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The case for a Green Capital Markets Union

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Everybody talks about cleantech, including politicians who stress the need for more investment in green technologies. Yet, the reality is that we are at an all-time high when it comes to investments in gas, oil and even coal, writes Jorgo Chatzimarkakis.

Jorgo Chatzimarkakis is the CEO of the industry lobby group Hydrogen Europe and a former member of the European Parliament on behalf of ALDE/FDP.

On the one hand, we see renewable projects, especially innovative hydrogen projects, being announced worldwide; on the other hand, the number of hydrogen projects reaching final investment decisions is just 4%.

The gap between the idea and the realisation is due to a lack of certainty. Will there be straightforward targets for substituting fossil products with green and clean products? Will the right focus be on infrastructure, which needs to be retrofitted, refurbished, or built from scratch? Who guarantees public funding or at least public incentive nation?

China and the US move ahead in paving the way for cleantech. China’s contribution to solar development, especially to the cost revolution, is remarkable. At the same time, it has led to a global dependency on PV panels from China. The wind sector is moving in the same direction.

In 2021, the European hydrogen strategy forecasted that China would have an electrolyser capacity share as high as 10%. Today, not even three years later, China has reached 50%. Europe seems to be hit most by this trend as it has not found the right answers to the US Inflation Reduction Act, attracting many European manufacturers to American shores.

In the case of hydrogen

What are the underlying problems for the hydrogen sector? On the one hand, inflation. Rising interest rates hurt clean energy companies’ capacity to deploy projects and raise funds. Developers might wait for costs and labour costs to come back down before beginning construction of large projects.

Debt, which was already scarce, will be even harder to secure and will offer higher borrowing costs. Despite a sharp increase of venture fund investment in hydrogen between 2019 and 2022, both early and growth stage investment seems to start in 2023, with fundraisers in the first quarter of 2023 set to be approximately a third of what they were in Q1 2022.

There were big expectations on the EU side to see what the response would be.

If the launch of the hydrogen bank, green deal industrial plan and sovereignty fund began to reassure investors, the eventual announcement of EUR800 million for the first pilot auction for domestic hydrogen production in Europe fell slightly flat.

No transition without transmission

Additionally, there are question marks over infrastructure investments. According to the most prominent studies, global investment requirements by 2050 range between six and EUR30 trillion globally, with Europe’s market accounting for approximately EUR1-2 trillion. To put this into perspective, this would mean that Europe needs annual investments of EUR40 – EUR80 billion until 2050.

Recognising that the hydrogen industry operates on an extended investment cycle, the biggest spending should occur between 2025 and 2030. This means the cumulative announced and enforced public funding dedicated to the sector should be around EUR100 billion in 2023.

The reality shows the funding gap is so huge that until the market is more mature and competitiveness against fossil fuel projects increases, debt and project finance will not be able to fill it.

Currently, corporate equity financing and grants have been the primary financial instruments deployed to support the hydrogen sector. It is crystal clear: equity will not be enough for the hydrogen economy to scale up.

Similar to how the LNG or renewable energy sectors developed, equity must be paired with bank and project finance debt. Only a mix of these two sources of capital can unlock the amount of funding required and ensure the returns expected by investors.

A Green Credit Market Union – the first step toward “Qualitative Easing”?

We need a bold step.

I had the honour to represent the hydrogen sector and the pleasure to listen and contribute to a high-level debate in the presence of Mario Draghi, former president of the ECB and former prime minister of Italy, who Commission President Ursula von der Leyen has recently nominated to lead a group to overcome this problem.

The idea discussed is called green CMU, a green Capital Markets Union and newly issued green bonds, proposed by ECB President Christine Lagarde.

As always, the devil is in the detail. However, the time has come for a bold approach to creating the right stimulus and long-term certainty for investments into cleantech in Europe.

This should encompass de-risking by burden sharing between the private and the public sector. A public sector enabled by private sector-led activity would be the right answer to overcome the lack of investments and the daily loss of competitiveness of European industry.

The discussion also showed that the main driver should be decarbonisation, not concentrating on a few technologies. The proper taxonomy encompassing all technologies that lead to fast decarbonisation will be key. Similar to the principle of “time to market” from innovation, here “time to decarbonisation” should be the guiding principle – which leads us to a rich and complementary mix of clean tech.

The five “S” approach for the European Hydrogen Bank

Many expectations relate to the European Hydrogen Bank, first announced in the State of the Union speech by von der Leyen in 2022. She talked about EUR3 billion.

That number so far has not materialised and, in any case, is still insufficient as even an annual amount on this level would only scratch the surface. Yet, as a one-stop shop dealing with public and private investments in the hydrogen sector based on a green CMU would be effective.

Europe could regain competitiveness if the bank sticks to five basic principles: simplicity, scale, speed, stability, and last but not least, sustainability. It should concentrate on both domestic production of hydrogen and imports, possibly with a focus on European technology.

How could that work? Instead of having a domestic and an international leg of operations, as has been proposed so far, it would be much better to concentrate on a green fixed premium for hydrogen production, including manufacturing, especially electrolysers and similar technologies.

Made in Europe would be part of the question as price should not be the only guiding principle but should be accompanied by a WTO-conforming definition of European components.

On the other hand, there should be options for off-takers who could purchase their hydrogen from within or outside Europe. However, they would need a different approach based on a contract for difference. The reference point for the difference could be the CO2 price.

Carbon content was the new currency of the industrial revolution ahead. If Europe becomes pragmatic in accepting a technology-diverse approach, it still has the chance to keep up with global developments that are extremely rapid.

We all want cleantech as it’s the best way to achieve the Paris goals, but at the same time, we don’t want to deindustrialise, and this is the dilemma that needs to be overcome with the support of Mario Draghi’s new “whatever it takes” moment.



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