Our COO Helena Anderson spoke at PwC-sponsored roundtable on alternative fuels about how money into emerging industry faces bottlenecks as investors grapple with uncertainty over regulation and bankability


Concerns over bankability, regulation and project deployment risks are holding back some investors from the hydrogen sector despite its long-term growth potential as a key plank of the energy transition, according to participants in Transition Economist roundtable on alternative fuels, held in association with PwC.

Corporate and institutional investors are treading carefully as they weigh up risks relating to evolving regulation, the need for bankable long-term offtake deals and the possibility that hydrogen production assets could become stranded because of a lack of midstream distribution infrastructure.“Is there a role for government to play the offtaker of last resort?” Anderson, Ikigai Capital

“The key bottlenecks right now, you can group in two sort of categories. One is the economic viability and regulatory clarity—or  lack of—and the second is residual project risk, the deployment risk,” says Shiva Dustdar, head of division, innovation finance advisory at the European Investment Bank, which  recently surveyed a group of more than 30 corporate and strategic financial investors.

Investors’ concerns about the deployment of hydrogen projects are focussed more on the demand side and the ability to put in place bankable offtake agreements than on technologies, Dustdar says.

And investors want to see “a strong push from the public sector” to make sure the midstream or distribution piece of the supply chain is not neglected, she says. “It is of no use to constantly look at the sort of other two ends, the supply and demand set, and forget that there is a midstream that needs to connect the two.”

Stranded assets?

Helena Anderson, co-founder and COO of Ikigai Capital, also cited investors’ concerns over “project on project risk” where a new facility is dependent on the successful deployment of another stage of the supply chain, and could potentially become a stranded asset.

“It is essential to take a demand-led systems approach for blue hydrogen as you have got project on project risk with distribution and storage infrastructure for both hydrogen and carbon capture. And for green hydrogen, it is not enough to consider lowest cost of production at source; how are you going to transport it?” she says. “Is there a role for government to play the offtaker of last resort for larger projects so that you can have the suppliers of these fuels move forward no matter what, knowing that, at the end of the day, the infrastructure will come?”

Anderson also highlights investors’ need to lock in stable cash flows through offtake deals. “Even when strategic investors are willing to take a view on the transition to hydrogen or the transition to more biofuels in the system, they always want a certain level of long-term stable cash flows,” she says. “They want certainty. Strategic investors are better able to handle the level of merchant risk in a project, but they still want a certain level of contracted revenues where possible.”

Regulatory risks

Uncertainty over regulation and carbon pricing is also a significant constraint on some investors’ appetite for the hydrogen sector. “There is, of course, a lot of emphasis put on regulation. The new taxonomy is going to be an important part of this,” Dustdar says.

But also, generally, having much greater coherence and clarity on carbon pricing, and looking at it not just regionally but from a global perspective, will definitely drive financing.”

A lot of investors are also concerned about the level of reliance on government support for hydrogen, says Anderson. “And that’s actually a reason why they might not get involved yet, other than in jurisdictions or applications where that support is already clear.” She adds that some investors may prefer projects that are based on the conversion of an existing business model to incorporate a new fuel over time.

The Transition Economist roundtable, ‘The role of alternative fuels in the transition to net-zero and the pathways to commercial viability’, in association with PwC, is now available on demand.