The law of demand: does hydrogen need a Keynesian push?

“If demand and confidence reappear”, wrote John Maynard Keynes in his letter to President Roosevelt in 1938, “the problems of the capital market will not seem so difficult as they do today”.

To those well versed in Keynesian macroeconomic advice, demand stimulation is familiar territory. The Keynesian prescription is also relevant to scaling nascent climate technologies. Hydrogen being one amongst them.

While demand for hydrogen has grown steadily in recent years, almost all of it is serviced through production that relies on unabated fossil fuels. By comparison, the market for low emission hydrogen has struggled to find its footing and its investment case is losing ground. A new white paper from MUFG, a Japanese banking group, suggests a way forward: demand-linked financing.

Early days

In the context of decarbonising hard-to-abate sectors, hydrogen is hard to ignore. From long-distance transport and aviation to steel and chemicals. Yet, as far as low emission hydrogen production goes, it is still early days. The most common technology relies on abated fossil fuels (through CCUS). The alternative is electrolytic production, which is also a nascent proposition.

Currently, these technologies account for less than 1% of global hydrogen production, according to the IEA’s Global Hydrogen Review. The pipeline, however, looks different. By 2030, projects that have already reached a final investment decision could expand low emission hydrogen capacity fivefold.

“The growth in new projects suggests strong investor interest in developing low-emissions hydrogen production, which could play a critical role in reducing emissions from industrial sectors such as steel, refining and chemicals,” says IEA executive director Fatih Birol.

Buy side

“For these projects to be a success, low-emissions hydrogen producers need buyers”, adds Birol. Buyers could, in theory, help address the key constraint that has stalled progress thus far – cost.

The issue, says MUFG, is that low emission hydrogen has consistently been more expensive than grey. In Japan, the first country to publish a hydrogen strategy, the levelised cost of grey hydrogen at last count was less than $4 per kg. The number for low emission hydrogen was over $8.

“The low-carbon hydrogen sector is at a critical juncture. While we've seen significant policy momentum globally, our analysis shows that current funding approaches aren't translating into the project delivery needed to meet net-zero targets”, says Andrew Doyle, executive director, power & renewables, project finance, MUFG EMEA.

Demand-linked finance

Part of the issue, says MUFG, is the funding model behind these projects. Across markets such as the UK, Germany and Japan, funding models have hitherto focused on revenue certainty.

Instead, the MUFG white paper argues, financiers should “find a way to mediate between long-term production price security and flexible procurement on an annual basis”. 

“The industry requires a shift towards demand-linked financing mechanisms that provide certainty for both producers and off-takers”, says MUFG’s Doyle, “without addressing the cost competitiveness gap and securing firm buyer commitments from project inception, we risk stalling progress in a sector essential for decarbonising hard-to-abate industries”. 

The IEA's analysis seems to agree. “Policymakers and developers must look carefully at the tools for supporting demand creation while also reducing costs and ensuring clear regulations are in place that will support further investment in the sector”, said Birol.

For now, a healthy pipeline of projects with committed capital is welcome news. But not for long. Cost gaps could still hinder progress. For projects to reach timely completion, the paper claims, demand stimulation could go a long way.

For investors looking into hydrogen as a climate solutions opportunity, demand stimulation could turn out to be a powerful tool. If the white paper is right, a Keynesian push could improve the investment outlook for low emission hydrogen - or at the very least, make it less risky.