25/01/09
Q&A: Germany's PtX Fund to ramp up in round 2
Q&A: Germany's PtX Fund to ramp up in round 2
London, 9 January (Argus) — Germany's state-backed Power-to-X (PtX) Development
Fund aims to help unlock investment decisions for a handful of mature renewable
hydrogen and derivatives (power-to-X) projects in select countries, thereby
advancing environmental and social development goals. Berlin picked
Bavaria-based fund manager KGAL to control the €270mn ($279mn) purse, and it
recently awarded its first €30mn to a €500mn Egyptian project that will produce
70,000 t/yr renewable ammonia. Argus spoke with the fund's managing director
Thomas Engelmann about lessons learned from the first round and hopes for round
two, which opens 8 January – 5 March 2025. Edited highlights follow: Which
countries are eligible in round 2, how is that decided? It is the mostly the
same as round one — South Africa, Brazil, Morocco, Kenya, India, Egypt — plus
Colombia as a new addition. The German government selects the countries most
suited for this instrument from more than 60 partner countries co-operating with
the Federal Ministry for Economic Cooperation and Development (BMZ). Not all
countries have the right ecological conditions. Participating countries ideally
have a workforce that is prepared to support PtX, and some potential domestic
offtakers in the country. Why was Colombia added for this round? 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
offshore wind in future via government-run auctions. So Colombia should have
among the cheapest PtX production. Costs in northern Colombia may reach €3.3/kg
($2.7/kg) in 2030 and €2.7/kg ($2.2/kg) by 2040, according to German research
institute Fraunhofer ISE. The strong government support from Colombia also helps
our goal of social transformation. What size projects will the fund support? We
haven't set a minimum size, but ideally the total capital costs should be in the
range of €100mn–500mn. That means €5bn 'white elephant' projects are probably
not for us. We have up to €30mn available, which is definitely not enough to
change the investment decision for a €5bn project. What is the €30mn grant
designed to do? We bridge the gap to financial close, so our €30mn 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. What
key ingredients do you look for in projects? We are bound by EU state aid law,
so we check very early in the process if projects are eligible. Project
feasibility and technical 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 debt partners see a project
that is economically viable. We want projects that have secured land and will
reach financial close in 6-12, 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 standards of the World Bank via its
International Finance Corporation (IFC). 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 €200mn first phase that unlocks future phases for the partners even
without us. Are those criteria typical for many financiers? 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 renewable power additionality principles, does not
conflict with local water uses, and its land is free from social or ecological
conflicts. Does the fund have rules on who the offtaker should be? 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, part of the ammonia stays in Egypt and part will go to
Europe. What lessons can developers take from round one? We realised the name
PtX Development Fund could be misinterpreted, as we often had to explain that we
don't have development money available — our name just means 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 developers that said, "my local government is not interested in doing
impact assessments on ecological or social impacts," but we, as the PtX
Development Fund, cannot accept that. On technology, the starting point must be
electrolysis since this instrument aims to help bring it to market and lower its
cost. Yes, e-fuels production needs some carbon molecules, but we don't want
projects that are completely biomass with no electrolysis involved. And what did
you learn about the wider PtX industry? We were positively surprised to get 98
expressions of interest totalling €150bn potential investment and 56GW
electrolyser capacity across these countries. But most projects were still in
feasibility studies. We followed up with around 10pc of interested parties, then
after deeper due diligence, held negotiations with 2-3 projects. We see the
technology for PtX is ready, but finding offtakers able to pay the premium for
CO2-neutral products is hard. Mandates with penalties, like the EU's e-SAF
quota, definitely stimulate the market, but it would be better if they started
in 2025-26 rather than 2030. Green ammonia buying for now is mainly voluntary
and it depends on fertilizer companies being able to attract a premium for it to
work. A green steel market is emerging in Sweden, as carmakers can attract a
premium for 'green' products. We hope the EU's Renewable Energy Directive III
will set quotas for ammonia and steel, but the carbon border adjustment
mechanism is of utmost necessity to ensure European industry is not
disadvantaged. What are your expectations for round two? Round one gave us an
overview of the countries, so we really know about the quality of the projects.
Now in round two, we want to support possibly several projects. Projects may
enter multiple rounds and increase their quality each time until they reach an
attractive level. Send comments and request more information at
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