How investment funds could help spur Latin America’s green hydrogen industry
Green hydrogen is slowly gaining traction in Latin America. Work on Chile’s first plant has started, and projects have been announced across the region. A big question surrounds financing.
The nascent nature of the green hydrogen industry will impact traditional debt financing costs and availability, at least in the early years. Project finance structures, meanwhile, are complex and take time to establish.
Against this backdrop, tapping investment funds could initially prove the viable option, said Alejandro Mendez, CEO of Houston-based asset manager Royal Eagle Capital Partners.
BNamericas spoke to Mendez about this and more.
In Latin America, Royal Eagle Capital Partners has renewable power generation assets in Colombia and Panama and is seeking to boost its footprint, while eyeing the emerging green hydrogen market.
BNamericas: How do you think green hydrogen projects in Latin America will get financed?
Mendez: Traditionally, with Latin American energy projects – such as oil and gas and clean energy – the sponsors have taken the risk with the license, environmental permit, interconnection; they have put some equity in, some 10-20%, and then looked for project finance. But project finance takes a lot of time and effort and there’s nothing sure about it.
What I think is going to happen is that, basically, you need to treat the green hydrogen project as if it were a startup, it has to be treated as an alternative investment. Yes, you need the sponsor equity, but you need funds, or an entity, like us, that takes on the risk to put in the equity and with our balance sheet bring in the finance that we need. I don’t think project finance will work in the green hydrogen structure in the short term.
BNamericas: How important will it be to secure an offtaker?
Mendez: That’s the main thing. I don’t think funding is the most important part of the mix; people need to work on offtake, work backwards. From what I have heard, the technology to produce the hydrogen, along with the safety concerns, is covered. There are two bottlenecks I think: one is offtake and the other transportation. These two things have to be solved.
I think what Chile and Colombia [countries with green hydrogen strategies] must do is create pilot projects and usage cases within the country, perhaps with buses, mining trucks … They have to create a circular economy around green hydrogen, even blue hydrogen [produced from natural gas] … having internal offtakers is key … going from client to producer.
BNamericas: Can you tell us a little about Royal Eagle’s strategy in the area of green hydrogen?
Mendez: We’re considering two-three phases. One involves generating clean electricity: solar or hydroelectric. That’s one core business. We always ask ourselves how we can increase the value of each kWh of power we produce. One route is to create hydrogen.
By 2023-24 we’d like to be involved in a pilot hydrogen project, no more than 10-20MW. We’d like to take the risk. Even if that one doesn’t have the best return on investment ratio for us, in terms of valuation of our company, we will be in the mix, in the conversation, and it will increase our enterprise value, that’s for sure, because hydrogen will come.
We would like to be involved with a good operator and we could provide the equity and finance needed. And obviously together we would need to work on the offtake aspect.
Chile and Colombia are perhaps a good way for us to start.
BNamericas: Can you tell us a little about your Latin American footprint?
Mendez: We’re acquiring operating assets and our own licenses in Panama and Colombia. We have stopped [operating] in Mexico because there’s a change in the law, and we’re waiting to see what congress does. The country is ‘out’ in terms of clean energy. From a risk management perspective, we need to be very cautious in Mexico right now.
We’re in a niche of 10-20MW [solar and hydroelectric] projects [in Panama and Colombia]. Our goal is to build 450MW in the next five years. Obviously, we’re talking around 40 projects, instead of doing one large farm of 300MW and another of 150MW.
We buy the licenses, or we buy 100% of the assets; that’s 90-95% of the cases. In the case of hydrogen projects, we don’t mind being a co-sponsor, because we need a local operator.
BNamericas: Any final words?
Mendez: Our doors are always open to receive any enquiries. We’re not going to stop; we’re always looking for partnerships with sponsors. Green hydrogen or blue hydrogen in Latin America and in the world is in the early stages. The challenge is creating your own internal economy or usage, with a pilot project. That’s the key. Maybe tax credits, a law [to promote usage].
There are corporates looking to have green energy, and they won’t focus only on the cost. It’s about sustainability, saving the planet.