An environmental lens on policies for better lives
By Moongyung Lee and Joseph Cordonnier, OECD Environment Directorate
In the 19th century, when William Nicholson and Sir Anthony Carlisle discovered the electrolysis process to split water into hydrogen and oxygen, they could not have foreseen the potential to develop a “hydrogen economy” in the 21st century. Over the last few years, more than 40 countries have released national hydrogen strategies. Renewable hydrogen, produced from renewable power via electrolysis, is now considered a cross-cutting option to decarbonise up to 20% of global emissions in the power, transportation and industry sectors by mid-century. It is seen as an essential solution, particularly in sectors such as heavy industry, where direct electrification is not feasible.
Net-zero pathways predict that the global production of hydrogen will be multiplied by 4-6 by 2050, up from around 100 million tonnes today. At least two-thirds of hydrogen is expected to be produced from renewable power (i.e. “renewable” or “green” hydrogen) by 2050, and the remaining volumes from low-carbon hydrogen, where carbon emissions during production would be captured. Achieving this production level of renewable and low-carbon hydrogen, collectively clean hydrogen, would imply a paradigm shift. Yet how can we make the shift, given the current share of clean hydrogen from total hydrogen production is less than 2% and renewable hydrogen costs around three times more than gas-based conventional hydrogen?
To respond to this question, the World Bank and the OECD, through its Clean Energy Finance and Investment Mobilisation (CEFIM) Programme, together with the Global Infrastructure Facility and the Hydrogen Council, released the joint report “Scaling Hydrogen Financing for Development”. The report sheds light on how to close the annual financing gap of USD 100 billion in emerging markets and developing countries from now until 2030. This is of particular importance as at least half of all clean hydrogen is projected to come from these countries.
Policies promoting clean hydrogen in early-mover countries could help to spur global development and reduce costs, but governments’ readiness to share risks is crucial for investment acceleration. Multilateral development banks have a strategic role to play in improving the conditions to enable a country to invest. They also support with de-risking investments, reducing costs and fostering suitable financing instruments, while ensuring alignment with the socioeconomic and climate mitigation goals of countries’ sustainable development agendas.
Many renewable hydrogen projects are capital-intensive and face high financing costs that have come from actual and perceived risks, deterring investors to enter this growing industry. A recent OECD study suggests that the current cost of capital for renewable hydrogen projects varies between 6% and 24%, depending on project structure, size and location. The related stakeholder survey of 40 financial institutions identified six key drivers of high financing costs in the following order of priority:
Cost-effective and efficient de-risking mechanisms can help large-scale renewable hydrogen projects in emerging markets and developing countries achieve financial viability.
Accelerating renewable hydrogen deployment hinges on various factors including using the right mitigation strategies and creating favourable investment conditions and financial solutions. The OECD report provides effective risk mitigation approaches and enabling conditions, garnered from successful projects reviewed as part of the study:
The joint report “Scaling Hydrogen Financing for Development” presents a comprehensive plan to expedite the worldwide adoption of clean hydrogen as a low-carbon energy source to combat climate change and enhance energy access in developing nations. This strategy involves the World Bank’s call for a 10-gigawatt capacity initiative, a tenfold increase from current global clean hydrogen production. The aim is to develop key projects in emerging markets and developing countries, thereby showcasing the viability of the clean hydrogen industry. This approach intends to lower financing costs, encourage widespread adoption, and establish scalable solutions to address the energy trilemma of sustainability, security of supply and affordability in emerging markets and developing countries.
Scaling Hydrogen Financing for Development
https://www.oecd.org/cefim/green-hydrogen/