The DBSA recently published a working paper on the hydrogen economy. As the world turns towards greener energy solutions, hydrogen stands out as a transformative force in our quest for sustainability. Development Finance Institutions (DFIs) are playing an important role in nurturing this growing sector, particularly in emerging markets and developing economies (EMDEs). Their involvement goes far beyond just providing funds, they are shaping the future of hydrogen by managing risks, influencing policies, and offering crucial technical support.
Bridging the financial gap
Hydrogen technology holds incredible promise, but it demands substantial investment. In developing countries, where the annual need for funding can reach around $100 billion, traditional financiers often hesitate due to the high risks and costs involved. This is where DFIs step in.
DFIs specialise in funding projects that might seem too risky for conventional investors. They use innovative financial models like blended finance, equity, and loans to bridge the funding gap. For example, a DFI might provide initial funding or guarantees that help attract private investors. This approach not only de-risks these projects but also brings in additional investment, making it feasible to push forward with ambitious hydrogen initiatives.
Shaping supportive policies
The right policies can make or break the growth of the hydrogen economy. DFIs are instrumental in crafting these policies by collaborating with governments and stakeholders. They help design regulations that make hydrogen investments more attractive and less risky.
DFIs advocate for policies that might include tax incentives or subsidies for early adopters of hydrogen technology. They also work to ensure that hydrogen projects align with national energy strategies, creating a stable and encouraging environment for investors. By helping shape these policy frameworks, DFIs play a key role in ensuring that hydrogen projects get the support they need to succeed.
Building technical expertise and infrastructure
Financial backing is only part of the equation. DFIs also provide essential technical support and help build the infrastructure needed for hydrogen production and distribution. This includes facilitating processes like competitive bidding for renewable energy projects and assisting in the creation of hydrogen-specific strategies.
For instance, DFIs help countries develop the infrastructure required for hydrogen, such as electrolysers for production or refueling stations for hydrogen vehicles. They bring technical expertise and facilitate knowledge transfer, enabling regions with abundant renewable resources to effectively develop their hydrogen economies.
South Africa's hydrogen ambitions
South Africa is setting its sights on becoming a major player in the hydrogen economy. With projections suggesting that hydrogen could contribute up to 3.6% to the country’s GDP and create about 380,000 jobs by 2050, the stakes are high. Initiatives like the SA-H2 fund are important in this vision, and DFIs like the Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC) are key partners in this effort.
These DFIs are not just funding hydrogen projects, they are helping to attract international investment and expertise. Strategic integrated projects (SIPs) in South Africa focus on producing and exporting green hydrogen, with DFIs playing an important role in de-risking these ventures. Their support is essential for making South Africa competitive in the global hydrogen market, fostering innovation and attracting further investment.
Challenges and opportunities
While DFIs are making significant strides, they face challenges:
- High costs - hydrogen projects often come with steep initial costs. DFIs need to continue developing creative financing solutions to tackle this issue.
- Infrastructure needs - building the necessary infrastructure for hydrogen is a massive undertaking. DFIs must collaborate with governments and the private sector to address these needs.
- Regulatory uncertainty - the evolving landscape of hydrogen regulations can create uncertainties. DFIs can help by engaging in policy advocacy and supporting the development of clear, consistent regulations.
Conclusion
Development Finance Institutions are more than just financial supporters of the hydrogen economy, they are important architects of its future. By mobilising capital, influencing policy, and offering technical support, DFIs are driving the growth of hydrogen projects, especially in emerging markets. As countries like South Africa work to harness their renewable resources and develop hydrogen technologies, DFIs will remain central to overcoming challenges and advancing towards a sustainable energy future.