Login Register as Member

BFSI

BANKING AND FINANCING SERVICES AND INSURANCE

Infrastructure development of green hydrogen projects require long term investments, but Indian banks are constrained by their ability to finance long gestation projects. Green hydrogen plants are heavily dependent on renewable energy projects which require long term financing as compared to banking sector’s ability to finance for 5 to 7 years. But banks can be helpful in originating these loans and then offload these loans via vehicles like alternative investment funds, among others. According to Bloomberg NEF data, in 2019-2021, Indian private banks made up 19 per cent of the sources of debt for new-build renewable energy projects in India while public sector banks made up 1 per cent. Foreign banks led at 39 per cent. In 2023-24 budget India has committed ~INR 75,400 crore for green growth in the country. INR 35,000 crore for priority capital investments towards energy transition and net zero objectives, and energy security by Ministry of Petroleum & Natural Gas. As green hydrogen is a sunrise sector INR 19,700 crore will facilitate transition to a green hydrogen economy. Green hydrogen projects need evolution of GH plant financing as renewable energy space has already evolved and established itself as a reliable investment. For GH projects to attain this level of traction there is a need for stronger contracts, increased investments, regulatory support and established financing mechanism. With increased foreign bank participation in India, this opportunity can be converted to a commercial arrangement which can be fruitful in accelerating adoption of GH in India. With high risk of GH projects now due to offtake uncertainties of hydrogen, will the developers be able to honor the agreement of payment to banks at the right time without default. Hence, government plays critical role in managing this offtake risk and it may lead to increased participation of private banking and financial sector in India.

The bankers we rely on to finance such schemes, however, think more prosaically. They will not extend loans against imagined future demand from hydrogen-powered planes, trains and steel mills. They require guaranteed cashflow from a creditworthy customer, who has signed a contract to take all the hydrogen produced, at a fixed price. Therefore it is critical to first focus on greening existing hydrogen uses. Banks are most likely to finance renewable energy-powered electrolysers to produce green hydrogen at ammonia plants and refineries, because demand for the gas is proven. That would cut emissions from methane-produced hydrogen immediately. It would also show that green hydrogen is viable rather than theoretical and allow electrolyser technology to be scaled.
The bankers we rely on to finance such schemes, however, think more prosaically. They will not extend loans against imagined future demand from hydrogen-powered planes, trains and steel mills. They require guaranteed cashflow from a creditworthy customer, who has signed a contract to take all the hydrogen produced, at a fixed price. Therefore it is critical to first focus on greening existing hydrogen uses. Banks are most likely to finance renewable energy-powered electrolysers to produce green hydrogen at ammonia plants and refineries, because demand for the gas is proven. That would cut emissions from methane-produced hydrogen immediately. It would also show that green hydrogen is viable rather than theoretical and allow electrolyser technology to be scaled.
When the renewable energy revolution started a few decades ago, while financing was hard to come by, there was only one question banks had to ask. Would the electricity produced by solar panels and wind turbines be cheap enough to compete with coal or gas? The rest was relatively simple. Demand for electricity was clear, and the problem of getting it to market has long been solved by national grids. With green hydrogen the picture is very different. First there is the complexity of production, which requires a local source of both water and renewable energy. Then comes the question of getting the product to where it needs to be consumed. There is limited existing hydrogen pipeline infrastructure. Shipping would involve building one plant to liquefy the gas first, and a second to convert back to gas before consumption at the destination. Alternatives of using ammonia or other fuel carriers for shipping may become viable but are similarly difficult to carry out at this stage. Green hydrogen projects are complex with multiple moving parts from technology risks to building pipelines, liquefaction plant as well as associated RE production plant. All of these moving parts, each with its own delivery risk, must be delivered before hydrogen production can start, and the cash to repay loans begins to flow.
Finally there is currently no financial market for trading hydrogen, or hydrogen derivatives, so producers cannot take out futures contracts to guarantee a price for their hydrogen. That means they cannot offer banks any confidence about the size of future revenue, even once hydrogen generation does begin, unless the buyer agrees to a price in advance. Ammonia production plants and oil refineries that already use hydrogen offer an obvious solution. Demand is certain and there is limited new infrastructure to build. Most importantly, there is no buyer to be sought. The company producing the hydrogen is also the consumer. Banks effectively lend against the balance sheet of the company, generally a large one. Banks will also be relatively comfortable lending to supply projects where demand at a fixed price is guaranteed by a state-backed entity. But government financing is not unlimited, so it is essential that some green hydrogen supply projects are funded privately. This will not only increase demand for green hydrogen and encourage economies of scale, but also demonstrate to other private investors that the industry is viable.

 

 

Your experience on this site will be improved by allowing cookies.