This allows the financial institution to modify its underwriting criteria and accept more risk than it would otherwise. LLR may result in lengthened loan periods, i.e., the timeframe of the loan might be extended from 3 years to 7 or 10 years. The lower risk associated with the LLR coverage may also result in reduced interest rates (US DOE, n.d.[68]). Therefore, LLR can be an effective instrument in the nascent clean hydrogen industry that faces higher risks and uncertainty than other sectors.
A reserve account can notably mitigate O&M risks, as it can temporarily be a source of liquidity to cover downtime, underperformance, or maintenance and repairs in case of technology disruptions. The project operator can borrow from these accounts, and once operations return to normal, the amount that has been borrowed needs to be repaid. In the case of Chile, part of the World Bank loan is used for two such accounts (one for debt service, one for liquidity) that can be used in case of operational problem with electrolysers (see Box 2.4). This tool can even be more effective if it funds are pooled to cover different projects, as it could bundle the effect of occasional recourse of individual projects to the reserve accounts.
Chile is creating a liquidity reserve account (LRA) to cover unexpected short-term technical underperformance in a green hydrogen generation plant. This risk-mitigation instrument is intended to reduce the cost of performance guarantees and strengthen confidence among manufacturing and EPC firms, financiers, and lenders in the performance of the green hydrogen subproject.
Given the short track record of green hydrogen technology, the LRA would be available for the initial five years of a green hydrogen subproject. It would be established based on a percentage (of up to 25 percent of a green hydrogen subproject’s revenue). The account would provide additional liquidity and facilitate the subproject’s continued operation. The LRA could be triggered solely when subprojects face non-structural technical challenges (especially early on) that could arise because of the early development stage of the green hydrogen industry. Triggers could include the following (among others):
temporary deviations of operational Key Performance Indicators (KPIs) related to the production, compression, or storage of hydrogen (an operational KPI matrix will be submitted with the subproject application)
complications arising from the unavailability of component replacements
excessive costs for repair and replacements as a result of component failure or unexpected performance degradation (beyond the scope of the performance-based maintenance contracting).
Source: World Bank
Syndication of loans
The concept of syndicated financing is closely linked to operations/transactions involving large amounts of capital, such as the acquisition of a company, the opening of a new business unit, the refinancing of a large volume of bilateral debt, relevant investments or the start of a new project. In this case, financing is granted by a group of entities, under the same financial conditions, in order to share the risk among all of them, and it is executed in a single contract, which regulates both the obligations toward the funded party and between the financing entities (BBVA, 2024[69]). The advantage of syndicated lending is that it enables originating banks to share risk across the syndicate. Such risk sharing is valuable if banks are themselves financed in an imperfect capital market and adverse shocks require them to raise costly external capital (Ivashina and Scharfstein, 2010[70]), which is the case for clean hydrogen.
Syndicated loans are often sought for large-scale clean hydrogen projects. For example, Lhyfe secured a USD 28 million green syndicated bank loan indexed to EURIBOR with a 5-year maturity and a bullet payment, structured by Credit Agricole Group with three additional banks (Lhyfe, 2023[71]). The NEOM project, valued at USD 6.5 billion, involved a syndicate of 21 commercial banks, the National Investment Fund, and the Saudi Industrial Development Fund (Lee and Saygin, 2023[14]).
Performance guarantees
Performance guarantees reduce uncertainties regarding construction delays, upfront cost overruns, energy or hydrogen production (capacity factor uncertainty), operation and maintenance cost uncertainty (Deloitte, 2024[44]). They are typically offered by insurance and reinsurance companies.
In the short-term, insurance covers for the hydrogen economy will mainly relate to the production and supply sides. Standard engineering policies could cover the risks inherent in the construction phase of hydrogen production facilities (Swiss Re Institute, 2022[27]), and performance guarantee could apply to the operation phase, in particular for the most critical technology to produce clean hydrogen, i.e. the electrolyser. This can be particularly critical, as electrolyser manufacturers do not necessarily have a strong enough track record to provide sufficient certainty on the performance of their technology in real conditions. Even when they offer contracts that include replacing defective components at their expense, it may be associated with certain risks: indeed, the electrolyser manufacturer may fail to honour its obligation because of insolvency, as most of these actors are not yet profitable (BNEF, 2024[72]).
Under a performance guarantee for a clean hydrogen project, the insurer can bear excessive costs related to the electrolyser’s underperformance resulting in a lower hydrogen production. It can include components such as product guarantee (covering against breakdowns and excessive repair or replacement costs) and availability guarantees (covering electrolysers or entire plant’s downtime). If the pre-agreed amount for these costs (the deductible) is exceeded, the insurer starts to pay the major portion of the additional warranty costs up to the agreed limit. The manufacturer can bear a certain percentage of the indemnifiable loss as co-payment (Munich RE, 2024[45]).
Buyer credit guarantees
A Buyer Credit Guarantee, provided by a country’s export credit agency (ECA), is an instrument that covers most of the risk assumed by a commercial bank towards a foreign borrower or buyer of goods from the home country of the ECA. In other words, a commercial bank provides a loan to a foreign buyer and, instead of that bank assuming credit risk on the foreign buyer, this risk is transferred to an ECA. The Buyer Credit Guarantee covers both the commercial and political/sovereign risks (Cordonnier and Saygin, 2023[16]).
