Governments not doing enough to enable green hydrogen, says private equity investor
The business case for this frontier clean-energy option to reach price parity with other conventional renewable sources, such as solar and wind, has not come to pass as initially hoped
[SINGAPORE] The investment proposition for green hydrogen has declined, partly due to governments not providing the support to enable it through regulatory frameworks, said Shen Chenhua, fund partner of I Squared Capital.
The equity investor, which has acquired a stake in Canadian green hydrogen company HTEC, said that the business case for green hydrogen and green ammonia to reach price parity with other conventional renewable energy sources, such as solar and wind, has not come to pass as initially hoped.
While governments across the world rolled out policies such as feed-in tariffs to support the adoption of solar and wind energy, Shen noted, the same is not being done for green hydrogen or green ammonia to improve the bankability of such frontier clean-energy technologies.
Feed-in tariffs guarantee renewable-energy producers a fixed, above-market price for the electricity they generate and supply to the grid.
“You didn’t see these initiatives in the grid roll-out, in the liberalisation of the power market, especially in South-east Asia, or in the green molecule roll-out, in the green hydrogen and green ammonia,” said Shen, who was speaking at a panel session organised by OCBC and the Energy Market Authority on Friday (Aug 22).
“As private equity investors, we are very keen to look into technology. We don’t think technology is a risk, but we do see regulatory framework as a risk, and we do see the economic liabilities and the long-term commitment from the market as a risk,” she added.
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Concurring with Shen, Alan Heng – who is chief executive officer of the newly created Singapore GasCo – said that he is not optimistic about the commercial distribution of green hydrogen and ammonia, adding that the solution is “some years away”.
Shen said governments can help scale these new technologies through a contracts for difference scheme, which provides long-term revenue stability to low-carbon electricity generators that shield them from volatile market prices and also protect consumers from high costs when electricity prices rise.
When governments are able to improve the economics of these projects and boost the confidence of banks, these banks will then be able to provide non-recourse project financing. This is a type of commercial lending where the lender is repaid only from the profits of the project it is funding, and not from any other assets of the borrower.
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This will, in turn, give equity investors the assurance to enter the project as catalytic capital providers, said Shen.
“Even if, let’s say, the long-term off-takers are not around, the government will give the support, then you are able to be the catalyst. Once these industries scale, the economics will become a self-realised outcome,” she said.
In the case of green ammonia, Shen said that the infrastructure to support its deployment is already available in the petrochemical and shipping industry. The issue then is about scaling the downstream applications of green ammonia, such as by burning it in gas turbines, or co-firing it with coal. “I think with all this, the government push is very limited in the value chains,” she added.
One way to speed up the adoption of less-conventional renewable energy such as green hydrogen is by imposing a carbon tax, said Heng, who was also speaking at the same panel.
However, he noted that it is a thorny issue for South-east Asian governments. For one thing, several countries in this region are still subsidising fossil fuel.
In the case of Indonesia which has plentiful coal resources, it would be “hard to fight against the commercial realities”, he added.
“I think the question is, how long does it take for us to get to that (low enough) cost curve? Or will we ever get to that cost curve? Or is this the technology we should be betting on? Maybe the better technology may be something different. There has been talk about small-scale (nuclear) reactors, that might actually be a better option for us,” said Heng.
Conventional renewable energy
While the scaling up of these frontier clean-energy solutions are important, Nitin Apte, CEO of renewable energy company Vena, said that conventional renewable energy such as solar and wind is still under-penetrated in South-east Asia.
“We’ve got a long way to go, and we can do it with existing technology. We can do it now... we are at grid parity on most of conventional renewables today,” said Apte, who was another panellist.
To scale the deployment of conventional energy, he noted that there must be stronger collaboration between various South-east Asian governments, especially in the area of regional transmission networks.
Efforts are under way to develop an Asean power grid, with Singapore signing deals with several of its Asean neighbours to import their green electricity.
Having an integrated power grid in Asean, however, is particularly challenging, noted Shen.
For one thing, South-east Asia’s power market is not liberalised to begin with. Any endeavour to liberalise the tranmission network would be far too remote.
“As a private sector investor, what we expect from utilities and grid operators are, No 1, institutionalising the open access. What is the transparent pricing on the access cost? No 2, what is the market entry? If I want to export, what is the playbook? So far, there is a lot of vagueness in overall plans. So if you are talking about integration in the region, I think it’s very, very difficult,” she said.
Shen also added that another problem is political, as other Asean countries around Singapore would want to fulfil their domestic demand first before exporting any excess to the city-state, which is renewable energy-disadvantaged.
“So I think what is more important is, how we – as a private sector – facilitate the renewable-energy penetrations, lobby the government to fast-forward renewable-energy penetrations, rather than just building solar, wind,” she added.
Heng said that the natural gas pipeline built to transport the fuel from Indonesia to Singapore offers lessons on how this can be overcome, as shared interest between countries often leads to a more positive outcome.
The project not only brought the fuel to the city-state which was paying international market prices, but also brought the energy source to the Indonesian island of Batam.
“When you have those commercial interests being aligned, it makes it harder for commercial companies, as well as governments to say no. And I think this is the opportunity we need to create. How do we find sufficient opportunities like that, where we can find that right balance, that it provides a domestic obligation, but yet is able to monetise at international prices,” said Heng.
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