The gaps
An information gap is slowing the nascent market for high impact industrial decarbonisation projects. To begin bridging this gap, RMI’s Industrial Transition Finance team initially focused on the emerging clean hydrogen market, recently completing its “
hydrogen project finance roadshow” as part of the RMI and Mission Possible Partnership’s (MPP) Clean Industrial Hubs program. This initiative shared consolidated insights from a dozen leading financial institutions (FIs) with a dozen US hydrogen developers to foster knowledge exchange and pave the way for efficient market growth.
RMI and MPP’s Hubs program brings together financial institutions, policymakers, project developers, and community-based organisations to enable ground-breaking decarbonisation projects in the hardest-to-abate sectors. This work is done in partnership with the Bezos Earth Fund.
This article summarises hydrogen developers’ questions and responses to the investor community during a series of roundtables. The roadshow highlighted five major gaps between developers and FIs – and four potential market developments that, together, could close them:
Gap 1: Performance data
Using the ammonia sector as an examples, there are just two “
clean” plants operating globally today with another
10 at Final Investment Decision. The energy transition needs 60 such new projects online by 2030 — a fivefold scaling in five years. Given this need, sponsors are often skipping pilot-stage projects and going straight to commercial-scale (albeit, taking a phased approach, with capacity ramping up over time). As one investment banker said, “We’re going straight from kilowatts to gigawatts without the megawatt-scale stuff in between.” The speed of this scale-up means neither debt nor equity investors have enough data on technology performance, plant production, feedstock usage, etc. to appease their cautious credit committees.
On the other hand, a private equity-backed developer flagged that banks’ perceived technology risk feels overblown because 1) certain electrolyser designs from original equipment manufacturers (OEMs) are not as risky as perceived, and 2) alkaline and proton exchange membrane electrolyser's solid operating performance should scale smoothly to the gigawatt-scale because the modular cells increase in number rather than size. As one example of how to begin bridging the data gap, the hydrogen market could emulate the Enhanced Rock Weathering (ERW) market, where Cascade Climate is introducing the
ERW Data Quarry, the first-ever ERW data-sharing system with 10 leading ERW companies already committed.
Gap 2: Offtake expectations
Banks’ traditional project finance frameworks generally seem too rigid to fund
first-of-a-kind hydrogen facilities. Bankers are trying to find easy analogues for green molecules transactions but neither renewables nor LNG deal structures are perfectly replicable templates. While hydrogen and hydrogen-derivatives like ammonia mirror early renewables deals in their need for government loan guarantees and state procurement, the current grey ammonia industry, for example, operates on 1–2-year offtakes rather than 10–20-year offtakes.
Hydrogen buyers and financiers will need to “meet in the middle” in tactical and structural ways. Tactical solutions could include adding interest rate step-ups if the project isn’t able to recontract offtake, and/or letting “mini-perm” loans amortise beyond the length of original offtake contract. Solutions could also be structural, like aligning investors and sponsors around the value of projects’ climate attributes (e.g., how much more should investors value a project because it has locked up finite local biogenic CO2 supply that competitors will struggle to emulate?).
Similarly, investors in offtakers (e.g., sustainability-focused corporate share- and bondholders) could incentivise corporate policy reform that encourages procurement teams to pay the necessary greenium for clean commodity contracts instead of sticking to status quo procurement practices, which mostly incentivise minimising operating expenditures. In other words, if the most influential investors in a listed European petrochemicals giant properly incentivise the management team to procure green ammonia (like food makers pay a premium for fair-trade cocoa), this could unlock the offtake contracts needed to make green ammonia bankable. This would be a fundamental shift in mindset, with offtakers shifting their perspective on the role of their procurement departments — from cost centre to a powerful medium for investments in the clean energy transition.
Gap 3: Return expectations
This first wave of clean hydrogen and hydrogen-derivative projects will get built because we must kick-start industrial decarbonisation — not necessarily because they’ll generate handsome financial returns. Climate infrastructure is challenging precisely because it combines large up-front capital requirements with the relatively low returns of infrastructure and complexity of emerging technology.
Governments (both through subsidies and penalties) and philanthropy have a role to play in de-risking and improving projects economics. This support can bring the costs of hydrogen debt, equity, and tax equity closer to the financing costs of comparable renewables and LNG deals. And even with that external support, pureplay project developers expecting to exit with the multiples offered to software start-ups, for example, may be disappointed — as might creditors looking for core infra-like risk/return. The bulk of financial returns may come from/after refinancing these projects in 3–5 years as the industries mature, rather than from during initial investment period. Until then,
creative risk-sharing through blended capital stacks and novel deal syndication will be needed just to meet investors’ minimum return thresholds.
Gap 4: Risk management solutions
There’s a standard way to measure and price traditional infrastructure project risks—the sponsor can pay for a full-wrap EPC, performance guarantees, and/or insurance. Emerging climate infrastructure is trickier. In green hydrogen for example, investors and sponsors are unsure whether to
solve intermittent clean electricity supply by overbuilding storage infrastructure or overpaying for firm power; they’re unsure whether exporting lowers their regulatory risk (by diversifying it) or increases their financing cost (because their project is now much more complex). The consensus on efficient risk management for new clean industrial projects will likely form only as the first deals close in 2025. In the meantime, to speed up learning, more transparency is needed on the deal structure, offtake agreement provisions, and other risk management solutions that get deals over the finish line.
Gap 5: First mover investors
Developers are not only wondering who the first mover offtakers are, they are also asking which banks, asset managers, and institutional investors are first mover financiers. In public, financial institutions have committed billions to the energy transition; in practice, developers are encountering more fast follower behaviour from investors, with limited access to the types of flexible terms needed from first movers to scale up nascent markets.
Part of the issue resides in the legacy investment selection frameworks that guide most mainstream investor decision-making with limited evidence that the value being created by high impact climate solutions is being properly accounted for. In parallel, the risk exposure of legacy assets being used as benchmarks for investment performance also needs to be properly accounted for. There is a lack of transparency on which investors have greater risk capacity/appetite, and therefore should be the focus of fund-raising efforts for high impact industrial decarbonisation projects.
At this stage of the market, there is often a fundamental disconnect on term structures, which immediately halts fundraising progress. For example, developers cite frustrations as they pitch to private equity funds who want risk-return profiles similar to a wind farm or toll road; venture capitalists meanwhile often want proprietary technology to be licensed so revenues can scale exponentially. Lastly, sponsors understand they may need to dilute equity — painful as it may be — to bring midstream companies, utilities, etc. into the consortium. However, that partner identification process is time-consuming. It is a job ripe for innovative deal-making from investment bankers, but those bankers are also highly incentivised to be fast followers instead of first movers, often focusing their attention on easier to implement solutions like drop-in fuels, which at this stage of the market, are much easier to structure and scale.