In countries with high-risk profiles, the Buyer Credit Guarantee is key as it unlocks financing and thus enables the foreign buyer to finance the purchased equipment. This is particularly important for clean hydrogen projects, in particular because 90% of the electrolyser production capacity is concentrated in Europe, China and the United States (IEA, 2023[73]). The Netherlands is considering expanding its coverage to guarantees for hydrogen production in EMDE with consumers in Europe (Lopez Rocha, Gielen and Govindarajalu, 2024[46]).
The Buyer Credit Guarantee also benefits the exporter. Indeed, in addition to securing a contract for export, it receives the payment immediately upon deliveries. According to OECD rules (OECD, 2023[74]), the foreign buyer will normally have to make a down payment of minimum 15% of the amount of the order.
Contractors-all-risk insurance
Contractors all risk (CAR) insurance generally covers risks related to physical loss or damage to works during construction. It is often complemented by a delay in start-up (DSU) coverage that provides protection against delays caused by physical damage.
The design, construction and completion of the project, from power generation to hydrogen electrolysis to output production, needs to be carefully co-ordinated to reduce risks. A fixed-price turnkey EPC contract with a reputable company is a solution to mitigate the risks of cost and time overruns. In the absence of such a contract, CAR and DSU provided by insurance companies may offer solutions to mitigate risks related to design, construction, and completion.
Liquidated damages
Liquidated damages are an exact amount of money, or a set formula to calculate the amount of money, a party will owe if it breaches a contract, in order to compensate the injured party for its losses. Liquidated damages must be clearly stated in a section or clause of a contract and agreed upon by the parties prior to entering a contract. Liquidated damages are a variety of actual damages and a remedy for breach of contract (Cornell, 2024[75]).
The risk of delay of construction of the clean hydrogen and derivatives project would ultimately lie with the seller under the sales agreements. The project company/seller would seek to lay off the delay risk on the EPC contractors through delay liquidated damages in the EPC contracts. These should, ideally, be set at a level to match the seller’s anticipated liabilities (Craen, 2023[29]). As the clean hydrogen market is nascent, experience of the EPC company will also be critical to inform the adequacy of contractual liquidated damages, which is a provision that seek to match the likely losses that a company will incur or suffer in the event of late completion.
Results from the investor survey
Profile of respondents
Clean hydrogen investors and lenders are a heterogeneous group, including governments, public and private banks, investment funds, (re)insurance companies, technology suppliers, renewable energy companies, utilities, project developers, industrial companies, etc. Each of them needs to adapt its business and/or operating model to align with climate objectives, industrial development targets, regulations and market dynamic, ensuring they remain attractive or competitive while decarbonising to reach net-zero emissions. However, objectives, strategies and viewpoints on acceptable risks may greatly vary across and among actors. Therefore, including in the survey a detailed analysis on the respondents’ profile provides great insights on the preference of different investor groups.
A total of 41 respondents took part in OECD 2024 survey on “Risk mitigation instruments for clean hydrogen financing” developed for this report. Seven respondents are from industrial corporations (mostly clean hydrogen producers or project developers), five each from governments and bilateral development banks, four from investment funds, two each from private banks, multilateral development banks and export credit agencies. Other respondents come from diverse organisations, including consulting firms, technical assistance providers, international organisations and research organisations or think tanks.
The respondents have a relatively equal distribution in terms of their business focus on the clean hydrogen value chain. 20 to 26 respondents are investing or aim to invest in the next 18 months in hydrogen production, transport and storage infrastructure or integrated project structure. 16 respondents mentioned investing or planning to invest in the short-term in end-use sector projects.
More than 50% of the respondents declared being involved in 2 to 6 clean hydrogen projects in EMDEs. Only four respondents declared having no role as an investor or advisor for such projects. On the other side, four respondents declared having more than 10 clean hydrogen projects in EMDEs in their portfolio.
The median total investment required for these projects ranges between USD 500 million and USD 1 billion. 16 of these projects have a total investment size below USD 500 million, while 18 of these projects require more than USD 1 billion investment. However, individual ticket size of respondents’ organisations is below USD 1 billion in 73% of the cases, confirming that large-scale projects require to build a strong investor pool.
Note: The first graph shows the project size for clean hydrogen projects under implementation or planned by 2030 in emerging markets and developing economies. The second graph shows the respondents' expected ticket size for clean hydrogen projects under implementation or planned by 2030 in emerging markets and developing economies.
Source: Authors
Mapping of de-risking instruments with key risks for clean hydrogen projects
In the investor survey, respondents were asked to assess, for each selected de-risking instrument, its relevance to address six key risks identified in (OECD/The World Bank, 2024[15]): (i) uncertain clean hydrogen market demand, including market uptake, volume commitment and credibility of offtakers; (ii) uncertainty about hydrogen price; (iii) country risk, including political risk, policy reliability and public support predictability; (iv) uncertainty about technology performance; (v) licensing, permitting and completion risks; (vi) interest and exchange rates. Respondents provided a grade to each {instrument, risk} pair, on a scale ranging from 0 (the instrument is not relevant to address this risk) to 3 (the instrument is very relevant to address this risk). Then, all answers for a given {instrument, risk} pair have been averaged to identify the most relevant instruments to address the six risks (see Table 2.6).
