With Europe seeking to become the first carbon-neutral continent in the world, several huge milestones will have to be reached along the way.
When the European Commission presented the European Green Deal Investment Plan a year ago, it had identified a financial requirement of €1 trillion. The European Green Deal centres around “building back” Europe better, an important pillar of which is the energy transition. This is where hydrogen has large potential to support decarbonisation.
For technical and economic reasons, green molecules are necessary for decarbonisation of the raw materials sector, in industry, in transport and in the building sector. Green energy can also be stored using hydrogen and be transported more efficiently – using the existing gas grid.
Allianz, as one of the founding members of the Net-Zero Asset Owner Alliance, is committed to transition its proprietary investment portfolios to net-zero by 2050 and is engaged in several hydrogen projects through its portfolio companies in the power and gas grid sectors. The current focus is on green hydrogen (which is derived from renewable energy). However, a rapid market integration of hydrogen calls for a “blue period” during which hydrogen shall still be produced from hydrocarbons, although the CO2 emissions tend to be captured and stored.
In July 2020, the EU published its hydrogen strategy which aims to build 40GW of electrolysis capacity by 2030. Total investment needs for electrolysis, dedicated renewable energy, transport, distribution and storage are estimated at €300 billion-€400 billion. Up to one million metric tons of hydrogen are to be produced from renewable energies by 2024. By 2050, hydrogen technologies are to be broadly introduced in the economy including in sectors such as aviation where achieving reductions in CO2 emissions is most challenging. Beyond the significant financial and human efforts, these huge projects will demand adequate regulatory and fiscal frameworks which constitute prerequisites to attract private capital.
“To contain ballooning public indebtedness and increases in budget deficits in many European countries, private markets can play a crucial role here”
The European Green Deal was announced only a few weeks before the coronavirus outbreak in Europe. While the economic repercussions of covid-19 will likely last for years to come, it need not slow down the decarbonisation process. Infrastructure can be essential for the post-pandemic recovery as a driver towards a sustainable future. Governments will launch new stimulus packages to support the economic recovery and will foster new investment structures. To contain ballooning public indebtedness and increases in budget deficits in many European countries, private markets can play a crucial role here.
Funding these long-term investments into a sustainable Europe with long-term institutional money from pensioners and insurance clients is a perfect fit. The pot of European pension and insurance money is currently estimated at €13 trillion, but the share of infrastructure remains relatively modest (circa 3-4 percent) and there is great investor interest in expanding this.
Investors are typically already aware of the technical and commercial risks associated with hydrogen investments; their appetite to provide significant sums will however be predicated on regulatory considerations. Under Solvency II, which drives many insurance investors, price and volume risks must be contained either through mid to long-term off-take contracts or adequate regulations to ensure an efficient risk capital treatment. This would, in turn, render such institutional investors attractive funders for promoters of decarbonisation.
Finally, the demand for low-carbon hydrogen will depend on its relative cost position versus higher carbon solutions, such as grey hydrogen, natural gas, or diesel for which the prices will likely be substantially lower for the foreseeable future. Against this background, a comprehensive policy support framework is therefore paramount, at least initially, to stimulate demand and mitigate investment risks.
A policy support framework should allow us to achieve economies of scale which, over time, render the support framework redundant, in a way not dissimilar to the recent experience in the renewables sector. In this way, European institutional investors can make an important contribution to build back Europe better.
Emmanuel de Blanc is head of private markets at Allianz Global Investors.