APG invests in low-carbon steelmaking facility

Published on: 5 February 2024

APG is investing €30 million in the subordinated tranche of debt issued by H2 Green Steel for the world’s first large-scale steel plant based on hydrogen from renewable sources. The company has secured a total of €4.2 billion in debt financing for this project, including €600 million of subordinated debt in which APG is investing on behalf of its clients.

The new steel plant will host Europe’s largest electrolyzer, generating hydrogen using electricity from renewable sources. By replacing coal with hydrogen in the steel production process, the plant aims to produce steel with CO2 emissions up to 95 percent lower than traditional blast furnace methods.

Active role for APG

The selection of Boden, northern Sweden, as the site for the steel plant is strategic, given the region’s abundant access to renewable energy sources, in particular hydropower. Also located in the same northern region is Northvolt Ett, a lithium-ion battery gigafactory powered entirely by renewable energy. APG had previously participated in a comparable debt financing round for this battery factory, an experience that has proven valuable for the current investment.

“Drawing on the insights gained from orchestrating the subordinated loan for Northvolt, we were actively involved in negotiating the financing terms of the H2 Green Steel plant,” says Sven Smit, Senior Portfolio Manager. “Three members of our Credits team participated in structuring the transaction and negotiating the documentation, a process spanning over a year. The limited availability of capital for subordinated illiquid long-term investments made APG, as a pension fund manager, a natural candidate to participate in this transaction.”

Circular approach

The plant’s construction is well underway, with operations scheduled to commence by the end of 2025. Supply contracts for iron ore and equipment are in place, and a large portion of the required electricity is secured through long-term power purchase agreements. The manufacturing facility will embrace circular practices, incorporating scrap from customers and steel recycling companies back into its steelmaking process. H2 Green Steel also plans to reuse the residual heat generated during production.

The initial production capacity of 2.5 million tonnes of CO₂-reduced steel per year will double to 5 million tonnes by 2030. Half of the initial yearly volumes are already pre-sold through binding five- to seven-year offtake agreements. Ileana van Hagen-Balboa, Senior Credit Analyst: “Spot transactions are the norm in the steel industry, so the fact that H2 Green Steel has been able to close offtake agreements signifies how important this project is also to its customers.”

Accelerating decarbonization

With the construction of the steel plant, H2 Green Steel aims to accelerate the decarbonization of the steel industry – a hard-to-abate sector responsible for around 5% of all CO₂ emissions in the European Union. Maxim Matveev, Senior Portfolio Manager: “H2 Green Steel’s new plant facilitates large-scale low-carbon steelmaking by utilizing locally generated renewable energy, on-site hydrogen production, a state-of-the-art manufacturing facility, and a circular approach. This investment aligns with our pension fund clients’ responsible investment objectives and ambitions.”