Each instrument has been assessed against 6 key risks, on a scale of 0 (not relevant) to 3 (very relevant)
Note: Highlighted values correspond to cells where an instrument was considered “relevant to very relevant”; “% of respondents who mentioned this risk in their top 3 risk factors for clean hydrogen projects” refers to a survey conducted in 2023 to prepare (OECD/The World Bank, 2024[1]), where a total of 19 risks were listed.
Source: Authors
The survey confirms that stakeholders associate most instruments with the risks that they are specifically designed to address. This is visible when {instrument, risk} pair obtained an average score greater than 2.5 on the 0 to 3 rating scale (in bold in Table 2.7):
Offtake guarantees and contracts for difference (CfDs) are well-placed to address offtake risk, including both the uncertainty on market demand and clean hydrogen price. Actually, the relevance of all instruments to address demand market risk and price risk is very similar, hinting that these two risks should be addressed jointly.
Political risk investment insurance/foreign investment insurance are key to address country risk;
Interest rate swaps and foreign currency guarantee are considered as very efficient way to address interest and exchange rates. Indeed, interest rate hedging tools, such as interest rate swaps, play a crucial role in mitigating the risks associated with floating interest rates in project finance.
Loan syndication also appear as a potentially very efficient tool to overcome high interest rate. This is explained by the fact that by offering a smaller ticket and investing alongside other lenders, an organisation can gain more comfort in the project and be incentivised to provide better conditions, given that the risks are shared among a larger pool of actors.
The relative grades of {instrument, risk} pairs provide indication on the confidence of respondents about the effectiveness of instruments. For instance, performance guarantee only obtains a grade of 2.2 against technology performance, indicating insufficient coverage of the instrument toward the exposed technology performance risk. This suggests that lenders will continue to face uncertainty about the residual risk associated with technology performance in large-scale clean hydrogen projects. Contractors-all-risks insurance also has a relatively low grade of 1.9 against completion risks, which indicates that respondents may favour instruments not selected here, or other de-risking measures (such as contractual strategies with reputable EPC firms) to mitigate this risk. It also means that insurance companies have a big role to tailor insurance products that are available in the market such as CAR to the specificities of clean hydrogen projects.
The results also provide useful information to make sure that instruments are complementary and do not overlap when building risk mitigation packages:
Reading the table column by column, one can notice that the key risks identified are unevenly covered by the selected instruments. For instance, only “performance guarantees” are identified as relevant to very relevant to address technology performance, whereas seven instruments are relevant to overcome risks related to interest and exchange rates.
Reading the table line by line, it is visible that almost all instruments are targeting a specific risk, or a few risks that fall under the same category. For instance, respondents identified instrument credit default swap (CDS) as having a significantly impact the individual risk profiles of investors for macroeconomic risks, which can relate to country risks, interest and exchange rates (Henricot and Piquard, 2022[65]) (see Table 2.7).
Outcome from the investor survey: providing several instruments to help projects reach FID
As there is no single instrument that addresses all risks, instruments must be combined to minimise the overall risk level of a large-scale clean hydrogen project in EMDEs. As some instruments only tackle specific aspects of risks within a broader risk category, their suitability needs to be considered in the project specific context. Typically, the need for a foreign currency guarantee highly depends on the project design, location, cost structure and revenue streams.
% of respondents who selected each risk mitigation instrument in the top three instruments that, if available jointly, would provide the highest incentive to secure financing on a non-recourse or limited-recourse project financing.
Note: % of respondents who selected each risk mitigation instruments in the top three instruments that, if available jointly, would provide the highest incentive to secure financing on a non-recourse or limited-recourse project financing.
Source: Authors based on OECD/World Bank survey
Typically, projects incorporate various instruments to create a security package that ensures financial viability. For clean hydrogen projects, a survey across different sovereign ratings investigated the optimal mix of instruments to enhance project bankability. The survey revealed that an offtake guarantee is crucial, given the nascent stage of the hydrogen market.
In AAA credit-rated countries, there is an expectation for tax credits, which are critical for debt and cash flow enhancement, indicating advanced market incentive packages for clean hydrogen, such as the Inflation Reduction Act (IRA).
In A-rated countries, performance guarantees are prioritized due to the lack of experience in hydrogen technology, such as electrolysers.
For countries with BBB- to B credit ratings, offtake risk remains a key priority, but there is a growing preference for instruments addressing macroeconomic instability or risks.
In addition, the tail risk of clean hydrogen projects should be appropriately reflected in the design of security package given the long-term asset’s lifespan and high capital investment. Tail risk has often been addressed through insurance, contingency planning, and conservative financial structuring to mitigate the potential for severe losses and ensure project stability. Given that insurance products with comprehensive coverage are not yet widely available for clean hydrogen projects, it is anticipated that the development of tailored de-risking insurance products will become increasingly important to address the unique characteristics of these projects.
