Rabobank has prepared an initial financial model to assess the financial viability for the construction and operation of two electrolysis plants and two biomass gasification units (500 MW each).
Model assumptions have been provided by stakeholders involved in the ‘Green Hydrogen Economy’ project and have neither been tested nor externally validated. Additional due diligence is recommended once detailed information becomes available about contracts and cash flows. The model assumes limited recourse financing with a long debt maturity (up to 20 years) and relatively high leverage (60 percent). To accommodate such a structure, first of all, cash flows must be contracted with experienced, credit-worthy and reliable counterparties. Risks related to construction, production, offtake (price and amount of hydrogen) and feedstock supply (price, quality and amount of electricity and torrefied biomass) need to be allocated to those that are best positioned to assess and manage risk. Secondly, large-scale electrolysis and biomass gasification hydrogen production is not yet considered proven technology. A sufficient track record will need to be built to allow each project to operate as a baseload production unit (efficiency, availability and economies of scale). Third, parties like Gasunie and Groningen Seaports are presumed to incur certain capital expenditure, e.g. for modifying gas infrastructure and upgrading harbor facilities. It is considered fair to assume at this stage that these investments will become operational expenses, which reflects the situation in many other types of (renewable) energy production.
Gemini offshore wind farm, under construction
Profitability and cash flows depend on a strong correlation between hydrogen sales and input costs (electricity and biomass). Such correlation will therefore need to be embedded into a project and financing structure and is a prerequisite for assessing financial viability. When assuming such correlation in combination with a cost of debt of 4 percent, a Debt Service Cover ratio of 1.5x and a Leverage of 60 percent*, the calculations demonstrate that debt in most scenarios can be repaid within an assumed economic lifetime of about 20 years. As illustrated on the next page, the model supports the initial assessment that, given an electricity price of roughly 20 to 30 euros per MWh and a torrefied biomass feedstock price of eight euros per GigaJoule, it will be possible to sell hydrogen for 2 to 3 euros per kg. Rabobank understands that such a hydrogen price could potentially be contracted with external parties on a long-term basis and could also be competitive with current hydrogen production derived from gas.
* A Debt Service Cover (debt service over cash ﬂow, “DSCR”) and Leverage (debt to equity) ratio are typical constraining ratios in project ﬁnance. Rabobank considers a Leverage of 60percent and a minimum DSCR of 1.5x reasonable at this stage.
Exemplary cost build-up of hydrogen (electricity: 25 EUR/MWh, EUR per kg)
Exemplary cost build-up of hydrogen (torrefied biomass: 8.3 EUR/GJ, EUR per kg)
Magnum power plant, to be fueled by green ammonia-hydrogen