Insights | March 30, 2021

The hydrogen market – trends and developments in Northern Europe

Creating a well-functioning regulatory framework, developing technology, and investing in hydrogen projects are the first, crucial steps that need to be taken in order to create an operating hydrogen market. But in what order will the emergence of the market will take place? How will the puzzle be put together?

Together with Shearman & Sterling, Roschier recently hosted a webinar concerning the current trends and developments in the Northern European hydrogen market. Those discussing the topic were Shearman & Sterling’s Energy and Infrastructure partners Dan Feldman, Iain Elder and Sanja Udovicic, and Counsel Laura Huomo from Roschier, alongside distinguished guests Joris Bijvoet (CFO of the Hydrogen business of Shell), Guillaume Rivron (Partner at Marguerite, an independent fund investing in European infrastructure), and Olli Sipilä (CEO of Gasgrid Finland, the gas transmission system operator in Finland).

Hydrogen space in the Nordics and Baltics

The webinar was kicked off by the stage being set for the Nordic and Baltic hydrogen landscape. The hydrogen space in the Nordics and the Baltics is framed by the EU strategies relating to hydrogen and sector integration, as well as the new industrial strategy, all published in 2020.

Based on these strategies, the Nordic countries have either published their own hydrogen-related strategies or roadmaps. None of the Baltic countries have a national hydrogen strategy (although, Estonia intends to publish a hydrogen roadmap). All of the Baltic countries have included hydrogen in their national energy and climate plans.

The whole emerging industry in the Nordics and in the Baltics is eagerly waiting for the gas decarbonization package, renewal of energy taxation and the final TEN-E renewal and the outcome of the RED II directive public consultation.

After the webinar, on 26 March 2021, the EU Commission launched an open public consultation on revising the Gas Directive and Gas Regulation in the context of the European Green Deal. The feedback from this consultation will feed into the EU Commission’s preparations of legislative proposals for a new hydrogen and gas markets decarbonization package intended for publication before the end of the year. The consultation is open until 18 June 2021.

Structuring and financing

Following the landscape and building blocks, Shearman partners Iain Elder and Sanja Urovicic discussed the structuring and financing of hydrogen projects. The structure of a hydrogen project is very much influenced by the fact that these projects are taking place in a nascent industry and projects are almost exclusively the first of their kind in the relevant market.

Iain Elder discussed the issues they were facing in the NEOM USD 5 billion Helios green hydrogen groundbreaking megaproject in Saudi Arabia. There are various variables that need to be considered in green hydrogen projects.

The focus in the structuring and financing needs to start with the product and the market. What is the end use of the product and what are the market conditions where this product is created? Different sectors will have different requirements for greenhouse gas emissions. Will the hydrogen produced be used by a nearby plant or will the production facility produce hydrogen for export purposes? Regulation will affect the structuring of the emergence of the value chain differently in different parts of the chain.

Where is the required green electricity coming from? The requirements for green hydrogen will set the boundaries on the source of green electricity either by forcing the project to have its own green electricity source (like a wind park) or alternatively the country would need to have in place guarantees of origin in terms of the green electricity to ascertain the green delivery. The green power needs to be new and not additional. Also, the fact that no additional source may be used places an extra burden on the project planning to make sure that there are backup systems for green electricity in case there are any problems with the main source.

Sanja Udovicic continued by speaking about financing and the existing scale of pilot projects that are taking place in Europe. These projects can benefit from various support schemes on a local and EU level, and there are interesting co-operation schemes and partnerships forming between companies and research facilities, for example. Some of the first projects are balance sheet financed. These pilot projects are being initiated by forward-looking corporates future-proofing their business models.

When it comes to financing, it all begins with offtake. Standard project finance techniques are used in the hydrogen projects market and there are no exceptions as regards the bankability requirements. Regulatory support will be important in developing financing structures with the help of carbon pricing, subsidies and other incentives.

There is also increasing liquidity in financing EGS projects in the debt financing capital markets in the form of green financing and green bonds. Also, sovereigns, corporates, and financial institutions are raising sustainability decarbonization linked financing in green bond offerings. Later on, it can be predicted that capital markets will assist as a source to tap into financing for these projects.

Driving hydrogen development past the tipping point

The webinar ended with a panel discussion moderated by Dan Feldman from Shearman, involving the distinguished guests referred to above. Iain Elder and Laura Huomo also participated with certain observations. The discussion around taking actual business decisions involved different points of view by panelists.

In terms of the Nordics and Baltics, the emergence of hydrogen is due more to innovation than an actual need to replace e.g. coal-dominated energy production. It all starts with offtake, the building block for a bankable project. Most likely, hydrogen clusters will lead the way for the industry.

When there is demand and supply for hydrogen, the TSOs also want to be ready to provide a platform for transportation. Investors will want to invest in self-sustainable projects. It is also clear that, in the Nordics and Baltics, the route will comprise focusing on and developing full value chains.