This is an extract from a recent report “Green Hydrogen Imports into Europe: An Assessment of Potential Sources” by The Oxford Institute for Energy Studies. In this extract we specifically focus on Morocco and Chile.
Morocco
Historically, more than half of public infrastructure investment in Morocco has come from state-owned enterprises, who have sourced a sizable amount of their funds from state-guaranteed long-term foreign currency concessional loans and state-guaranteed domestic loans, altogether amounting to 15% of the country’s GDP as of end-2017. The state’s strategy however is for green hydrogen production to be led by the private sector, same as for the dedicated (off-grid) renewable power generation necessary for it. Indeed, all projects announced so far are intended to have their own dedicated power generation. Moreover, the trade in green hydrogen between producers in Morocco and buyers abroad is also predicted to be conducted by the private sector, with off-take agreements having durations of 15-20 years. That said, the most important driver for the green hydrogen business to take off anywhere in the world will be the availability of a large-scale buyer.
Green hydrogen investment in Morocco will likely assume the project finance model and consist of much off-balance-sheet financing for future projects. This is largely thanks to Morocco’s relatively low country risk for an EMDE country – and long experience with project finance, but also due to its exceptional potential for green hydrogen production resulting from its excellent wind and solar resources. The kingdom’s local commercial banks have great experience in project finance, for both local and West African projects, whereby they formed syndicates which comprised other local banks as well as international ones. In fact, 5% of the total credit extended by local Moroccan banks in 2019 went towards the energy and water sectors, and local public-private equity funds have been established during the previous decade to target industries such as agriculture and green energy.
International banks which would likely provide debt include JBIC. As for European banks, the European Investment Bank (EIB) has mobilised a total of €2.5 billion ($2.75 billion) during 2017-2022 in Morocco’s economy, with 20% of that going towards renewable energy. Moreover, the European Bank for Reconstruction and Development (EBRD) has agreed to provide senior debt worth $48 million to the Koudia Al Badia Energy company, which operates a wind farm in Morocco and is owned by the country’s Agency for Sustainable Energy (MASEN), along with other international and Moroccan banks. In addition, the EBRD has provided a total of $220 million in debt to Morocco’s Société Nador West Med (NWM) to support the development of the country’s Nador West Med (NWM) port, and has extended a further package worth $1.1 million to support NWM in becoming the operator of the port and assessing its role in the hydrogen value chain.
OCP, a state-owned enterprise, currently imports around 2 MT of ammonia from abroad to produce fertilisers, a key export of the kingdom’s economy. Buying locally produced ammonia at a fixed price (less than $700/tonne) would enable OCP to hedge its future ammonia costs given the market volatility in recent years, especially for natural gas markets, which has resulted in large fluctuations ($300-1,200/tonne since 2020) in the price of ammonia. Thus, locally sourced ammonia would effectively bring down OCP’s fertiliser production costs through de-risking its ammonia supply chain while also helping to decarbonise its business. This is why OCP has recently announced an investment, all equity-funded, of $7 billion in a green ammonia production project in Morocco. OCP’s investment is in the entire production process, including power generation. Thus, one of OCP’s aims is to achieve a levelized cost of renewable electricity which is lower than the price which it has historically paid to Nareva Holding. Once the green ammonia supply chain has been established, it is possible that it would serve as a catalyst for the creation of a Moroccan ecosystem, from which future projects aimed at exporting to EU off-takers would eventually emerge. Within Morocco’s project finance framework, other investors including banks; both commercial and multi-lateral, Export Credit Agencies (ECAs), and local bonds would also contribute funds.
Project financing examples in Morocco
An example of an investment structure can be found in the Agadir desalination plant project, which received total funding of $457 million in the form of debt (about 40% of total) from a commercial bank, BMCE (Bank of Africa), and in the form of equity (the remainder). The equity funding came partly from the state (about 45% of total) and partly from Spain’s Abengoa (about 15% of total). Abengoa formed a consortium with Morocco’s state-owned financial institution, CDG, to operate the plant. Another example is the Safi coal-fired power plant, the debt for which was provided by Japan Bank for International Cooperation (JBIC).
As for the project sponsors, these will likely be the developers of green hydrogen production infrastructure, and in the case of Morocco they are likely to be international renewable energy companies, such as the aforementioned Abengoa. So far, the only major oil & gas company to publicly show interest in Morocco’s green hydrogen potential has been TotalEnergies, which took over the renewables company, Total Eren, in 2023 after the latter had announced plans to invest $10.3 billion in Morocco’s sector, including ammonia production facilities. In Morocco, projects have achieved cost of debt within the range of 6.5-7.5%.
The Moroccan state has historically only provided sovereign guarantees in relation to what it deemed to be critical infrastructure and is therefore unlikely to cover green hydrogen project completion or debt servicing risks. The former risk would likely be borne by the project sponsor(s) along with the associated Engineering, Procurement, and Construction (EPC) company(ies) to begin with, before the sector becomes more mature and lenders become comfortable guaranteeing this risk themselves. The latter risk, that of lenders not receiving debt servicing payments for whatever reason, would likely be underwritten by insurance which is arranged by the project sponsors.
Chile
Export of green hydrogen from Chile is likely to be via the ammonia pathway, with most projects which are geared for export being designed for that, although methanol and e-fuels offer other possibilities. Nevertheless, the IEA predicts that traded amounts of e-fuels will be much lower than those of green ammonia, both from Chile and worldwide. Moreover, global prices of ammonia have fluctuated significantly during the past three years, between $300 and $1,300 per tonne in the US and Europe, mainly as a result of fluctuations in global natural gas prices.
