Aidan: Hello and welcome to another podcast from Argus Media's Hydrogen and Future Fuels. I'm deputy editor of the service, Aidan Lea.
Today we're talking to Germany's state-backed Power-to-X Development Fund. The fund aims to help unlock investment decisions for a handful of mature renewable hydrogen and derivatives projects in select countries, thereby advancing both environmental and social development goals. The German government picked Bavaria based fund manager KGAL to control the €270 million envelope. It recently awarded the first €30mn to an Egyptian project that will produce 70,000t/yr of renewable ammonia.
I'm excited to have joining me today, the fund's managing director, Thomas Engelmann, to tell you about insights from the first round and his hopes for the second round, which is open for applications from 8 January – 5 March. Welcome, Thomas.
Thomas: Welcome and thanks for having me.
Aidan: to start with, which countries are eligible in round two and how is that decided?
Thomas: So it's mostly the same as round one. It's South Africa, it's Brazil, it's Morocco, it's Kenya, it's India, it's Egypt and it's now in this round Colombia as a new addition. The German government selects the country's most suited for the instrument from more than 60 partner countries cooperating with the Federal Ministry of Economic Cooperation and Development. Not all countries have the right ecological conditions. Participating countries ideally, have a workforce that is prepared to support power-to-X and some potential domestic offtakers in the country.
Aidan: OK, interesting. So why was Colombia added for this round?
Thomas: Colombia has good conditions for renewables. Its electricity mix is currently 65pc hydroelectric, 4pc solar and 30pc fossil fuels. And it plans to add 3GW of offshore wind in the future via a government-run auction, so Colombia should have among the cheapest PtX production. Costs in northern Colombia, costs may reach an area of €3.3/kg in 2030 and potentially could come down to €2.7/kg by 2040, according to German research institute Fraunhofer. The strong government support from Colombia also helps our goal of social transformation in the country.
Aidan: What size projects will the fund support?
Thomas: So we haven't set a minimum size, but ideally the total capital costs should be in the range of around about €100mn-€500mn. Why is this so? For us the €5bn white elephant projects are probably not really good for us, not capable for us. We have up to €30mn available per project, which is definitely not enough to change the investment decision for €5bn project.
Aidan: That €30mn grant, what exactly is that designed to do? What can projects use it for?
Thomas: We bridge the gap to financial close. Our 30 million per project grant agreement supports the banks, supports the sponsors, acting like an airbag for the project to mitigate any kind of risks or uncertainties in the project. For us, it's non-refundable. In return, we expect to see ecological and social transformation that comes from financial close and commercial operation.
Aidan: OK, perfect. And when you're evaluating these projects, what would you say are the key ingredients that you're looking for?
Thomas: Yeah. The first thing is we are bound to European Union state aid law, so we check very early in the process if projects are eligible from that perspective. Project feasibility and technological readiness are important. We check the source of the renewable power. We check it's a profitable and reasonable business model. Clearly we are not seeking return on investment for the PtX Development Fund, but we need to check that the equity sponsors and depth partners see a project that is economically viable. We want projects that have secured land and will reach financial close within 6 to 12 months, maybe 15 months. If a project is further away, that doesn't mean it's a bad project, it's just not ready for the purposes of this instrument. Each project must do a very intensive environmental and social impact assessment based on the lending structures of the World Bank via International Finance Corporation. That is the minimum for eligibility before we consider its level of positive impact.
Regarding impact, we want greenhouse gas emission reduction or avoidance. We want replacement of fossil fuel resources, in particular coal. We want job creation in the country and a just transition. It's interesting if a project is scalable. For example, if we help with a 200 million first phase project that unlocks future phases for the partners for the country even without us.
Aidan: a lot of those criteria that you mentioned, those aren't unique to your fund, right? Would you say those are quite typical for many financiers?
Thomas: Yeah, that's correct. So it's a huge plus for a project if our fund awards a grant, as it shows the overall concept of the project has been checked according to World Bank and IFC standards. Other banks coming later or in parallel to us know the project is sustainable, complies with the renewable power additionality principles, does not conflict with local water uses, and its land is free from social or ecological conflicts.
Aidan: does the fund have any rules on who the offtaker – in other words the customer – for the project should be?
Thomas: Very good question, because for us, ideally the project would have offtakers in the country to support our target of local value creation. But not all seven countries have the possibility to absorb 100pc of the product and clearly we need economically viable projects. In our first round project, as an example, part of the ammonia will stay in Egypt and part will go to Europe.
Aidan: Reflecting on the submissions you saw in round one, what lessons can the project developers take into the next round?
Thomas: We realised the name PtX Development Fund could be misinterpreted, as we often had to explain that we don't have a development money available. Our name just means that we are supporting developing countries. Hopefully in round two, those projects will return with an extra year of maturity.
Second, we must clarify that the environmental and social impact assessment is of utmost importance. We very often had discussions with interested parties that just said, “my local government is not interested in doing impact assessments on ecological or social impacts” but we, the PtX Development Fund, cannot accept that.
On technology it’s clear the starting point must be electrolysis, since this instrument aims to help bring it to the market and lower its cost. Yes, E fuels production needs some carbon molecules, but we don't want projects that are completely biomass and with no with no electrolysis involved.
Aidan: thinking again about what you saw in the first round that must have given you quite a fascinating peek into the state of the industry. Did anything surprise you? What did you learn?
Thomas: What we learned about the wider PtX industry was very interesting. First of all, we were very positively surprised to get 98 expressions of interest, totalling round about €150bn potential investment and in the range of 56GW electrolyser capacity across the countries of the first round.
But most projects are still in feasibility studies. We followed up with around 10pc of the interested parties. Then, after deeper due diligence, held negotiations and meetings with them, we figured out that two to three projects were in the clear focus of our target.
We see the technology of power-to-X is ready but finding offtakers able to pay the premium for CO2 neutral products, this is hard. Mandates with penalties like the EU’s e-SAF quota definitely stimulate the market in the future, but it would be better if they started in 2025-2026 rather than 2030. Green ammonia buying for now is mainly voluntary and it depends on fertiliser companies being able to attract a premium for it to work. A green steel market, for example, is emerging in Sweden, as carmakers can attract a premium for green products. We hope the European Union's Renewable Energy Directive III will set quotas for ammonia and steel as well. But here, the carbon border adjustment mechanism is of utmost necessity to ensure European industry is not disadvantaged.
Aidan: Yeah, that's all clear and I definitely agree about the importance of stimulating offtake. We hear that constantly from conversations in the industry.
OK, that's brilliant. Thank you. Maybe just briefly then, what are your expectations for round two?
Thomas: Round one gave us a very good overview of the countries, so we really know about the quality of the projects. In round two, we want to support now possibly several projects. We definitely want to see which projects are coming in. The projects may enter multiple rounds to increase their quality each time until they reach an attractive level for us.
Aidan: All right. Well, thank you very much. That's all we have time for today. Finally, Thomas, where can people find more information about the PtX Development Fund?
Thomas: So the PtX Development Fund has its own home page that can be found on the internet, and secondly all kinds of news and information will also be given on our LinkedIn account, which is available as well. You can see links to both of those below.
Aidan: OK, perfect. Well, thank you very much Thomas for taking the time, and thank you very much for listening.
