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Financing a world scale Hydrogen Export project
- Feb 28, 2023 9:01 am GMT
Financing a world scale Hydrogen Export project
The key issues that will need to be addressed to make a green hydrogen export project bankable are the political, offtake, and completion risks. Given that the project will rely for its viability on support from the importing country’s government in terms of both market and price, lenders will first and foremost need to be able to assure themselves that the legislation is robust and durable.
In terms of offtake, it will be critical that: (i) the offtaker entity is strongly creditworthy, as it will act as a conduit for the government support and it is unlikely that an alternative buyer could be found on similar terms; and (ii) that there is no exposure to price or market demand risk for an extended period given that these will both depend heavily on government intervention. Lenders will wish to satisfy themselves that they are not exposed to unproven technology and that the risk of the project failing to come in on budget and schedule are satisfactorily mitigated.
Lenders to LNG projects have almost always enjoyed completion guarantees from the sponsors. However, this has not been the case for offshore wind and, while completion guarantees do offer simpler and faster execution, it is considered that, provided that there is a robust contracting structure, they are unlikely to be an absolute requirement for the Archetype project but could well be if liquid hydrogen were chosen for the transportation medium. Lastly, if a project is located in a less developed country – and there are many that have excellent solar and wind resources – measures will also be required to mitigate the political risk of the host country. Most lender and investor groups are highly incentivised to invest in energy transition projects.
Subject to meeting the bankability requirements above, it is anticipated that there will be more than adequate liquidity to fund the Archetype project – and, indeed, substantially larger projects. Critical to achieving the lowest cost of capital, and consequently lowest cost of hydrogen, will be maximising the level of debt throughout the life of the project. This is best done by achieving the highest possible initial debt:equity ratio (DER) and minimising the rate at which the debt must be repaid. This last can be done either by securing debt with a long maturity (15+ years) and/or by ensuring that the debt can be refinanced one or more times over the life of the project.
Lenders are expected to be somewhat conservative in the early transactions (especially if completion guarantees are not offered) but to offer more favourable terms as they become more familiar with the sector. Additionally, projects will be able to choose from a number of different types of lenders to optimise their financing.
Concessionary lenders, typically owned by the importer country, may be willing to offer long maturities at concessionary pricing while export credit agencies can offer both mitigation of host country political risk, if necessary, and long maturities to promote exports from their home country. Commercial debt from either commercial banks or project bonds can help create competition and supply the balance of the financing need.
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