Financing the energy transition: Green hydrogen and industry

The transformation into a climate-neutral economy stands or falls with two key areas: hydrogen and industry. Both are considered indispensable building blocks for the energy transition – and both face the same challenges: high costs, lack of infrastructure, and a complex web of risks. While expectations for green hydrogen were euphoric for a long time, disillusionment has now set in. Projects are being withdrawn and investments are stalling. At the same time, industry is under enormous pressure to decarbonize its processes without jeopardizing competitiveness.

In this series of articles, we highlight the investment needs that arise in relation to technologies and sectors and provide an overview of the basics of financing. In this fourth article in the series, we take a closer look at hydrogen and industry.

The hydrogen and industrial sectors are still in the early stages of defossilization. Currently, less than 1% of global hydrogen demand is met from renewable or low-carbon sources [1]. At the same time, 70% of all industrial emissions come from the chemical, steel, cement, and aluminum industries. These processes are either considered difficult to electrify or require hydrogen as a raw material for products. For this reason, the use of hydrogen is being considered as a potential solution [2].

This article analyzes the specific requirements in the context of industrial applications and in the field of hydrogen. Together, these two areas require a significant increase in investment of over 300%, which is the highest growth rate among all areas (see Figure 1).

Status quo hydrogen

In recent years, optimism has grown in the hydrogen industry. This was due to predictions of massive cost reductions for the production of green hydrogen, coupled with forecasts that large quantities of green hydrogen would be needed to achieve climate protection targets. As a result, massive capacities were built up in electrolyzer production and new hydrogen projects for the production of green hydrogen were announced. While some of these projects are being implemented, the initial optimism is currently cooling off. Investments in green hydrogen projects fell by 56% in 2024 compared to the previous year (see Figure 2).

Overall, there continues to be a positive trend in investments in renewable energies and technologies for the energy transition. However, this trend is not currently evident for the ramp-up of green hydrogen, with difficulties particularly apparent within Europe. One indication of this is the discontinuation of important hydrogen production projects in 2025. This is particularly reasonable in the withdrawal of projects awarded in the second auction round of the European Hydrogen Bank.

The Hydrogen Bank is a tendering mechanism in which projects can receive subsidies per kilogram of green hydrogen. The projects with the lowest subsidy requests win the tender. As many projects as possible are considered until the allocated funding volume is exhausted. For the first bidding round, this amounted to €800 million, and for the second bidding round, it was just over €1.2 billion. At the same time, individual countries can provide additional funds to promote hydrogen projects in their own countries without additional tenders. Austria took advantage of this option in the second bidding round and is now funding the construction and operation of a 140 MW electrolyzer [6].

Of the 12 winners announced in June 2025, seven have withdrawn during contract negotiations (see Figure 3). Five projects are still in negotiations with the EU. This means that more than 80% of the initially planned production volume has currently been eliminated. Subsequent bids from the oversubscribed tender that demanded a higher differential price are eligible for funding. As a result, less hydrogen can be subsidized while the total amount of funding remains the same.

Due to a lack of economic viability compared to fossil fuel alternatives, subsidies are currently necessary to carry hydrogen projects to a final investment decision. This is primarily linked to the financing framework conditions, which need to be examined in more detail.

Framework conditions for financing hydrogen projects

The recent setbacks are mainly due to the fact that a lack of bankability is preventing projects from reaching positive final investment decisions (FID). Bankability describes the financial viability of projects and their acceptance by investors, especially banks. If bankability is not given, the risk-return ratio does not meet investors’ expectations. As a result, only one in 22 financing requests per bank is currently successful on average. Since neither a hydrogen infrastructure nor suitable trading structures currently exist, and there is therefore no liquid green hydrogen market, hydrogen purchase agreements must primarily be concluded bilaterally and, as a necessary safeguard, are a prerequisite for the further development of the project. In particular, regular cash flows are necessary to repay the lenders’ loan and interest payments.

It should be noted that investors expect long-term purchase agreements for the hydrogen produced, lasting 10 to 15 years, which should coincide with the term of the loans as far as possible. In contrast, potential customers want to commit themselves for as short a period as possible to benefit from future cost reductions in the production of green hydrogen. However, hopes for cost reductions in the production of green hydrogen have been dashed for the time being, partly due to massive inflation and high electricity prices in recent years [7]. Since green hydrogen commands a premium over (fossil) substitutes under current market conditions, the gap between hydrogen prices and willingness to pay has not narrowed due to the above-mentioned conditions. Potential hydrogen buyers are hoping that prices for green hydrogen will fall rapidly in the coming years and are therefore not signing any long-term purchase agreements.

This further exacerbates the existing chicken-and-egg problem. Cost reductions require scaling, and scaling requires investment. Investment will not materialize as long as costs do not fall. As a result, customers are reluctant to commit to long-term purchase agreements because they run the risk of paying a hydrogen price that will quickly become uncompetitive. Competitors who invest later could gain long-term price advantages here. For investors, especially debt investors, it is crucial that cash flows for hydrogen projects are predictable and secured in the long term. Only then can financing at adequate capital costs be ensured. The predictability of these cash flows and thus the financial framework conditions for hydrogen projects are further affected by other interactions.

