India’s green hydrogen sector is at a nascent stage, and the economics of production and distribution are still maturing. The sector needs significant capital to grow, due to the high capital cost of new infrastructure, and the relative cost and intermittency of renewable energy. There is a risk that inadequate financing leaves the green hydrogen sector underdeveloped, which discourages further investment, leading to a vicious cycle.
Breaking out of this cycle will require innovative financing solutions beyond just debt and equity. The consultancy firm EY has argued that “collaboration between public and private sectors is key to bridging the financing gaps”, calling for bold financing facilities like green bonds and sovereign loans¹. Whatever the chosen strategy, solving the financing puzzle will be critical to accelerate the green hydrogen transition.
A closer look at the financing challenges
A green hydrogen ecosystem requires substantial capital expenditure on infrastructure, from electrolyzers to storage systems and even pipelines. However, capital can be difficult to access. The cost of capital is also high in India, especially for such a new technology, amid macroeconomic volatility and currency risk². Domestic financial institutions are still finding their way, while global development institutions hesitate to provide concessional capital at scale due to the nascency of green hydrogen. India also competes with incentives from developed countries, which deter capital flows to emerging economies.
Another challenge is incentivizing demand. Green hydrogen costs more than grey hydrogen (~USD 3.5-5 versus ~USD 2/kg), making industries reluctant to switch. In fact, the Climate Finance Leadership Initiative concluded that "the cost of switching from grey to green hydrogen remains the largest impediment to the uptake of green hydrogen"³. Yet project developers and financing institutions need strong demand to make green hydrogen projects viable at scale. The government will thus have to offer financial incentives to boost demand for green hydrogen until it becomes cost-competitive with grey hydrogen.
How governments can ease financing
The Indian government is striving to reduce the cost burden on green hydrogen producers through the National Green Hydrogen Mission (NGHM). These measures include fiscal incentives such as tax benefits (e.g. GST relief on production components), subsidies and grants to attract investors. NGHM provides viability gap funding for green hydrogen production (though more is needed to fill the gap). It also provides production-linked incentives, for instance in electrolyzer manufacturing, to attract investment4.
The government could further use regulation to promote a carbon market. Monetizing carbon credits would create a new revenue stream for green hydrogen projects. Meanwhile, export credit agencies like the Export Credit Guarantee Corporation of India could expand financing and insurance for green hydrogen technologies and equipment⁵. This would diversify potential markets and significantly mitigate commercial risks.
Financing solutions and strategies
Developers will need innovative financial solutions to make projects more viable. They will have to work with governments and multilateral development banks to avail of concessional capital. Guarantees and viability gap funding mechanisms can help lower the cost of capital for projects and make Indian green hydrogen more competitive.
The other imperative is to reduce risk. Project developers and financial institutions could use currency-hedging products and USD contracts to mitigate the risks of investing in India. They could also work with governments to design projects in a way that mitigates o ake risk. For instance, they could connect renewable power generation capacity to the grid. This would create alternative revenue streams to mitigate commercial risk.
Developers and financiers should also work with the government to standardize medium-term o ake agreements for green hydrogen, much like power purchase agreements in renewable energy. This would offer more dependable revenues, with much-needed flexibility on price and volume, making projects more commercially viable9.
Sources
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Policy Watch
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