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Out-Law Analysis 7 min. read

How banks can support private financing of ‘green’ hydrogen

Banks have an opportunity to support the financing of ‘green’ hydrogen projects – and enhance their own climate and sustainability credentials at the same time.

The green hydrogen market is booming, with 522 projects in the global pipeline up to 2030. Continued growth, however, depends on a mixture of public support and fresh private investment. In this article, we explore the funding gap that exists for pipeline projects and factors that will play into projects funding.

The funding gap

The development of green hydrogen is faced with an important challenge. Of the 522 green hydrogen projects currently in the pipeline worldwide up to 2030, approximately $240 billion is pledged, leaving an investment gap of approximately $460 billion to fill. With only $70bn of public funding committed to date, private finance is expected to play a critical role in bridging that gap and enabling the green hydrogen transition.

Project financing is based on long-term 'limited recourse' financing, where lenders' claims are primarily against the project's cash flows during its operational phase. The structure usually involves setting up a special purpose entity (SPE) or 'project' company, which holds all assets, rights, and obligations of the project. Financing can be structured via two main methods: SPV (special purpose vehicle) financing, and portfolio financing.

In an SPV financing arrangement, the debt is held at the project company level. Equity interests are typically held by the project's sponsors or an intermediate holding company – so-called FinCos or HoldCos – with the project company's equity pledged to the lenders. The holding company's sole function is owning the project company's equity, making the SPV structure beneficial for isolating liabilities away from the sponsor.

Alternatively, portfolio financing places the debt at the holding company level, bundling multiple projects or assets under several SPVs to collectively secure financing. This method diversifies risk across several projects, potentially improving the portfolio's bankability and risk management. The choice between SPV and portfolio financing for green hydrogen projects often depends on access to competitively priced renewable electricity, crucial for the project's cost efficiency and competitiveness.

In markets with developed renewable energy and grid infrastructure, like France, green hydrogen projects can be financed separately from renewable energy generation. Conversely, in developing countries with limited renewable capacity, projects may need to integrate renewable generation facilities.

The sourcing of renewable electricity, whether from the grid or on-site production, influences the project's financing structure and lenders' due diligence. For grid-connected projects, the sustainability of the consumed electricity is vital. Lenders will scrutinise "additionality”, as outlined in the EU's Renewable Energy Directive. This concept, requiring electrolysers to be linked to new renewable electricity sources, aims to ensure green hydrogen production boosts renewable energy availability, aiding decarbonisation and supporting electrification without straining existing generation capacities.

Key financing features for green hydrogen projects

The commercial terms for green hydrogen projects are shaped by country risk and project structure. Those factors will have consequences on some specific financing features that will need to be tailor-made in the finance documents to the unique characteristics and risks associated with green hydrogen projects.

Financial covenants

A green hydrogen project is, at the outset, likely to have less debt capacity than the renewables projects providing electricity to the electrolyser and the purchaser of the green hydrogen, such as a refinery or steel plant, where there is a long track record of successful financing and clear precedent for the financing. However, where the hydrogen project is for the “captive” supply to a related business or industry, this will influence the lender’s assessment of the credit risk and bankability assessment of the project.

As for any conventional renewable energy project, the hydrogen project company will undertake, or “covenant”, to adhere to respect financial performance standards set out in the credit agreement. Those financial tests will apply for certain specified purposes, such as making a distribution to the equity investors or incurring additional permitted debt.

However, the key difference as regards bank covenants for financing green hydrogen projects with “captive” supply will lie in the debt sizing criteria. As green hydrogen is a very new market for banks, the first commercial financings will, with no doubt, be based on conservative and cautious assumptions compared to the financing of the traditional renewable energy industry.

Based on experiences from other industries and technologies, it may be assumed that the level of equity which will be required by the commercial lenders to finance such green hydrogen projects will likely be higher than “plain vanilla” renewable energy projects. It is therefore assumed that the leverage ratio debt to equity to be required by the banks will be in the range of 60% debt to 40% equity to 70% debt to 30% equity.

The waterfall structure

In project finance transactions, the cash flow from the project’s operations and assets, rather than the balance sheet of the borrower or its affiliates, will be the source of debt repayment. Lenders will therefore require certain restrictions on the borrower’s access to the project’s cash flow and its allocation.

