Green hydrogen is recognised as a crucial element in the global energy transition, particularly for its ability to decarbonise challenging sectors such as heavy industry, including cement, steel, and chemicals and heavy-duty transport, including trucking, shipping, and aviation. Produced through the electrolysis of water using renewable energy sources, green hydrogen results in zero carbon emissions, significantly reducing greenhouse gas emissions compared to traditional fossil fuels. Its versatility allows applications across various sectors, including transportation, power generation, and heavy industries such as steel and chemicals. Additionally, green hydrogen serves as an efficient energy storage solution, capable of storing excess renewable energy for later use, which is crucial for balancing supply and demand in energy systems. Unlike grey hydrogen, which is produced from natural gas and releases substantial CO₂ during production, green hydrogen offers a climate-neutral alternative. This makes it a far more sustainable option in the long-term shift away from fossil fuels. However, its production requires substantial amount of energy. Currently, the most cost-effective methods, natural gas steam reforming and coal gasification, dominate the market but have a high carbon footprint.
In 2023, global hydrogen demand exceeded 97 million metric tons (Mt), with future projections ranging from 150 Mt to 500 Mt per year. A McKinsey report forecasts green hydrogen consumption could reach 179 Mt annually by 2050. Despite its transformative potential, several challenges hinder the widespread adoption of green hydrogen:
- High production costs: Production of green hydrogen costs between US $5.30 to US $6.70 per kg, significantly higher than grey hydrogen, which costs between US$1.90 and US$2.40 per kg. This “green premium” stems from high initial capital costs, particularly for electrolyser technology, which can range from US $500 to US $1,800 per kW
- Uncertainty in incentives and regulations: Inconsistent government incentives and regulatory frameworks creates uncertainty, making it difficult for investors to commit to large scale projects. Unlike fossil fuels, which have long benefited from subsidies, green hydrogen lacks consistent long-term financial support, such as tax credits, subsidies, or guaranteed purchase agreements. Additionally, unclear carbon pricing mechanisms and evolving green energy policies further destabilise the market, while the absence of clear regulations on safety standards and grid access complicates project approvals and increases costs
- Limited project viability: The global hydrogen industry has experienced significant growth in recent years. The number of clean hydrogen projects reaching final investment decisions (FIDs) increased from 102 in 2020, representing US $10 billion in investment, to 434 projects in 2024, totalling US $75 billion. Despite this progress, only 28% of announced large-scale clean hydrogen projects had reached FIDs as of early 2024. This indicates that many green hydrogen projects remain in the pre-commercial phase, lacking the scale for economic viability
Financial mechanisms to overcome challenges
The green hydrogen sector presents substantial investment opportunities, driven by government initiatives and a growing demand for clean energy solutions. For example, India’s National Green Hydrogen Mission, targets 5 million metric tonnes (MMT) of green hydrogen production annually, along with a 125 GW expansion in renewable energy capacity by 2030. Effective policies and innovative financing strategies will be key to accelerating investment in green hydrogen infrastructure and technology.
- Blended finance models:
Combining public and private capital can reduce investment risks and improve the financial attractiveness of green hydrogen projects. Government-backed financial instruments, concessional loans, and risk-sharing mechanisms can lower the weighted average cost of capital, making projects more viable. A key example is Namibia’s SDG Namibia One Fund, launched in 2023 as a US$1.1 billion blended finance vehicle to attract green hydrogen investment. Managed by Nam-H2 Fund Managers, it integrates public and private funding to mitigate financial risks and encourage private sector participation
- Green bonds:
Green bonds, fixed-income instruments used to fund environmentally beneficial projects, can finance green hydrogen infrastructure, including electrolysers, storage facilities, fuel cells, and hydrogen distribution networks. For example, in 2021, Iberdrola, a Spanish energy company, secured a €6 million loan from Spain’s Instituto de Crédito Oficial (ICO), supplemented by a €3.7 million grant from the European Union’s Connecting Europe Facility (CEF), to build Spain’s first public green hydrogen station in Barcelona. This facility was set to supply renewable hydrogen to Transports Metropolitans de Barcelona (TMB) buses, with the potential for future expansion to other public and private fleets
- Carbon credits:
Green hydrogen, produced using renewable energy, can generate carbon credits by replacing fossil fuels and reducing greenhouse gas emissions. Producers can sell these credits to companies aiming to offset emissions through compliance or voluntary carbon markets. Eligible projects must meet certification standards such as the Gold Standard or Verified Carbon Standard (Verra) to ensure credibility. Green hydrogen initiatives can also earn credits under mechanisms like the EU Emissions Trading System (ETS) or the Clean Development Mechanism (CDM), providing an additional revenue stream to enhance financial viability.
- Off-take agreements:
Given the absence of a robust merchant market for hydrogen and its derivatives, producers face considerable difficulty in securing futures contracts to lock in pricing. In such situations, offtake agreements serve as critical contractual mechanisms to mitigate market risk. These agreements typically define pre-agreed volumes, pricing structures, and contract durations between producers and buyers. Many include “take-or-pay” clauses, which obligate the buyer to pay for the agreed quantity regardless of actual delivery, thereby providing the producer with assured minimum revenue. This level of revenue certainty is frequently essential for unlocking the financing necessary to construct hydrogen production facilities and ensure project bankability. Despite the challenges, several offtake agreements have been made for hydrogen and its derivatives, for example, in June 2024, TotalEnergies has entered into a 15-year offtake agreement with Air Products to purchase 70,000 tonnes of green hydrogen annually from 2030, supporting the decarbonisation of its Northern European refineries
Ensuring a sustainable hydrogen market
Green hydrogen is vital to the energy transition, enabling decarbonisation of hard-to-abate sectors. Strategic tools like blended finance, green bonds, carbon credits, and offtake agreements are key to closing the investment gap and scaling the market. Clear criteria are essential to guide policy, draw investment, and create a fair and reliable market environment.
The Climate Bonds Initiative’s Hydrogen Criteria apply to eligible assets, projects, decarbonisation measures, and entities involved in low-carbon hydrogen production, conditioning, conversion, transportation, and storage. This framework serves three core functions: identifying hydrogen-related projects that qualify for certified climate bonds to promote sustainability and emissions reduction, setting stringent eligibility standards to ensure only environmentally and socially responsible initiatives receive certification, and implementing robust monitoring systems to ensure ongoing compliance and transparency.
References
https://www.nextias.com/ca/editorial-analysis/18-12-2024/green-hydrogen-financing-challenge
https://icapcarbonaction.com/en/ets/eu-emissions-trading-system-eu-ets