When clean hydrogen technology first came onto Jeremy Hasnip’s radar, several years ago, there was little happening in the sector to warrant much excitement from financiers.
Now, the Head of Power & Renewables at Sumitomo Mitsui Banking Corporation (SMBC) likens its presence to the early invention of the internet. “The ability for hydrogen to reshape our everyday lives is so large that no one can truly understand its potential,” he said.
What started as a gleam of opportunity back then, has unfolded rapidly. Europe’s commitment to net zero – and the listing of hydrogen as an agenda item at the 2017 Clean Energy Summit – have piqued the interest of Australia’s industrial sector.
“Companies are getting serious about developing assets and businesses around clean hydrogen. They are quietly investing time and building teams – getting real projects to happen,” said Mr. Hasnip.
“Oil companies and utilities are committing large resources to develop blue and green hydrogen sectors. Large buyers of LNG are thinking about how quickly hydrogen can displace gas.
“Likewise, transport manufacturers are producing new fuel cell vehicles, trains and ships. And gas turbine manufacturers are developing products that run on 100 percent hydrogen fuel.
“Sure, many will need government assistance – grants and subsidies – to get off the ground, but it’s the kind of progress you don’t see every day,” he added.
The progress is not dissimilar to that seen in the early stages of the wider renewable sector. Despite uncertainty with the labour government’s carbon tax, renewable projects are now creating a surplus of green certificates and beating the Renewable Energy Target. Meanwhile, retailers and corporates have been entering into power purchase agreements, in their droves.
Mr. Hasnip believes hydrogen has similar growth potential, with investor interest now starting to pour in.
“People are beginning to approach us about hydrogen. Fund managers, especially, are having conversations about where to get their money into the sector – which parts of the hydrogen value chain show most promise.
“They know the world is serious about its net zero targets and that renewables alone aren’t enough to get us there; that wind and solar can’t deal with space heating and emissions from large scale manufacturing. With expected lower costs, green and blue Hydrogen have a key role to play in sectors were carbon abatement is more difficult.”
In fact, Hasnip believes investor reticence in hydrogen is largely a myth.
“Banks want to help in the creation of the industry and bring low cost finance. It simply hasn’t been on people’s radar until now. Solar stole the spotlight between 2016 and 2017 – and before that, wind. Now hydrogen creates a whole new opportunity set for financial institutions, to help meet their growing ESG ambitions.”
While some have raised concerns about political risk and uncertainty, Mr. Hasnip does not believe this will stunt industry growth. “Investors are no stranger to political risk. It’s something we see across other sectors regularly. I think you have to live with that uncertainty – work out what you can do within the current constraints.
“Yes, you can work in your industry group to get more runway or clearer policy, but that will be an ongoing activity that we will see in the broader energy sector. You don’t get a durable 50 year plan out of government in a free market economy – that’s just life.”
Room to play
As the industry develops, there are tremendous opportunities for financial institutions to play a role in lowering the cost of capital and making hydrogen cheaper.
“Equities investors are looking at where they might best deploy capital to the sector – across the entire hydrogen value chain. Credit providers will follow their customers into the new sector and look to support their financing needs.”
While the early deals may be small before plant sizes scale up and larger distribution infrastructure is needed, financiers should be supportive from the earliest stages.
“We need to start supporting the industry from the beginning – be prepared to back smaller projects at first with appropriate commercial structures and continue to be part of the journey as the scale increases,” he added.
Capitalising on the opportunity
To date, a lot of interest has been shown in the production stage of the hydrogen value chain. With a large land mass and low population density, Australia is naturally advantaged in this space. Other aspects of the production stage, however, aren’t quite as rosy.
“Some may have started thinking about hydrogen as a way to mop up surplus solar production but the reality is, we probably need to be using both wind and solar to get high capacity factors.
“Solar power on its own is only about a 30 percent capacity factor. If you are only getting that on electrolysers it becomes a really expensive project. If you can get that to 60 or 70 percent capacity factor, you halve your cost on solar alone.”
Building up down-stream markets is another area that needs more focus.
“There is no use being able to produce hydrogen without people being able to consume it. In highly developed countries we will see hydrogen being used in mass transit – replacing diesel assets in parts of the train network that have not been electrified. In Australia, though, most of our suburban rail networks are electrified and we don’t have a lot of regional rail in comparison to Europe.
“We will also need more end user marketing to consume hydrogen at the smaller user or residential level. End customers will effectively need to replace appliances, so that will naturally be a slower market to build up demand in.”
To usher things along, policy settings may need strengthening, he added.
“This is ultimately going to be an industry that needs nurturing. Government support is needed to give Australia experience in design, manufacturing and construction and get some early projects built. This will drive further cost savings and accelerate the early stage development of the industry’s supply side.”
Likewise, policy settings – such as that seen in Japan, South Korea and Europe – will need to support demand side efforts.
“We need to see a route to getting utility-scale – or true commercial scale – assets into construction,” he said. “I think what would help is to have further rounds of the green hydrogen support program, like the current ARENA process.
“They have shortlisted seven parties and are trying to announce some selected projects in the next month. We would expect further rounds of that to assist in a scale up – beyond the ten megawatt range envisioned by the current auction.”
Time to act now
With these boxes ticked, Australia can head down the learning curve and reach its holy grail of $2 per kilo.
“I think it’s feasible. There are a lot of clever engineers and developers working on the sector. If it goes to the scale that people are expecting, then that’s a large amount of equipment that will be manufactured and built, and we will see significant learning curve effects.”
In the meantime, financial institutions can play a crucial role in the sector’s success story.
“This is a wake up moment for financial institutions. Industry has been quietly plugging away at this. They may not be attracting a lot of attention but they’re potentially conducting large scale development projects.
“This is a sector that’s really starting to take off. The level of resource and activity suggests that projects will be commercial with some level of government grant subsidy in the very near future.”
Jeremy Hasnip is Head of Power and Renewables at Sumitomo Mitsui Banking Corporation.
He is due to speak at the Australian Hydrogen Conference on 26-27 May 2021.
Jeremy’s session ‘Why Financial Institutions should be focusing on Hydrogen, and the role they can play in providing competitive sources of capital to making the sector a reality’ will be held at 1:35 pm on Wednesday 26th May.
Learn more and register.