Learnings from case studies on flagship projects and financing instruments
In addition to the analysis of de-risking instruments in the previous section, the fifteen new case studies (see Table 2.1) provide further insights into effective financing and enabling strategies for scaling clean hydrogen projects. The five project case studies illuminate key approaches to capital mobilisation and structural optimisation for advanced-stage developments, illustrating how carefully crafted financial frameworks combined with development and operational expertise of local project teams can attract investment and drive project progress. The other ten case studies focus on economic, de-risking, and financing instruments, highlighting the value of tailored tools in facilitating a timely final investment decision (FID) by effectively managing risk and securing necessary funding. Together, these case studies offer valuable guidance on establishing the necessary conditions for scaling and replicating clean hydrogen projects globally, addressing financial and operational complexities specific to this emerging technology.
Effective risk mitigation and financing instruments are essential for attracting investment to clean hydrogen, an industry facing high costs, equity constraints, and local currency risks. The examined de-risking tools are designed to reduce or re-allocate risks and increase attractiveness for a broad range of investors. Thereby, these instruments can enable hydrogen projects to progress swiftly from development to FID and implementation.
Public support and economic instruments emerge as critical tools in advancing timely FID and scaling hydrogen projects. Alignment with national and regional policy frameworks, including hydrogen-specific subsidies, creates a conducive environment that both accelerates project timelines and provides the necessary financial backing. Beyond financing, strong partnerships between public and private sectors are essential for risk distribution and ensuring effective coordination of technical and financial resources. The success of studied projects is further strengthened by dedicated sector expertise, ensuring a well-rounded approach to project origination, appraisal, and execution. These collaborations, combined with targeted economic policies, enhance the replicability of clean hydrogen initiatives globally, setting a clear path for decarbonisation at scale.
Public support and economic instruments for timely FID
All studied instruments are tailored to address high-risk tranches of financing, notably development costs, equity financing, and local currency risks. They serve to support clean hydrogen production uptake and decrease the perceived risk for a broader set of more risk-averse investors, thus mobilising significant capital and lowering financing costs. These actions encourage clean hydrogen scale-up both at individual project levels and across global project pipelines.
Domestic economic instruments, such as tax rebates within IRA’s 45V Clean Hydrogen Production Tax Credit in the USA and contract for difference scheme within Japan’s low-carbon hydrogen subsidy program, offer OPEX-oriented support to incentivise investments in the clean hydrogen market locally and accelerate project development at scale.
National clean hydrogen frameworks, such as Egypt's Green Hydrogen Law and India's National Hydrogen Mission, establish regulatory conditions that encourage both local and foreign investment. These policies support projects aimed at domestic and export markets, providing implementation incentives and subsidies.
Large-scale projects over 1 GW of hydrogen installed capacity, like CIPP Ceara Green Hydrogen Hub in Brazil and HyDuqm project in Oman, benefit from public-private partnerships with available regional and global clean hydrogen policy support, producing clean hydrogen and its derivatives for both domestic and export-oriented markets.
De-risking and financing instruments for capital mobilisation
Several studied instruments address high-risk tranches of financing, including development costs, equity financing, and local market risks. These strategies support clean hydrogen production uptake and reduce perceived risk for a broader set of more risk-averse investors, thus mobilising significant capital and lowering financing costs. These actions encourage clean hydrogen scale-up both at individual project levels and across global project pipelines.
Private Equity investment funds, such as Hy24 and SDG Namibia One, address specifically clean hydrogen projects, offering targeted expertise and financial resources by employing adaptive equity, quasi-equity investments, and co-investment strategies to facilitate financing of capital-intensive clean hydrogen projects.
DFI-supported programs, such as Chile Green Hydrogen Facility by the World Bank and CORFO and Eco Invest Brazil by the IDB, use blended finance to reduce costs and risks, enhancing the economic viability of local sustainable projects, including clean hydrogen.
Hydrogen-specific insurance products, such as Marsh Clean Hydrogen Insurance Facility and Munich Re’s HySure product, offer tailored insurance solutions, notably for construction and operational phases, covering project-specific risks and contributing to larger capital mobilisation for clean hydrogen projects.
Impact on project financing structure: insights on development and asset financing
Project Development Financing: instruments supporting project development financing play a crucial role in effective risk allocation for clean hydrogen projects, significantly improving the likelihood of successful implementation. The development costs of large-scale clean hydrogen projects represent a substantial budget, which is challenging to finance on the balance sheet of independent developers or through existing financial solutions due to the perceived risks associated with the emerging industry. Financing instruments that address project development costs, such as reimbursable development loans, equity injections at the corporate level, or project development assistance, significantly increase the probability of timely project development and implementation.
Hydrogen-specific investment funds, such as Hy24 and SDG Namibia One, enhance project credibility by financing development activities at both corporate and project levels via equity injections. This approach mitigates early-stage development risks, provides a solid foundation for subsequent project phases, and facilitates further private and institutional financing.
Eco Invest Brazil provides project structuring support through reimbursable financing for project preparation, covering detailed planning and feasibility analysis. This assistance ensures that projects are thoroughly appraised and planned, reducing the risks associated with project origination and enhancing the chances of securing further financing.
Large-scale projects from 25 MW to 100 MW of hydrogen installed capacity, such as Lhyfe’s Green Horizon in France and Scatec Green Hydrogen in Egypt, integrate to a large extend development and operational risks at the project level, allowing prompt project development timelines and extended risk-sharing with private and public financiers.
