Will there be a green hydrogen market in a decade’s time?
10 Nov, 2023

Ashwin West, Investment Director, Head of Sustainable Infrastructure Investments, BlueOrchard and Prabaljit Sarkar, Investment Director, Infrastructure at Schroders


The global need to decarbonise is being felt ever more keenly amid daily headlines about the effects of climate change, in the form of extreme weather events, ecological disaster and social upheaval.


Green hydrogen is now a crucial element in the majority of countries’ strategies to achieve net zero. In some places, it is the only option.

Here we explain the tricky economics of green hydrogen, why it is essential that they are overcome and how we expect a functioning green hydrogen financing market to develop.


Where will green hydrogen play a critical role?



There are two critical areas where hope for decarbonisation hangs heavily on green hydrogen:

  1. Hard- to-abate (HTA) sectors such as steel, cement, heavy transport, by replacing fossil fuels as a zero-carbon feedstock, and
  2. Energy storage

The manufacture of steel, cement and aluminium employs extremely high-temperature processes. Today these can still only be achieved in a cost-effective way by burning fossil fuels. Heavy-duty transportation, which includes shipping, trucking and aviation cannot be electrified with renewable energy at present.

These are the HTA sectors that require high-density local energy sources, a need still best met by fossil fuels.

Green hydrogen is typically produced through the electrolysis of water using renewable energy. The resultant emissions are water vapour and heat, which means the direct green hydrogen process creates near-zero emissions. As the temperature of that heat can be up to 2,100 degrees Celsius, it can power even the most intense industrial processes. Green hydrogen currently appears to be the only promising alternative fuel we have to decarbonise these HTA sectors.

Decarbonising energy supply will also need energy storage solutions. This has grown in importance in recent years, alongside the increasing use of intermittent renewable energy. Hydrogen fuel cells and electric power generation could be integrated at a wind or solar farm to allow flexibility to “store” electricity when the wind is not blowing or sun is not shining. In electricity storage, hydrogen has a technological advantage for long-term storage over batteries that are more efficient for short-term storage.




Industrial production in advanced economies is expected to remain stable or increase slowly between 2020 and 2050. In emerging and developing economies, the production of steel, cement and chemicals products is expected to increase more quickly. Green hydrogen could therefore support emerging economies with large industrial production capacity. Examples include steel manufacturing in India, ammonia and fertilisers production in Egypt, and Trinidad & Tobago, or cement production in Vietnam and Indonesia.

Emerging and developing countries need to build greenfield infrastructures more than developed markets, and this brings a “leap frogging” opportunity. It’s possible these countries could design new infrastructure ready to use, or can easily to switch to, green hydrogen.

Many emerging and developing countries are endowed with abundant low-cost renewable energy resources, making them major potential exporters of green hydrogen to developed economies as well. Many emerging and developing countries are endowed with abundant low-cost renewable energy resources, making them major potential exporters of green hydrogen to developed economies as well. African countries are particularly well-placed to take advantage of such opportunities and many countries are already making progress along these lines. For example, South Africa has accepted the chairship of the Africa Green Hydrogen Alliance (AGHA) and intends to be a leading player in developing Africa’s green hydrogen sector. This follows an agreement reached earlier in the year between Netherlands, Denmark and South Africa to launch a $1 billion blended finance fund to develop green hydrogen projects in South Africa.

There are also official discussions around international green hydrogen trade, with India potentially exporting to Netherlands and Germany. Chile and Namibia could export to Germany, Netherlands and Belgium


When – and where – will green hydrogen become viable first?


Currently, green hydrogen is too expensive for most applications.

Experts generally agree that meeting the green hydrogen cost target of circa $2 per kilogram would be ideal. At that point hydrogen is cost-competitive with natural gas and oil. However, taking CO2 emissions pricing into account, hydrogen could be cost competitive earlier than currently forecast.

The good news is that the economics are rapidly changing.

There are several enablers of cost-competitive green hydrogen. Large scale production can help with economies of scale. Reductions in electrolyser costs are emerging as technologies improve. Renewable power prices are falling. In fact, a range of efficiency gains can potentially make green hydrogen cheaper than low-carbon alternatives before 2040.


Broadly, there are two types of hydrogen projects emerging.