For example, the technological risk of directly coupling electrolysers with renewable energies and processing variable load profiles cannot yet be definitively assessed in the long term.

Furthermore, compared to renewable energies, there are market risks for hydrogen that do not exist in this form for electricity. Hydrogen is particularly relevant as an energy carrier because, unlike electricity, it can be transported and stored for long periods. This means that hydrogen (derivatives) can be traded worldwide. Imports produced in countries with better renewable energy potential could therefore undercut the price of locally produced hydrogen, adding a new dimension to the complexity of the market situation.

Due to the above-mentioned risks, investments are often considered too risky from a financial perspective. Risk premiums that banks factor into their interest rates are more than three times higher for green hydrogen projects than for comparable renewable energy projects, making the projects disproportionately expensive. However, with investment sums in the millions for electrolysis projects, high proportions and large sums of debt capital are urgently needed for financing.

Many projects ultimately fail due to a lack of capital. In particular, the challenge of finding long-term, contractually bound customers is described as the main criterion for why hydrogen projects fail on the way to the final investment decision.

Investors also assess the creditworthiness of potential customers, especially in the case of bilateral contracts. Therefore, the financing of hydrogen projects depends not only on the willingness of a customer to sign a contract to purchase hydrogen, but also on whether they are able to master the financial capacity necessary to realize the transformation to a climate-neutral production facility, including hydrogen procurement.

Hopes for the purchase of green hydrogen are primarily pinned on industries that are difficult to electrify. However, German and European industry is struggling with its own challenges that make the transition to transformative industrial processes difficult.

Status quo industry

The transformation of industrial activities is of paramount importance. These are the second largest source of CO₂ emissions worldwide, with the cement, steel, and chemical industries responsible for 70% of all industrial emissions [8].

However, high electricity prices, integration into the ETS and its expansion, as well as the aggressive expansion and export plans of Asian nations and the customs policy of the USA are putting additional pressure on European industry. This has a negative impact on the competitiveness of energy-intensive European industry in international comparison (see Figure 4).

Due to the average age of production facilities, industrialized countries currently have a window of opportunity lasting just a few years that must be used for the transformation. Ninety percent of steel production facilities and 80% of cement production facilities in the EU are more than 20 years old. The aging plants need to be quickly renovated or rebuilt. All plants built after 2030 must be climate-neutral to reach climate goals. Any conversions of existing industrial plants must be planned carefully and with foresight, otherwise they run the risk of becoming stranded assets. The decision to build a new plant or renovate an existing one is valid for at least 20 years and, due to the high level of investment involved, can only be made once in this cycle. A wrong decision can therefore inevitably lead to serious consequences, including plant closure.  [8]

The technologies required for industrial transformation are currently often at the prototype or demonstration stage. As a result, there is a particular lack of experience in scaling up potential projects. Furthermore, there are uncertainties regarding the economic framework conditions, as each plant construction project is unique and previous experience cannot be fully transferred to new plants.

Steel industry:

32 of the 47 operators of steel plants in Europe have announced a date for the end of blast furnace production, 24 of them by 2035. Lock-in effects of more than 20 years exist if a decision is made to overhaul a plant. Forward-looking action and political support are necessary, especially since, according to industry representatives, economic and political conditions have deteriorated since 2022 [12]. This has also been recognized in principle by the EU and Germany. Across the EU, €9 billion, including €7 billion in Germany, has been made available in subsidies and guarantees for the transformation of the steel industry. Despite this support, the outlook remains uncertain.

The implementation of transformation projects in the steel industry presents a mixed picture. For example, the Germany-based SHS Group recently signed a purchase agreement for green hydrogen to supply its direct reduction plant, while thyssenkrupp steel has withdrawn its tender for the purchase of green hydrogen for the time being due to excessive prices [13, 14]. However, the DRI plant is scheduled to start operation in 2027 and will be gradually converted to be fueled by green hydrogen by 2037 [15]. Salzgitter has initiated the first phase of its steel production transformation but has postponed further expansion stages by two years [12]. ArcelorMittal, Europe’s largest steel manufacturer, has put all transformation plans for its German plants on hold [12]. At the same time, the project is the first new steel mill to be built in Europe in more than 50 years. The flagship project also includes the largest European electrolysis project with more than 700 MW, which is to supply the plant with green hydrogen. However, the project is also in financial difficulties due to unplanned cost increases and needs fresh capital in a new round of financing.

Chemical industry:

The European and German chemical industries are particularly affected by current geopolitical uncertainties. The market share of the European chemical industry has fallen from 16% to 13% over the last 10 years. At the same time, China has steadily increased its market share from 34% to 43% [16].

High electricity and gas prices (see Figure 3) show that competitiveness is at risk in international comparison.

In addition, US tariff restrictions on the European and Chinese markets mean that exports from the European chemical industry are burdened by tariffs in the US. At the same time, China is diverting excess capacity resulting from weak domestic demand to the European market. As a result, European imports of Chinese chemicals have increased by 34% since 2019, putting pressure on the domestic chemical industry [16]. Capacity utilization was still above 90% between 2015 and 2022 but has fallen steadily since 2022 and has since stabilized at around 80% [17].