Project Assets Financing: de-risking and financing instruments facilitate better risk allocation and optimise debt sizing, which are essential for securing the necessary funding for capital-intensive clean hydrogen projects. The instruments range from foreign exchange (FX) hedging solutions to equity stakes in dedicated clean hydrogen projects SPVs (Special Purpose Vehicles).
Chile Green Hydrogen Facility by the World Bank and CORFO, along with India's National Hydrogen Mission, provide significant CAPEX subsidies (up to 40%), which significantly improve the economic viability of clean hydrogen projects and so facilitate private financing for first-movers in the hydrogen sector.
Hy24 and SDG Namibia One use adaptive investment, quasi-equity investments, and co-investment strategies to facilitate the financing of project assets. These approaches help allocate risks more effectively between public and private investors, enhancing the overall financing structure of the projects. A dedicated focus on hydrogen projects and strategic long-term commitment ensure that projects have access to substantial and patient capital, thus improving debt sizing and reducing financial uncertainty.
Flagship projects, such as HyDuqm in Oman and Lhyfe’s Green Horizon in France, effectively combine available local public financing, global clean hydrogen incentives with private financing and senior debt to complete necessary funding for clean hydrogen projects at scale.
Improving enabling conditions via partnerships to allocate risk and co-ordinate efforts
Through both public and private partnerships, the studied programmes not only distribute risks more effectively but also coordinate the efforts of diverse stakeholders, thereby creating a robust framework for the successful development, financing and scaling of clean hydrogen projects.
Risk sharing: effective partnerships are essential for distributing risks among various stakeholders, thereby enhancing the viability and attractiveness of clean hydrogen projects. These collaborations account for risk appetite of different actors, ensuring a more balanced risk and capital allocation.
Chile’s Green Hydrogen Facility, Eco Invest Brazil and SDG Namibia One collaborate with international development banks and local government bodies, providing both financial and technical assistance. This multi-stakeholder approach not only distributes risk to facilitate financing but also brings in diverse expertise and resources, enhancing the projects' overall resilience and capacity for success. Successful partnerships are often realised through robust government backing and political will.
Coordination of actors’ efforts: coordination between private and public actors is crucial in aligning financial resources and technical expertise, which ensures project implementation and accelerates scaling-up. These partnerships are instrumental in completing necessary financing and creating a cohesive strategy for implementing clean hydrogen projects.
Hy24 engages financial and technical partnerships with industrial actors. This approach accelerates the hydrogen market's global development by ensuring that projects benefit from the latest technological advancements and industry best practices.
Implementation insights on projects’ origination, appraisal and execution
Project Origination and Appraisal: the origination and appraisal stages of project development are critical for ensuring that clean hydrogen initiatives are viable and attractive to investors. Effective strategies and adapted financing instruments at these stages help to identify promising projects and facilitate long-term funding.
Eco Invest Brazil employs blended finance mechanisms to streamline the origination and appraisal processes. By combining public and private investment, Eco Invest Brazil reduces the risk associated with green projects, making them more appealing to international investors. This approach allows for a thorough evaluation of project feasibility and auction process, ensuring that only the most promising projects proceed to the execution stage.
Hydrogen-specific private equity investment funds, such as Hy24 and SDG Namibia One, address and finance the development risk of certain projects under their investment portfolio, by leveraging their lower risk aversion due to sector specific approach and dedicated clean hydrogen educated teams.
Lhyfe’s Green Horizon in France leverages public-private coordination and industrial partnerships to optimise resource allocation, aligning technical and financial capacities to reduce project risks and enable successful implementation, while internally addressing an important part of the development effort.
Project Execution: effective execution of clean hydrogen projects is essential for their success. This involves dedicated teams, strong governance, and robust operational frameworks to manage the complexities associated with large-scale, capital-intensive projects.
Large scale projects’ teams of Cearà Green Hydrogen Hub in Brazil, HyDuqm in Oman, and JSW Green Hydrogen in India have established a comprehensive operational framework with dedicated local teams, enabling efficient execution and project scalability.
Policy frameworks, such as Chile’s Green Hydrogen Facility, IRA USA 45V Clean Hydrogen Production Tax Credit framework, and Japan’s financing instruments, provide consistent project support for clean hydrogen consumption over long term through contract for different schemes and tax rebates, supervised and implemented by several departments, ministries and government agencies.
India's National Hydrogen Mission employs a more general structured governance model, ensuring coordination across various stages of execution, from infrastructure development to policy alignment. Chile’s Green Hydrogen Facility puts in place a more specific sub-program to finance technical assistance, capacity-building activities, and overall project management to streamline project execution.
Conditions for replicability and scale up
Public support: public involvement provides support frameworks that mitigate risks, ensuring project viability and investor confidence. Alignment with national and international climate policies and objectives (e.g. Nationally Determined Contributions, South Africa's Just Energy Transition Investment Plan, COP28 declaration of intent on certification schemes for hydrogen and derivatives) provides regulatory support and enhances the credibility of projects, making them more attractive to investors.
Egypt's Green Hydrogen Law and India's National Hydrogen Mission offer regulatory guidance and risk mitigation for investors, making local hydrogen projects, like Scatec Green Hydrogen in Egypt and JSW Green Hydrogen in India, more feasible and aligning them with international climate commitments, driving local and export-oriented production of clean hydrogen and its derivatives.
