Q&A: Building investor confidence in new hydrogen projects

Some of the most exciting projects in the hydrogen space are coming from relatively unknown players. In the lead up to the Australian Hydrogen Forum, we asked some of these innovators about how to attract and keep investors on board for their hydrogen journey:

Whether you are working on your own hydrogen project or considering investing in this growing sector, read on to hear:

• How colour and emission profiles impact investor decisions
• What the key factors are in building investor confidence
• Ways to manage offtake agreements and risk
• When investment in the hydrogen economy might pay off
• Why small independent projects might have advantages over those funded by established energy generators

1. Tell us a bit about yourself and how you came to be involved in hydrogen?

Stephen Gauld, Managing Director, Infinite Blue Energy
I have more than 20 years’ experience as an engineer across some of the largest global service companies and operators such as Baker Hughes GE, Weatherford, ENI, ExxonMobil, Chevron & Woodside.

After working across multiple renewables projects and identifying the huge potential of hydrogen as a clean energy source, I created Infinite Blue Energy (IBE) in 2018.

IBE is committed to leading the transition to a net zero emissions economy by developing projects in Australia, Italy and New Zealand to produce and deliver green hydrogen to domestic and export markets around the world.

Merrill Gray, Managing Director, Hexagon
My hydrogen journey started way back in 2006. That is when I got into hydrogen projects and technologies (started and back door ASX listed a company) that on a large scale were proven commercially outside of Australia. They were about converting one energy form to another with hydrogen at their core/produced as an intermediary. The end product in this process was market driven.

Fast forward to today/2021 where the decarbonising of energy globally is being invested in heavily including by governments, who are spending trillions of dollars on decarbonising as part of their COVID recovery plans. Investment in lithium-ion batteries (for use with renewables) and hydrogen is growing exponentially. From upstream, in raw materials or inputs, to production facilities, investment is taking place faster and to a greater extent than most people predicted even two years ago, especially in the transportation sector.

So now I want to take my learnings from the past and apply them to create new commercial solutions through practical achievable ‘grounded’ projects that deliver into the growing hydrogen economy. No one ever said it would be easy, and indeed it hasn’t been! But practical, staged, market driven/centric hydrogen projects that step towards the decarbonised world we are all striving for, is what I want to be involved in.

Rhys Tucker, Techno-Commercial Advisor, QEM
I was formerly with ThyssenKrupp for 17 years who are, among other things, a major OEM for alkaline water electrolysis. I spent many years working with steam methane reforming and gasification to produce hydrogen for chemical use and became involved in water electrolysis at an early stage in Australia. So I have made the jump from grey hydrogen to now working on green hydrogen projects.

Laura Hillis, Director, Corporate Engagement, Investor Group on Climate Change (IGCC)
I lead IGCC's work on corporate climate action, disclosure and governance, working with global and Australian investors to engage with companies highly exposed to climate risks and opportunities. Part of this work is looking at what the transition pathways might be for Australian industry and companies to transition to net-zero emissions and capitalize on the opportunities of the transition as well. Hydrogen is a key strategic and market opportunity for many Australian companies - it has the potential to be widely used for applications spanning industrials, transportation and materials which would reduce company emissions, but also we have the opportunity for hydrogen to be produced in Australia for export.

At IGCC we are running a project (due to wrap up in early 2022) looking at investment opportunities for hydrogen and pathways for companies particularly in the oil and gas sector, so we'll be looking at what it would take to develop up a hydrogen sector in Australia and the implications for investors.

2. What do you see as the biggest hurdles for hydrogen projects seeking investment?

Stephen Gauld, Managing Director, Infinite Blue Energy
As a starting point, projects need to have their fundamentals in order to demonstrate project viability to investors. Infinite Blue Energy’s flagship, Arrowsmith Hydrogen Plant, is planned to be built in a location renowned as a high-yield corridor for large-scale renewable generation, in close proximity to existing transport routes, a population, rail, electricity network infrastructure and accessibility to the coast for future export growth.

Projects need to understand the domestic and international drivers of investment and clearly identify market opportunities and demonstrate viable offtake potential at market bearable prices.

Merrill Gray, Managing Director, Hexagon
There are four key things in terms of overcoming the inherent funding and financing hurdles hydrogen projects have:

1. The same thing faced by all new and emerging technologies or products; hydrogen is simply new or unfamiliar to most people. I find people only have a cursory understanding of what it takes to actually produce hydrogen (from the inputs to the challenges around cost of production and delivery for example infrastructure and transportation wise). All of that usually needs to be set out so they can understand it for them to invest. Key here is how you can or will de-risk, whether it is through scale, securing customers or government support. But nothing will change if we don’t bring people up this learning curve and bring investors along on the journey right?

2. We are all on a journey when it comes to hydrogen. Many people jump to thinking anything is possible now, as in they think hydrogen is something that will be fuelling most buses and trucks on the road within the next few years. It simply isn’t like that. Look at how long (and the $ invested/cost) it took to establish the infrastructure for the fossil fuels to be so readily used around the world today… or for Australia’s LNG industry to be established. It is likely to be decades before the investments of today really bear fruit and that requires a certain type of investor; a patient and well informed one.

3. The technology advances that we really need to make for hydrogen to become commercially viable in multiple applications. Compressing and/or liquifying hydrogen so it can be transported from where it is produced to where it is needed, for example, is hugely energy consuming. In Australia, this might be transportation from high solar generation capacity areas – often inland and remote – to industrial parks and ports for export. There are many (many) innovation breakthroughs required for hydrogen to become part of our daily lives.

4. While we all want to create a decarbonised world, commercial returns is what drives most investors. Pulling together a truly economic return generating/commercially viable green hydrogen project is extremely challenging! With great minds focussing on solving this problem, many investors see that we can and will get there.