Cement industry:

The momentum of the cement industry has been declining in recent years from an economic perspective. An inflation-driven rise in interest rates has led to a decline in new construction activity in the building sector since 2022. Residential construction has been and continues to be particularly affected by this. The slump from the peak in 2021, with over 350,000 apartments approved annually, to 2024, with approximately 216,000 apartments approved, is considerable and at the same time an important economic factor for the cement industry [18, 19].

The construction and materials industry is drawing hope primarily from the release of the special fund for infrastructure and climate neutrality. This was announced by the current federal government in March 2025 and is intended to contribute to the modernization of Germany’s domestic infrastructure in order to enhance it for the future. The volume for this is €500 billion and will be paid out over the next twelve years. When the special fund was announced, the share prices of affected companies, including companies in the cement industry, rose by 16 to 30% within a day, underscoring the relevance of these investments for the industry [20]. However, the initial euphoria has now somewhat dampened in the industry after major investments were postponed to future years and funds are not being drawn down as quickly as originally planned [21]. If these investments are initiated in the near future, their impact will be noticeable. Around 30% of turnover in the construction industry comes from the public sector [22].

Framework conditions for financing industrial projects

The current situation in energy-intensive European industries has many similarities. High energy prices are reducing competitiveness and depressing capacity utilization at industrial sites. This leads to inefficiencies and, consequently, declining profits. Several large industrial companies have already issued profit warnings this year. A lack of profits curtails cash flows and leads to lower internal financing power. This makes it difficult for industrial companies to refinance themselves. Even when external financing sources are considered, the framework conditions are often not sufficient for the construction of new plants, whose investment volumes quickly exceed the billion Euro mark. This is further exacerbated by investors’ risk assessments. Under the current conditions and with the use of defossilization technologies, the defossilization of industrial plants often leads to higher costs than conventional plants (see Figure 5). Therefore, a financially attractive business model cannot currently be presented solely based on economic incentives, or only rarely. This makes it difficult to find investors who need stability and long-term stable cash flows in order to invest with a suitable risk-return profile.

In order to mitigate existing risks and create financially viable conditions for industrial projects, various instruments and mechanisms are currently being discussed that are intended to support companies in defossilizing their production processes.

Overall, the EU and Germany are currently providing more than €100 billion in various funding formats and programs for the defossilization of industry. In doing so, they recognize the enormous economic efforts that must be made to advance the idea of industrial transformation. Industrial companies have recognized that pure investment cost subsidies cannot fully offset the specific risks resulting from high energy costs.

For this reason, so-called climate protection contracts were designed as a funding format (see Figure 6). They serve as a compensation mechanism to close the gap with fossil fuels. The agreements protect industrial companies against long-term price risks, e.g., for hydrogen and CO₂. The total subsidy payment is dynamic and adjusts to the current market prices of CO₂ and fossil fuel substitutes. This allows investment risks from uncontrollable price and certificate fluctuations to be hedged. As soon as the low-carbon production process becomes cheaper than the conventional method, the compensation mechanism changes and the producer make an excess payment to the state [27]. The aim is to specifically promote the most innovative technologies with the lowest CO₂ avoidance costs. In Germany, the first round of the award procedure for climate protection contracts has already been completed. The second bidding process was recently approved by the EU Commission and is expected to amount to a low double-digit billion-euro sum, which will be granted to companies over a period of up to 15 years.

Since defossilization is progressing at different speeds globally, European industry is running the risk of carbon leakage by pricing its CO₂ emissions, meaning that CO₂ emissions will be emitted in countries with lower requirements. As a result, industrial products with a high carbon footprint could be imported. Goods could be produced in third countries and sold within the EU without the additional tax on CO₂ emissions. This would not only weaken the competitiveness of European industry but would also undermine key support instruments such as climate protection agreements, which are designed to be essential levers for the transformation of industry.

To compensate for these unequal competitive conditions for European countries, the Carbon Border Adjustment Mechanism (CBAM) was introduced (see Figure 7). This is still in a transitional phase until its full implementation in 2026.

Outlook

Both the hydrogen economy and energy-intensive industries are currently facing similar challenges, many of which are closely interlinked. Despite a wide range of support instruments, the current pace is not sufficient to drive the transformation forward decisively. International interdependencies and geopolitical uncertainties further complicate the situation and can even put pressure on innovative mechanisms such as climate protection agreements.

In addition to political cooperation, the rapid market readiness of new technologies is crucial in order to make a noticeable contribution to defossilization in the medium term. Above all, this means that technological advances and regulatory frameworks must not remain fragmented but must be harmonized and promoted globally. Uniform CO₂ pricing and mechanisms such as the CBAM play a central role – provided they are accepted internationally. Due to the globally networked trade flows of hydrogen and industrial products, only globally defined, reliable framework conditions can reduce risks and exploit opportunities for new markets, particularly in these areas.

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