SDG Namibia One leverages public finance and policy support from the Environmental Investment Fund of Namibia, providing necessary risk reduction to attract private investment.
Hands-on, hydrogen-specific tailored support: sector-specific expertise and funding are critical for replicating and scaling hydrogen projects. Specialised teams and funding strategies address unique hydrogen market challenges and opportunities.
Hy24 ensures long-term support for clean hydrogen projects through its substantial funding and dedicated teams. The fund's strategic focus on hydrogen infrastructure and its hands-on governance model enable it to address sector-specific challenges effectively.
Marsh Clean Hydrogen Insurance Facility and Munich Re’s HySure product offer risk management solutions tailored to hydrogen, building confidence for scaling similar projects globally.
Conclusion
In summary, the examined case studies reveal that successful scaling of clean hydrogen projects hinges on well-coordinated public support, risk mitigation through tailored financing instruments and approaches such as blended finance,12 and robust public-private partnerships. National and regional policies, when aligned with international climate objectives, significantly bolster project credibility and attractiveness, while hydrogen-specific economic tools like subsidies, tax credits, and dedicated insurance solutions foster investment and reduce development risks. Blended finance, strategic equity injections, and adaptive insurance facilities play a crucial role in enabling risk-averse investors to participate, enhancing capital mobilisation. Implementation success is further driven by development capacities of local project teams, clear governance structures, sector-specialised teams, and partnerships that unite technical and financial resources, creating a replicable framework for the global scale-up of clean hydrogen infrastructure.
Public support and economic instruments emerge as critical tools in advancing timely FID and scaling hydrogen projects. Alignment with national and regional policy frameworks, including hydrogen-specific subsidies, creates a conducive environment that both accelerates project timelines and provides the necessary financial backing. Beyond financing, strong partnerships between public and private sectors are essential for risk distribution and ensuring effective coordination of technical and financial resources. The success of studied projects is further strengthened by dedicated sector expertise, ensuring a well-rounded approach to project origination, appraisal, and execution. These collaborations, combined with targeted economic policies, enhance the replicability of clean hydrogen initiatives globally, setting a clear path for decarbonisation at scale.
Public support and economic instruments for timely FID
All studied instruments are tailored to address high-risk tranches of financing, notably development costs, equity financing, and local currency risks. They serve to support clean hydrogen production uptake and decrease the perceived risk for a broader set of more risk-averse investors, thus mobilising significant capital and lowering financing costs. These actions encourage clean hydrogen scale-up both at individual project levels and across global project pipelines.
Domestic economic instruments, such as tax rebates within IRA’s 45V Clean Hydrogen Production Tax Credit in the USA and contract for difference scheme within Japan’s low-carbon hydrogen subsidy program, offer OPEX-oriented support to incentivise investments in the clean hydrogen market locally and accelerate project development at scale.
National clean hydrogen frameworks, such as Egypt's Green Hydrogen Law and India's National Hydrogen Mission, establish regulatory conditions that encourage both local and foreign investment. These policies support projects aimed at domestic and export markets, providing implementation incentives and subsidies.
Large-scale projects over 1 GW of hydrogen installed capacity, like CIPP Ceara Green Hydrogen Hub in Brazil and HyDuqm project in Oman, benefit from public-private partnerships with available regional and global clean hydrogen policy support, producing clean hydrogen and its derivatives for both domestic and export-oriented markets.
De-risking and financing instruments for capital mobilisation
Several studied instruments address high-risk tranches of financing, including development costs, equity financing, and local market risks. These strategies support clean hydrogen production uptake and reduce perceived risk for a broader set of more risk-averse investors, thus mobilising significant capital and lowering financing costs. These actions encourage clean hydrogen scale-up both at individual project levels and across global project pipelines.
Private Equity investment funds, such as Hy24 and SDG Namibia One, address specifically clean hydrogen projects, offering targeted expertise and financial resources by employing adaptive equity, quasi-equity investments, and co-investment strategies to facilitate financing of capital-intensive clean hydrogen projects.
DFI-supported programs, such as Chile Green Hydrogen Facility by the World Bank and CORFO and Eco Invest Brazil by the IDB, use blended finance to reduce costs and risks, enhancing the economic viability of local sustainable projects, including clean hydrogen.
Hydrogen-specific insurance products, such as Marsh Clean Hydrogen Insurance Facility and Munich Re’s HySure product, offer tailored insurance solutions, notably for construction and operational phases, covering project-specific risks and contributing to larger capital mobilisation for clean hydrogen projects.
Impact on project financing structure: insights on development and asset financing
Project Development Financing: instruments supporting project development financing play a crucial role in effective risk allocation for clean hydrogen projects, significantly improving the likelihood of successful implementation. The development costs of large-scale clean hydrogen projects represent a substantial budget, which is challenging to finance on the balance sheet of independent developers or through existing financial solutions due to the perceived risks associated with the emerging industry. Financing instruments that address project development costs, such as reimbursable development loans, equity injections at the corporate level, or project development assistance, significantly increase the probability of timely project development and implementation.
Hydrogen-specific investment funds, such as Hy24 and SDG Namibia One, enhance project credibility by financing development activities at both corporate and project levels via equity injections. This approach mitigates early-stage development risks, provides a solid foundation for subsequent project phases, and facilitates further private and institutional financing.
