Green hydrogen needs a climate finance architecture

India’s National Green Hydrogen Mission (NGHM) aims to catalyse more than Rs 8 lakh crore (over US$100 billion) of investment while developing an annual production capacity of 5 million metric tonnes of green hydrogen by 2030. The ambition is not merely to decarbonise hard-to-abate sectors but to position India as a global hub for green hydrogen manufacturing and exports.

Yet mobilising capital at this scale will require more than generous incentives or larger climate funds. It will require a financial system capable of financing technologies that are commercially promising but have yet to evolve into mature infrastructure assets. As the Reserve Bank of India advances its climate risk framework and financial institutions increasingly integrate climate considerations into lending decisions, the focus must now shift from managing climate-related financial risks to building the institutional architecture that enables climate investments themselves.

This explains an important paradox in India’s energy transition. Commercial banks readily finance utility-scale renewable energy (RE) projects, yet green hydrogen, battery energy storage and industrial decarbonisation projects continue to struggle to achieve financial closure. The conventional explanation is that banks remain overly risk-averse. That diagnosis, however, mistakes the symptom for the problem.

Banks are not unwilling to finance climate technologies; they are unwilling to finance risks they cannot adequately assess or price. A 500 MW solar park today can comfortably secure long-tenor debt, whereas an equally ambitious green hydrogen project often struggles to attract financing. The difference lies less in the technology than in the predictability of future cash flows. Competitive auctions, standardised power purchase agreements, payment security mechanisms, declining technology costs and experienced developers created stable revenue streams that lenders could underwrite with confidence.

Green hydrogen presents a fundamentally different proposition.

Despite the NGHM and significant public support, lenders continue to confront four unanswered questions: Who will purchase green hydrogen? At what price? Under what contractual arrangements? And for how long?

Similar uncertainties confront battery energy storage, where revenues depend on evolving ancillary service markets and capacity payments, and industrial decarbonisation projects, where returns often arise from avoided costs rather than dedicated revenue streams. These sectors are commercially promising, but they have not yet developed the predictable revenue models that conventional project finance requires. These are not merely financing constraints. They are bankability constraints.

TThis distinction fundamentally changes the policy response. If capital scarcity were the principal challenge, mobilising larger climate funds or attracting additional international finance would be sufficient. But where projects lack revenue certainty, investable risk profiles and mature market structures, additional liquidity alone is unlikely to unlock commercial investment. International experience points in a different direction. Germany’s Carbon Contracts for Difference (CfDs) and H2Global programme reduce market risk by providing long-term revenue certainty for green hydrogen and industrial decarbonisation. The UK’s Green Investment Bank demonstrated how specialised public institutions can crowd in private capital into commercially nascent sectors. The common thread across these models is institutions designed to convert uncertainty into investable opportunities. India’s next challenge is building the institutional architecture that makes emerging climate technologies bankable. Recent research by the Chintan Research Foundation proposes a Climate Finance Architecture Framework in which emerging sectors become investment-grade only when risks are systematically reduced as projects mature.

The first stage is pipeline creation. Institutions such as MNRE, SECI and state governments should move beyond production incentives towards project preparation facilities, standardised long-term hydrogen purchase agreements, industrial demand aggregation and common infrastructure within hydrogen hubs to create a pipeline of investment-ready projects with predictable contractual arrangements.

The second stage is early-stage risk absorption. Institutions such as the National Investment and Infrastructure Fund (NIIF), sovereign-backed climate funds and multilateral development banks should establish platform-level investment vehicles capable of absorbing technology, construction and market risks across diversified portfolios rather than financing individual projects. Such platforms can anchor private investment by improving risk allocation.

The third stage is commercial debt mobilisation. Once project risks begin to decline, specialised lenders such as IREDA and REC, together with commercial banks, should provide long-tenor debt supported by blended finance structures, partial credit guarantees and risk-sharing facilities. Public finance should complement, and not replace, commercial capital by addressing risks that private lenders cannot efficiently bear.

The fourth stage is financial intermediation. India requires specialised intermediaries capable of aggregating projects, warehousing assets, standardising documentation and refinancing operational portfolios. Individual green hydrogen projects may remain too small or risky for institutional investors, but diversified portfolios can evolve into investment-grade assets capable of attracting pension funds, insurance companies and global climate investors.

The final stage is capital recycling. Regulators, capital markets and institutional investors must facilitate green bonds, securitisation, InvITs and other market-based instruments that enable mature assets to be transferred from bank balance sheets to long-term investors. Recycling capital is essential if commercial banks are to finance successive waves of climate investments without stretching their balance sheets.

India’s renewable energy sector offers an important lesson. Solar parks did not become bankable because banks suddenly became more willing to lend. They became bankable because institutions progressively allocated risks, standardised market practices and created financing mechanisms aligned with lenders’ risk appetite.

Green hydrogen now demands the same institutional evolution. India’s leadership in the next generation of clean technologies will ultimately depend not only on technological innovation or larger financial commitments, but on whether its financial institutions evolve as rapidly as its energy ambitions. The next chapter of India’s energy transition will therefore be written not by capital alone, but by a Climate Finance Architecture Framework capable of systematically converting technological promise into investable infrastructure.

The writer is a Senior Research Consultant at the Centre for Climate Change and Energy Efficiency, Chintan Research Foundation; Views presented are personal.