Clean hydrogen is a nascent technology that could play an essential role to achieve net-zero emissions. However, less than 10% of announced clean hydrogen projects worldwide have reached final investment decision, as equity and debt investors often consider these projects to be too risky. This report provides a better understanding of the risk mitigation strategies to unlock and mobilise private capital for clean hydrogen in emerging markets. It highlights how de-risking instruments can address key barriers faced by investors in clean hydrogen projects and suggests ways to allocate risks among actors. The report also proposes actions to enhance international co-ordination for scaling clean hydrogen financing for development. Furthermore, it draws lessons from case studies showcasing how lighthouse clean hydrogen projects and available economic, de-risking and financing instruments are being implemented in a wide array of countries.
Leveraging De-Risking Instruments and International Co-ordination to Catalyse Investment in Clean Hydrogen
Abstract
Executive Summary
Clean hydrogen offers a major decarbonisation opportunity for both advanced economies and emerging markets and developing economies (EMDEs). It can reduce emissions, boost energy security, and drive economic growth. Based on announced projects, clean hydrogen annual production may increase from under 1 million tonnes (Mt) in 2023 to 40 Mt by 2030, including half in EMDEs. This would require urgent investments, as large-scale projects take years to operationalise. As such, to produce 20 Mt of clean hydrogen by 2030, EMDEs would need to invest on average USD 100 billion annually in the clean hydrogen value chain, including renewable electricity, hydrogen production, storage, transport, and conversion.
The report Scaling Hydrogen Financing for Development, published by the World Bank and the OECD in February 2024, identified that less than 10% of clean hydrogen projects globally have reached final investment decision (FID) due to high perceived risks. De-risking instruments can improve bankability by lowering the cost of capital, reducing production costs, and attracting more private investment. This new OECD and World Bank report examines these instruments and proposes actions to enhance coordination and scale investment.
An investor survey conducted by the OECD and the World Bank in 2023 shows that the main six categories of perceived risks affecting the development of clean hydrogen projects are uncertainty on the offtake (both volume and price), political and regulatory risks, insufficient enabling infrastructure, technology risks and macroeconomic risks. While lessons from sectors like liquefied natural gas (LNG) and offshore wind are useful, clean hydrogen faces unique challenges, such as a lack of reference price indices, market uncertainty, and the absence of a commercial track record, making it difficult to effectively evaluate the impact of de-risking instruments.
De-risking instruments help projects reach FID by reducing uncertainties and lowering costs, such as optimising debt sizing and cutting capital costs. In 2024, the OECD surveyed over 40 stakeholders, including governments, development finance institutions (DFIs), and private investors. The survey identified key de-risking instruments for clean hydrogen in EMDEs, including contracts for difference, offtake guarantees, foreign currency guarantees, political risk insurance, contractors-all-risk insurance and performance guarantees.
Yet, there is no one-size-fits-all solution: effective de-risking requires a combination of instruments, as each project and country presents unique risks. Careful management of de-risking instruments is crucial to balance risk-return, avoid overlaps and prevent redundant costs. Especially in EMDEs, it is critical to ensure a security package that minimises reliance on public support and boosts private investor confidence in the long term. Moreover, risk mitigation strategies must include enabling conditions like access to infrastructure, demand creation by public and private actors, and sound contractual frameworks to develop a pipeline of investable projects.
An increasing number of international initiatives are supporting clean hydrogen projects in EMDEs, led by both global and regional actors. These initiatives focus on research and development, de-risking, financial assistance, capacity-building, policy support and coordination. This report depicts 46 initiatives. More than two-thirds offer direct financial support or de-risking mechanisms, stressing the need for further collaboration to identify projects’ risks, increase financing efforts and maximise socio-economic benefits. One half cover EMDEs broadly, while others focus on specific regions. Three-quarters target renewable hydrogen, with a well-balanced coverage of the entire hydrogen value chain.
However, coordination among initiatives for de-risking and financing clean hydrogen remains limited. Investment platforms, bilateral collaborations, and peer-learning sessions among financial institutions can be effective tools to address this gap.
Since 2022, the OECD has been collecting data on enabling conditions and financing strategies for clean hydrogen projects. This report analyses 15 new case studies, highlighting the importance of tailored financial and policy frameworks, risk-reducing tools like subsidies and tax credits, and public-private partnerships to attract investment and facilitate scaling. The case studies provide key insights on various areas:
De-risking and financing: effective risk allocation is crucial for securing capital, with instruments like currency hedging and equity stakes in special purpose vehicles playing key roles in large-scale clean hydrogen projects.
Government support: national programmes with targeted subsidies and clear hydrogen-specific policy frameworks are vital for optimising risk allocation and stimulating investment.
Partnerships and Implementation: public-private partnerships and dedicated teams are essential to align financial resources and technical expertise to manage the complexities associated with large-scale hydrogen projects.
Replicability and scale-up: alignment of the projects’ objectives with national and international climate policies, tailored business models and sector-specific funding strategies are essential.to address the hydrogen market challenges.
This new OECD and World Bank report features de-risking instruments for clean hydrogen projects in EMDEs, emphasising their role in attracting private investment. It evaluates asset risk profiles and de-risking tools, based on an investor survey and experience from other sectors. The report highlights the importance of international coordination, public-private partnerships, and knowledge-sharing to overcome investment barriers. It informs the World Bank's 10 GW Lighthouse Initiative and the OECD efforts to help countries accelerate financing for clean hydrogen projects.
Source: Authors