Eco Invest Brazil provides project structuring support through reimbursable financing for project preparation, covering detailed planning and feasibility analysis. This assistance ensures that projects are thoroughly appraised and planned, reducing the risks associated with project origination and enhancing the chances of securing further financing.
Large-scale projects from 25 MW to 100 MW of hydrogen installed capacity, such as Lhyfe’s Green Horizon in France and Scatec Green Hydrogen in Egypt, integrate to a large extend development and operational risks at the project level, allowing prompt project development timelines and extended risk-sharing with private and public financiers.
Project Assets Financing: de-risking and financing instruments facilitate better risk allocation and optimise debt sizing, which are essential for securing the necessary funding for capital-intensive clean hydrogen projects. The instruments range from foreign exchange (FX) hedging solutions to equity stakes in dedicated clean hydrogen projects SPVs (Special Purpose Vehicles).
Chile Green Hydrogen Facility by the World Bank and CORFO, along with India's National Hydrogen Mission, provide significant CAPEX subsidies (up to 40%), which significantly improve the economic viability of clean hydrogen projects and so facilitate private financing for first-movers in the hydrogen sector.
Hy24 and SDG Namibia One use adaptive investment, quasi-equity investments, and co-investment strategies to facilitate the financing of project assets. These approaches help allocate risks more effectively between public and private investors, enhancing the overall financing structure of the projects. A dedicated focus on hydrogen projects and strategic long-term commitment ensure that projects have access to substantial and patient capital, thus improving debt sizing and reducing financial uncertainty.
Flagship projects, such as HyDuqm in Oman and Lhyfe’s Green Horizon in France, effectively combine available local public financing, global clean hydrogen incentives with private financing and senior debt to complete necessary funding for clean hydrogen projects at scale.
Improving enabling conditions via partnerships to allocate risk and co-ordinate efforts
Through both public and private partnerships, the studied programmes not only distribute risks more effectively but also coordinate the efforts of diverse stakeholders, thereby creating a robust framework for the successful development, financing and scaling of clean hydrogen projects.
Risk sharing: effective partnerships are essential for distributing risks among various stakeholders, thereby enhancing the viability and attractiveness of clean hydrogen projects. These collaborations account for risk appetite of different actors, ensuring a more balanced risk and capital allocation.
Chile’s Green Hydrogen Facility, Eco Invest Brazil and SDG Namibia One collaborate with international development banks and local government bodies, providing both financial and technical assistance. This multi-stakeholder approach not only distributes risk to facilitate financing but also brings in diverse expertise and resources, enhancing the projects' overall resilience and capacity for success. Successful partnerships are often realised through robust government backing and political will.
Coordination of actors’ efforts: coordination between private and public actors is crucial in aligning financial resources and technical expertise, which ensures project implementation and accelerates scaling-up. These partnerships are instrumental in completing necessary financing and creating a cohesive strategy for implementing clean hydrogen projects.
Hy24 engages financial and technical partnerships with industrial actors. This approach accelerates the hydrogen market's global development by ensuring that projects benefit from the latest technological advancements and industry best practices.
Implementation insights on projects’ origination, appraisal and execution
Project Origination and Appraisal: the origination and appraisal stages of project development are critical for ensuring that clean hydrogen initiatives are viable and attractive to investors. Effective strategies and adapted financing instruments at these stages help to identify promising projects and facilitate long-term funding.
Eco Invest Brazil employs blended finance mechanisms to streamline the origination and appraisal processes. By combining public and private investment, Eco Invest Brazil reduces the risk associated with green projects, making them more appealing to international investors. This approach allows for a thorough evaluation of project feasibility and auction process, ensuring that only the most promising projects proceed to the execution stage.
Hydrogen-specific private equity investment funds, such as Hy24 and SDG Namibia One, address and finance the development risk of certain projects under their investment portfolio, by leveraging their lower risk aversion due to sector specific approach and dedicated clean hydrogen educated teams.
Lhyfe’s Green Horizon in France leverages public-private coordination and industrial partnerships to optimise resource allocation, aligning technical and financial capacities to reduce project risks and enable successful implementation, while internally addressing an important part of the development effort.
Project Execution: effective execution of clean hydrogen projects is essential for their success. This involves dedicated teams, strong governance, and robust operational frameworks to manage the complexities associated with large-scale, capital-intensive projects.
Large scale projects’ teams of Cearà Green Hydrogen Hub in Brazil, HyDuqm in Oman, and JSW Green Hydrogen in India have established a comprehensive operational framework with dedicated local teams, enabling efficient execution and project scalability.
Policy frameworks, such as Chile’s Green Hydrogen Facility, IRA USA 45V Clean Hydrogen Production Tax Credit framework, and Japan’s financing instruments, provide consistent project support for clean hydrogen consumption over long term through contract for different schemes and tax rebates, supervised and implemented by various departments, ministries and government agencies.
India's National Hydrogen Mission employs a more general structured governance model, ensuring coordination across various stages of execution, from infrastructure development to policy alignment. Chile’s Green Hydrogen Facility puts in place a more specific sub-program to finance technical assistance, capacity-building activities, and overall project management to streamline project execution.