Rhys Tucker, Techno-Commercial Advisor, QEM
For a pure hydrogen play the two major hurdles are; electricity price / availability as this is the main driver for production costs, and the ability to secure off-take agreements as the market for green hydrogen is not really established. Fortunately, QEM doesn’t need an offtake to sell its hydrogen, as it uses it as part of their Vanadium processing facility in Julia Creek, Queensland. Although we could sell hydrogen as a by-product at a later stage should a market develop.

Laura Hillis, Director, Corporate Engagement, Investor Group on Climate Change (IGCC)
We do an annual low-carbon investment survey of IGCC members, and one section is on barriers to investment. In the 2021 survey, here were the key barriers identified by investors:

• Policy uncertainty (70% investors) characterised by national policy settings not matching ambitions of trading partners and in many cases domestic company aspirations. Concerns about changes in regulatory environment also create uncertainty
• Lack of opportunities with appropriate risk-return characteristics
• Lack of clear standards or definitions as to what 'green' or 'climate' investing is, and what meets this definition. Particularly an issue with hydrogen because the grey, blue, green types have vastly different emissions profiles and use of language "clean hydrogen" "hydrogen" (with no emissions details) can be confusing

3. The gold standard for project financing is a long-term, fixed-price offtake contract with a utility or other public or quasi-public purchaser. How do new hydrogen projects demonstrate a bankable offtake scheme?

Stephen Gauld, Managing Director, Infinite Blue Energy
You have to demonstrate scope to break away from the traditional offtake model that has underpinned the development of large-scale renewable assets over the past decade and identify the industries that are in the process of, or are on the cusp of decarbonising operations, and partner with respected and secure counterparties that share a mutual benefit.

Hydrogen, particularly green hydrogen, is a new world order and industries are struggling with the complexities of decarbonisation, so you have to be prepared to work with potential off takers to develop unique solutions to their requirements.

4. How effective are pilot projects in proving the financial viability of larger scale projects?

Stephen Gauld, Managing Director, Infinite Blue Energy
Economies of scale is absolutely imperative. What IBE has learned as we have evaluated and modelled plant capacity is projects need to be at a scale that is at the size required to attract serious investors.

Rhys Tucker, Techno-Commercial Advisor, QEM
Water electrolysis is a proven technology – this process was used in Norway for fertiliser production early in the 20th century. The issue is not the technical viability of the process, but rather the business case. Smaller scale hydrogen projects are more palatable, and suit uses such as mobility, whilst it the business case/appetite for larger projects is being developed.

Laura Hillis, Director, Corporate Engagement, Investor Group on Climate Change (IGCC)
I think they are typically very good and important however scalability is key and will need to be demonstrated.

Credit: A sustainable pathway for the European Energy Transition, 2019, Fuel Cells and Hydrogen Joint Undertaking (EU)

5. What can you tell us about the advantages start-ups have over other more established businesses?

Stephen Gauld, Managing Director, Infinite Blue Energy
We have the flexibility to move quickly, which has ultimately allowed us to have the most advanced hydrogen project in the country. We have been able to make relatively expeditious decisions in regard to our strategy because we aren’t required to consider how investing in a future as a green hydrogen producer could potentially impact the operations in another part of our operations.

Ultimately, we can be nimble, have a single focus and a concise purpose.

Merrill Gray, Managing Director, Hexagon
There is something to be said for being nimble, as long as this is matched with expertise, good risk management processes and funds. A key difference between start-ups and established businesses often lies in the management of risk and ambiguity and how businesses within their internal approvals systems and in terms of communications with investors handle risk. Communications around risk and risk management can be very concise and happen within a compressed timeframe, which can make all the difference.

I have often had much larger entities say to me, “We will do it ourselves”, as in, enter a new and emerging market by adopting a new technology or developing a breakthrough project. This often doesn’t eventuate, because it is not their core established business’ focus. It takes time and resources to do something different and change.

Smaller companies often end up taking on substantial (the lion’s share of) risk on projects because for them it is their core business or reason for being. They have to be smart about how to mitigate these risks, particularly to attract funding. At the end of the day, a good outcome that can work for both types of companies, is for start-ups to get the business up and running or to a point where its commercial potential in the market is evident and then be bought out by a more established business, capable of funding more substantial growth. That all sounds straight forward enough but it isn’t, and doesn’t always deliver success. By the time you get the business to the proof of viability and cashflow you don’t need other businesses to step in!

One thing I’ve found to be important here is being transparent. That way, wherever you end up, people know you have done everything you can to manage risks and create value. People are usually pragmatic and reasonable if you have done everything you possibly can, so good communications are really important. No one gets into business to fail, but success takes hard work and often a bit of luck timing wise. Hydrogen is on the move and that is certainly creating opportunities for both start-up/small and established/large companies.

Rhys Tucker, Techno-Commercial Advisor, QEM
QEM’s requirements meant it had the best of both worlds - on site usage and a custom build. It is a ‘clean slate’ – we will build the hydrogen production as part of a larger project specifically to serve QEM’s needs. So we aren’t trying to import someone else product and we are not working around existing grey assets to integrate green hydrogen into production. This makes the process of adopting and using hydrogen simpler and more efficient.

Laura Hillis, Director, Corporate Engagement, Investor Group on Climate Change (IGCC)
Depends on the investor is the simple answer - their investment beliefs, investment mandate, size of the investor and many other factors. Many of the large investors I work with are looking closely at the more established businesses because they are already invested in them and see hydrogen as a key transition pathway particularly for say oil and gas companies.

You can hear more about bringing investors on the hydrogen journey at the Australian Hydrogen Forum 2022.

Attend the forum, from 23-25 March, and you’ll interact live with speakers and your industry peers.