  1. Domestic hydrogen production projects are being developed close to the end users like steel and chemical producers, or fuel cell electric vehicles (FCEV)[1] . These users could act as “anchor customers” who will form a base-demand for hydrogen. The electricity for production of green hydrogen would be supplied through long-term contracts signed with renewable power producers.
  2. Large-scale green hydrogen production projects are being developed in countries where renewable power is highly cost-competitive and abundant. A good example is the Atome Energy 420MW Green Hydrogen and Ammonia project in Paraguay. This project has access to 100% renewable energy baseload power from the Itaipu hydroelectric dam. Massive in scale, such projects could include the construction of storage, pipelines and port infrastructures needed to serve domestic as well as the cross-border markets such as Europe, Japan, and South Korea.


How can green hydrogen projects become financeable?


To be financeable, a hydrogen producer must have a bankable “offtake” scheme with a creditworthy customer – the people that buy hydrogen for end use. The hydrogen offtake contracts will have to address several important risk elements depending upon the requirements of end user customers such as:

  • Pricing – fixed price versus costs plus margin
  • Volume structure – solving the issues of meeting end user demand profiles e.g. supporting peak time demand
  • Reliability of supply – “liquidated damages” (penalties) if the industrial processes of end users are interrupted in the event of delay or failure to supply hydrogen.


As the hydrogen value chain is complex, debt providers are initially most likely to select opportunities where the offtake picture is already clear, and it is easier to model the risks.

Three such areas where project financing opportunity are emerging:

  1. Steel, green ammonia (for fertiliser or shipping) and refineries already offer mature business cases for project financing opportunity, since these sectors already use “grey hydrogen”[2], the offtake picture is clear. Debt providers will find it easier to model the revenue and repayment schedules.
  2. Public transport such as hydrogen-powered bus and train networks with centralised refuelling stations/depots is another promising area. Demand at a fixed price could be guaranteed by a state-backed entity. Being the public transport sector, these projects may also benefit from blended finance, with concessional financing support from the local or national government body. In some scenarios, debt providers will get options for end-to-end financing. This means an electrolyser could be financed together with a fleet of buses that will use the green hydrogen fuel produced.
  3. Storage of electricity opens up project financing opportunity through emulating the business case of the electricity sector, as debt providers can apply the existing offtake structure of the electricity sector in green hydrogen long-term storage projects.


Alternative debt financing options for green hydrogen


It is likely that early-mover debt providers will be using alternative financing options. These might be mezzanine finance, or even equity investments and tax equity finance (e.g. in the US, this would allow a provider to take advantage of the Inflation Reduction Act).

Debt providers may also consider investments structured as convertible bonds with pre-agreed rights to co-invest at the asset level at a later point. This would mean investors keep the option to capture upside, in lieu of risk taken at the early stage of the green hydrogen market.


Conclusion: seize the early mover advantage


We believe there will be significant deployment into hydrogen-related assets over the medium to long-term, and this is essential to meeting net-zero targets.

Over time, many more projects are expected to emerge to match the risk profile debt providers typically look for and become “bankable”. In the meantime, those who are willing to be flexible and seize the opportunities available today stand to benefit from early-mover advantage. Opportunities in the emerging markets may provide the “leap frog” effect, reducing time to adoption and increasing overall positive impact.

We believe there is a tremendous opportunity for investors to get familiar with the market now.

[1] FCEV are electric vehicles that get their power from hydrogen fuel cell instead of battery used in battery electric vehicles (BEV). The lithium-ion batteries used in BEVs are expected to cause a serious environmental crisis when they reach the end of their useful lives. FCEVs offer much more eco-friendly solutions as FCEVs are easier and cheaper to recycle than BEVs.

[2] Grey hydrogen is derived from natural gas and produced from fossil fuels. Grey hydrogen produces greenhouse gas emissions: between 11.1 – 13.7 kg of CO2 equivalent per Kg of hydrogen.






@Ashwin West
+ posts
@Prabaljit Sarkar
+ posts

You May Also Like…

New Fiscal Frontiers

New Fiscal Frontiers

Izak Odendaal - Old Mutual Wealth Investment Strategist     Every year, the Budget Speech commands wall-to-wall media coverage. Most of this coverage asks something along the lines of “What does the Budget mean for the taxpayers, the economy and markets?”...


Subscribe To Our Newsletter

Subscribe To Our Newsletter

Join our mailing list to receive the latest news and updates from our team.

You have Successfully Subscribed!

× Talk to us...