All amounts received by the project company will generally be applied in accordance with a “cash waterfall” that governs how and when funds are deposited and withdrawn during the construction period and during the operation period. To facilitate this process, amounts are required to be deposited in a project revenue account, which serves as the top of the symbolic waterfall, and which is required to be pledged in favour of the lenders. As the money flows down the waterfall, it is transferred into isolated pledged accounts at each different level and applied or “reserved” for specified purposes, as described in the facility agreement. Any funds remaining at the bottom of the waterfall are then paid, assuming that all applicable conditions have been satisfied – this typically would include demonstrating that certain financial covenants are met – to the shareholders of the project company as a distribution.

Typically, a project waterfall is structured with six levels.

The first level of payment is the amount necessary to pay costs incurred by the project company, such as construction and/or operation and maintenance expenses depending on the project’s stage of development.

The second level of payment is for the senior lenders. The borrower shall pay loan fees and expenses; interest payments; and principal payments – in this order.

The third level of payment will be used to fill an account isolated for paying future debt service in times of lower project revenues. Once this account has been filled to the level of the required amount, which will be indicated in the facility agreement, no amounts will be taken out at this level. This is what is often called the ‘debt service reserve account’.

The fourth level of the waterfall may fill one or more reserve accounts, often for future major maintenance. But once that reserve account is filled with the required amount, no amounts will be taken out at this level, other than to pay for maintenance capex, when required. The sizing of the maintenance reserve account will be informed by the technical advisers’ report and the financial model. A maintenance reserve account is expected to be required for a green hydrogen project, considering the degradation of the electrolysers.

The fifth level of the waterfall may be used to repay the subordinated, junior lenders.

For the sponsors, the sixth level of the waterfall allows for cash remaining to be paid to the shareholders of the project company in the form of an equity distribution, assuming there are no defaults and that financial tests are met.

Each project waterfall will operate differently and many will have features unique to specific project and financing arrangements.

In the context of the sixth level of the payment waterfall set out above, banks may be inclined for green hydrogen projects to negotiate a cash sweep mechanism. Such mechanism would allegedly offer them greater comfort and security by ensuring early repayment of their debt, thereby mitigating their risk exposure.


In project financings, lenders will benefit from a comprehensive security package consisting of substantially all the project company’s assets. A typical French law security package includes a combination of assignments of the material project agreements and project insurances and reinsurances with the Dailly law master agreement of assignment receivables and its related bordereau; pledge over the project equipment; pledge over the shareholders loans; pledge over project bank accounts; and a share pledges over the sponsors’ equity interests in the project company – or the holding company when dealing with a portfolio financing structure.

Sponsors and developers of green hydrogen should not be surprised if banks request a parent company guarantee for green hydrogen projects where long-term offtake has not been secured. By seeking a parent company guarantee, banks aim to ensure a level of financial stability, providing them a direct recourse to the sponsor of the project in the event of defaults as set out in the credit agreement. However, it is unusual in project finance to include a parent company guarantee in the security package as this type of financing is supposed to be ring-fenced to the project’s assets only.

The role for banks and opportunities for France

Green hydrogen represents a future fuel with promising potential, necessitating technological advancements and robust public support. The responsibility now lies with commercial banks, positioned at the forefront of driving the financial ecosystem for green hydrogen. With their adept risk management, regulatory adherence, and scope to facilitate innovation, these institutions stand ready to guide the green hydrogen sector towards a sustainable, low-carbon future, in alignment with global environmental goals and providing significant value for clients and stakeholders.

In France, the momentum of the green hydrogen market presents an exceptional opportunity for commercial banks to take the lead in financing these projects. Leveraging their expertise in risk management and regulatory compliance, they can make substantial contributions to a sustainable energy future while creating value for stakeholders.

France stands poised to reap substantial benefits from the development of green hydrogen, bolstering its economic growth and energy security. By harnessing its renewable energy capabilities and fostering innovation, France aims to position itself as a key player in the global hydrogen economy.

Co-written by Charles Bressant and Léa Fournier of Pinsent Masons.

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