The financing of green hydrogen projects in Chile will likely be in the form of project finance, mainly due to the technology risks, and major developers are unlikely to fund such projects from their own balance sheets at this stage. The aforementioned Cabo Negro project for example plans to receive 70% of its funds through project financing and the rest from debt and equity markets. According to Kantner, commercial banks offered debt interest rates as low as 4% for a long time in Chile until the geopolitical events of the past couple of years took place and resulted in worldwide inflation and interest rate hikes.
In 2022, IRENA predicted that Chilean green hydrogen projects would benefit from a relatively low cost of capital in the near term, at 5.2%, with this advantage eroding if other countries were to reduce theirs in the long term. Nevertheless, the combination of relatively low WACC and rich renewable resources makes Chile resilient to the risk of high future renewable power generation costs worldwide, according to IRENA. Given that Chile’s credit ratings are at investment (‘upper medium’) grade and are even higher than those of some EU Member States, it is reasonable to expect a cost of debt for Chilean green hydrogen projects which is pretty close to that of EU-hosted projects.
Regarding the relative amounts of debt and equity, funding of renewable energy projects has historically been mostly (60-85%) from debt, a range which is likely to be similar for green hydrogen projects. That said, it is expected for green hydrogen project financing to constitute 60-70% debt to begin with before lenders can gain confidence in this technology and agree to provide up to 85% in debt financing at later stages or for future projects. Indeed, lenders are currently being conservative when providing funds to green hydrogen projects, and are thus demanding Debt Service Coverage Ratios (DSCRs) of 1.4-1.5 for Chilean projects – meaning that net operating income must be at least one-and-a-half times total debt obligations. For example, European lenders to green hydrogen projects currently seem unwilling to fix the off-take price for more than 10- 15 years because they are betting on there being a (variable and potentially more lucrative) market price for hydrogen beyond that timeframe.
The sponsors and equity holders are likely to be international private companies. As mentioned above, Denmark’s private equity firm, CIP, is already a partner in the HNH project as part of its Energy Transition Fund. In addition, HIF Global has secured a total of $260 million in equity investment into its green hydrogen projects, including those in Chile, from investors such as Germany’s Porsche AG and the US-headquartered institutional investor, EIG. Much of the investment will likely come from US companies, including banks, since US companies are deeply involved in Chile’s energy sector. In the future, these could possibly include the aforementioned HIF Global as well as AES, which is the second largest power producer in the Latin American country.
While it would be most cost-effective to secure all of the debt from commercial banks, Chilean projects which have a capital cost of more than $2 billion are unlikely to receive all of the debt which they need from banks only, hence the need for additional funding from ECAs and/or development banks. ECAs would typically either require that specific equipment manufactured in their respective countries is used in a project, or that the exported product’s end-destination is that of their respective countries. US-based suppliers have provided 5-7% of all electrical equipment imported by Chile in recent years, meaning that the ECA of the world’s largest economy could also get involved in Chile’s green hydrogen investments. Meanwhile, European ECAs will also likely provide funding if equipment for the projects is sourced from European manufacturers.
The government in Chile will likely not be an investor in green hydrogen projects. That said, the Chilean government has been providing significant support to developers of such projects, such as Corfo’s $50 million. Moreover, the state’s oil & gas company, ENAP, has agreed to collaborate with HIF Global on their Cabo Negro project by repurposing their nearby oil & gas terminal and associated infrastructure in Magallanes for the purpose of exporting e-fuels from that project. ENAP has also signed an MoU with HIF Global to purchase renewable electricity from the US company.
Since Chile became a member of the OECD, the role of development banks in the country has steadily diminished as the country is no longer deemed to be in need of their funding. Nevertheless, given the novelty of green hydrogen technology, these banks could make an exception for these projects. The WB seems to have already made such an exception in the case of Chile. Moreover, the EU, EIB, and Germany’s KfW have already agreed to provide funds to help develop Chile’s green hydrogen production sector. The country will nonetheless need to continue to find innovative ways to access climate-related funds to help grow its green energy sector. Moreover, regarding the possibility to refinance projects during the expected lifespan of their off-take agreements (15-20 years), thereby seeking more favourable terms once confidence in a project has been increased, this is unlikely to happen given the scale of green hydrogen projects relative to Chile’s banks’ liquidity and the limitations typically set by ECAs and development banks. These limitations typically include the requirement for a debt agreement to have a tenor which matches the duration of the off-take agreement. Meanwhile, the Chilean bonds are too small to make a significant contribution to the financing of the country’s green hydrogen projects.
In many cases all stages of the production process will likely be financed as one single project, from renewable electricity generation to ammonia production. That said, the creation of separate SPVs for upstream and downstream processes with different financing structures and terms, thereby minimising the WACC of the overall project, is also a possibility. The separation of financing structures would only be possible in a future scenario in which there is a local green hydrogen ecosystem which could offer options for any stage of a project to connect to facilities from other neighbouring projects in case failure were to occur in one or more of its other stages.
Generally, while lenders might take on some project risk, especially multilateral banks, the distribution of risk will not be even and most of it will fall onto the project sponsors. While every project will have its own dedicated renewable power generation, the ones in the north and centre of the country will benefit from being able to connect to the grid, whereas the ones in the south of the country will not have that benefit. So far, all projects which have received FID have their own dedicated power generation, apart from one which will also receive grid electricity, albeit most of these are very small. Moreover, the northern projects will be mostly powered by solar while the southern ones mostly by wind. In either case, curtailment risk is not a concern for such projects. In the Magallanes region, lack of access to the national grid is compensated for by the high – 70% – capacity factor achieved by wind power generation.
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