Energy & Infrastructure Insight - Issue 3

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13 There are plans in numerous European countries to create facilities that could be scaled sufficiently to generate exports, and in Western Australia's Pilbara region there is a proposal for 15GW of solar and wind capacity to supply the local mining industry and provide electricity for hydrogen commodity production through electrolysis. Future energy presents challenges despite the growing consensus that green hydrogen will be an important part of the future energy mix, and that demand for it will necessitate world-scale production and international trade, getting there will take creativity and dedication. We foresee three challenges that must be addressed: * Formation of the market; * Financing and; * Establishment of the supply chain. FORMATION OF THE MARKET In order to make the significant capital investments necessary for a world-scale green hydrogen project, investors need confidence that there will be a stable market for its products once it starts operations. For early projects, there will be a chicken-and-egg element to this calculus, as investors balance first-mover advantages against the risk of oversupply. However, as illustrated by examples throughout this article, we see policy globally as trending inexorably to the development of a market, similar to, and to some extent in place of, LNG, in which green hydrogen will be freely traded. Moreover, to some extent, green hydrogen projects will have inherent risk mitigation built in, because of their dependence on renewable energy project co- development. New electricity capacity intended for powering electrolyzers can be redirected to grids if the green hydrogen market is slower to develop than expected, or suffers demand volatility, assuming the grid has a need for the redirected power. We also expect the early investors in green hydrogen projects, such as those in the NEOM Company/ACWA Power/Air Products project, to be major hydrogen/energy industry players, who are capable of judging market risks well, and are capable of deploying green hydrogen resources within a wider product portfolio. FINANCING We see well-structured green hydrogen megaprojects as strong candidates for limited recourse project financing, as well as other debt markets. The zero-carbon nature of the products, and the high demand for them that is expected in countries heavily involved in the export credit financing market, means it is reasonable to expect significant liquidity being available for project financing. Renewable generation sub-components of green hydrogen projects, like many utilities projects, can also be structured to attract funds investment or facilitate capital markets issuances. Financing will involve innovative work, though. While electrolysis per se is a well-known industrial process, in the absence of a track record of world-scale projects having successfully operated, there will of course be questions about technology selection and reliability. We see this as similar to the early years of project financing in other major industries, such as power, LNG and petrochemicals, where lenders gather comfort over time, leading to the emergence of well-understood models for banking projects in various regions of the world. As with other sectors that integrate different technologies, such as LNG-to-power, for some projects there may also be difficulties in securing a competitive single point construction solution for all the various components, both power and hydrogen/ammonia production, which could give rise to split construction packages, and resulting interface risk that requires structuring to mitigate. Hydrogen – Is It the Answer to Clean Energy? (cont.)

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