Any hope of reaching net-zero global emissions rests on decarbonizing hard-to-abate sectors such as power, industry, heating, and transportation. And two emerging solutions—low-carbon hydrogen1 and carbon capture, utilization, and storage (CCUS)—will need to play a pivotal role.
These solutions come at a significant cost. We estimate that up to $13 trillion of private-sector investment in hydrogen and CCUS will be required to achieve the International Energy Agency’s (IEA) “net-zero emissions by 2050” scenario.
Thus far, however, banks have not provided the debt financing necessary for these two technologies to scale up. Why is that? To answer this question, we surveyed over 100 experts and interviewed more than 35 executives from commercial banks, development banks, private equity firms, asset managers, and energy companies.
While commercial banks are keen to finance hydrogen and CCUS projects, they are holding back because of the perceived risks involved.
We found that while commercial banks are keen to finance hydrogen and CCUS projects—both to support their clients and meet their own sustainability targets—they are holding back because of the perceived risks involved. And because most banks aren’t prepared to be more flexible with their project-finance risk criteria, many projects are simply not going ahead. Some 80% of announced low-carbon hydrogen projects worldwide are still in the planning stage, while only about 7% of CCUS projects have reached the final investment decision (FID) stage to date.
We believe this is a missed opportunity. The economics of hydrogen and CCUS projects will continue to improve as the underlying technologies mature and policy support increases. Over time, many more projects will come to match the risk profile banks are looking for and become “bankable.” In the meantime, banks that are willing to be flexible and seize the opportunities available today stand to benefit from a sizeable early-mover advantage.
Lending for Hydrogen and CCUS Projects Is Limited—for Now
According to IEA estimates, the world will need to produce 540 million tons of hydrogen and capture between 4 and 8 gigatons of CO2 each year to achieve net-zero emissions by 2050. This translates into a cumulative investment need of about $10 trillion in hydrogen projects and as much as $3 trillion in CCUS projects.2
Banks are factoring hydrogen and CCUS into their medium-term green lending plans. Our survey found that 75% to 80% of commercial banks expect the two technologies to make up over 10% of their energy-related portfolio by 2030. At present, however, most banks aren’t providing nonrecourse debt finance to hydrogen and CCUS projects.
Our research suggests that many commercial banks are waiting for these projects to meet the same standards and provide the same levels of risk as more developed green projects, such as solar photovoltaic (PV) parks and wind farms. Banks want the projects they finance to:
Have long-term offtake agreements with good quality counterparties (offtake risk)
Use mature technologies (technology risk)
Operate under clear regulations and industry standards (policy risk)
Be able to sell into established markets (merchant risk)
Hydrogen and CCUS project developers can’t currently provide the same degree of certainty in these areas. Our survey found that when it comes to hydrogen and CCUS projects specifically, banks were most concerned with offtake and merchant risks. (See Exhibit 1.)
A Unique Set of Challenges
Policy changes and technology advances have revolutionized the renewables sector over the last two decades, bringing greater cost efficiency and production capacity and making projects more bankable. We expect many of the same forces to transform hydrogen and CCUS projects in the coming years. But these emerging technologies face different challenges than renewables, and they will need to evolve in different ways.
For starters, renewable-energy project owners sell the power they generate into an existing electricity market. But because hydrogen and CCUS still lack an established marketplace—and because they involve molecules rather than electrons—offtake arrangements are less straightforward. For example, when it comes to using hydrogen to make green ammonia, production facilities for both hydrogen and ammonia typically need to be located next to each other due to transportation problems.
There is also a chicken-and-egg situation between users and suppliers of hydrogen. Potential users (steel producers, for example) point to cost considerations, such as the premium they must pay for hydrogen, and inadequate supply volumes3 as reasons why they are reluctant to convert their operations to hydrogen use. On the flip side, hydrogen project developers cite such weak demand as the main reason for not being able to scale up production. Breaking the impasse will require more policy support, improved economics, and greater access to low-cost funding.
Hydrogen and CCUS projects face different challenges than renewables, and they will need to evolve in different ways.
Other specific risk factors for hydrogen and CCUS include the absence of international agreements on what constitutes green hydrogen and on permanent CO2 storage, underdeveloped markets for trading hydrogen and carbon credits, a lack of clarity on liabilities and liability transfers relating to CO2 storage, and significant variations in CCUS regulations by region.
In the face of these challenges, banks need to have strong risk assessment and management capabilities in order to service emerging hydrogen and CCUS markets effectively. However, our research found that risk management was the leading capability gap preventing commercial banks from financing these markets at scale. (See Exhibit 2.)