Hydrogen will be a twin-track market in the near term

The investability and bankability of hydrogen projects in 2024 will be split between a flight to quality for large projects and smaller projects that are less reliant on project financing.

The fundamentals of bringing forward a hydrogen project are broadly the same as any other energy project. Developers need to show their investors how they will achieve a return, outline the risks associated with that return, and prove that they are the people best placed to bear the risks.

In the case of hydrogen projects, the minimum length of offtake contracts remains one of the most important considerations for investors, with anything less than 10 years likely to be unattractive. 

Government funding is also a key determinant of bankability. A government’s ability to support offtake contracts with either outright guarantees or guarantees on the difference between production costs and competitive pricing of alternative fuels, will increase interest in hydrogen investment. In the US, government backing in the form of the Inflation Reduction Act has been a major boost in this respect.

Investors are also more likely to commit to projects which have all of the fundamentals in place. Project financiers will be the hardest investors to persuade in this regard, as they have limited appetite for downside risk and don’t stand to benefit from the upside if the hydrogen price takes off.

Getting the green light for a fully-funded hydrogen production project, with customers identified and locked in, is going to be the big picture challenge for the energy sector in 2024. 

In the short-term, there will be a flight to quality for the larger, more sophisticated projects, with the least risky projects – which maximise the chances of everyone along the value chain (including governments) getting comfortable with the project and giving approvals at the same time – most likely to succeed. 

Smaller projects, which are likely to have a more diverse range of prospective customers and which are less reliant on project financing to proceed, will also find it easier to move forward. This will benefit the hydrogen economy as a whole, through demonstrating both the viability of the technology and how to overcome technical challenges to reach the operational phase of projects.