Conditions for replicability and scale up
Public support: public involvement provides support frameworks that mitigate risks, ensuring project viability and investor confidence. Alignment with national and international climate policies and objectives (e.g. Nationally Determined Contributions, South Africa's Just Energy Transition Investment Plan, COP28 declaration of intent on certification schemes for hydrogen and derivatives) provides regulatory support and enhances the credibility of projects, making them more attractive to investors.
Egypt's Green Hydrogen Law and India's National Hydrogen Mission offer regulatory guidance and risk mitigation for investors, making local hydrogen projects, like Scatec Green Hydrogen in Egypt and JSW Green Hydrogen in India, more feasible and aligning them with international climate commitments, driving local and export-oriented production of clean hydrogen and its derivatives.
SDG Namibia One leverages public finance and policy support from the Environmental Investment Fund of Namibia, providing necessary risk reduction to attract private investment.
Hands-on, hydrogen-specific tailored support: sector-specific expertise and funding are critical for replicating and scaling hydrogen projects. Specialised teams and funding strategies address unique hydrogen market challenges and opportunities.
Hy24 ensures long-term support for clean hydrogen projects through its substantial funding and dedicated teams. The fund's strategic focus on hydrogen infrastructure and its hands-on governance model enable it to address sector-specific challenges effectively.
Marsh Clean Hydrogen Insurance Facility and Munich Re’s HySure product offer risk management solutions tailored to hydrogen, building confidence for scaling similar projects globally.
Conclusion
In summary, the examined case studies reveal that successful scaling of clean hydrogen projects hinges on well-coordinated public support, risk mitigation through tailored financing instruments and approaches such as blended finance,13 and robust public-private partnerships. National and regional policies, when aligned with international climate objectives, significantly bolster project credibility and attractiveness, while hydrogen-specific economic tools like subsidies, tax credits, and dedicated insurance solutions foster investment and reduce development risks. Blended finance, strategic equity injections, and adaptive insurance facilities play a crucial role in enabling risk-averse investors to participate, enhancing capital mobilisation. Implementation success is further driven by development capacities of local project teams, clear governance structures, sector-specialised teams, and partnerships that unite technical and financial resources, creating a replicable framework for the global scale-up of clean hydrogen infrastructure.
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← 1. The cost of capital (or cost of finance) is a critical component in modern finance theory for making investment or divestment decisions, economic profit forecasts, and enhancing performance efficiency (Bruner et al., 1998[76]). The cost of capital includes both the cost of debt and the cost of equity and is usually called weighted average cost of capital (WACC) in project finance transactions. It represents the rate of return that investors expect to earn on their investments. In this paper, cost of capital, cost of finance, WACC and financing costs are used interchangeably.
← 2. The levelised cost of hydrogen (LCOH) is a measure of the average net present cost of hydrogen production over a project’s lifetime. It factors in all costs related to hydrogen production, including capital, operating, maintenance, fuel, and other expenses. These costs are divided by the total hydrogen output. The LCOH is typically measured in USD/kg.
← 3. The levelised cost of electricity (LCOE) is a measure of the average net present cost of electricity generation for a power plant over its lifetime. The LCOE is typically measured in USD/MWh.
← 4. De-risking means reallocating, sharing, or reducing the existing or potential risks associated with an investment. Allocating risks in an effective manner decreases the risk premium for equity and debt providers, thus reducing the expectations of equity returns and improving lending terms. (OECD/The World Bank, 2024[15]).
← 5. The risks faced by offtakers depends on various parameters such as the sector, market, geographical location, etc. Examples of business models are provided in Table 2.2.
← 6. For electrolysis, basic capital expenditures (CAPEX) cover the electrolyser system (stack); all necessary balance of plant (drier, cooling, de-oxo, and water de-ionization equipment); civil, structural, and architectural works (building and foundations); and power supply (electricity grid connection or renewable generation).
← 7. The impact would depend on each process and industry. For instance, as Scope 3 emissions account for 80-95% of total carbon emissions of oil and gas companies, the avoided emissions by using clean hydrogen are very small compared to the remaining emissions from burning the fuels. Thus, the risk of stranded asset remains high.
← 8. European Investment Bank states that a “PPP project yields value for money if it results in a net positive gain to society which is greater than that which could be achieved through any alternative procurement route”.
← 9. This definition applies notably for renewable electricity or hydrogen, and is the one used in this paper when referring to CfDs. More generally (but not considered in this paper), CfD is a financial derivative contract that can be concluded on a number of different products, such as interest rate swaps.
← 10. In principle, the choice of reference price can be agreed upon freely and is not necessarily the current market price.
← 11. BNEF launched a Hydrogen Offtake Agreement Database that tracks 149 offtake agreements for clean hydrogen and derivatives. The total volume is 7.9 Mt per year (nearly half in the form of ammonia). According the BNEF database by September 2023, only 13% of the contracted volume (or 1 million metric tons/year) is binding. Another 7% are pre-contractual agreements with a solid chance of becoming binding contracts. The remaining 80% are either memorandums of understanding or unspecified (BNEF, 2024).
← 12. For more information on blended finance use for clean energy, see (OECD, 2022[77]).
← 13. For more information on blended finance use for clean energy, see (OECD, 2022[77]).