The challenge of decarbonizing global society will require technological, economic, and behavioral transitions in diverse geographies and social frameworks. The “best” approach varies, depending on sector and local geography.
One decarbonization option under consideration is hydrogen. Combustion of hydrogen (or its use in a fuel cell) produces only water as a by-product, so fuel switching from natural gas to hydrogen may provide the opportunity to repurpose existing energy assets to zero carbon infrastructure. And the energy density of hydrogen compared to lithium opens interesting opportunities in long duration storage and energy transport.
While hydrogen provides some very compelling decarbonization opportunities, it is important to remember that most policymakers and financiers are looking at hydrogen as a complementary tool. Hydrogen use will likely sit alongside energy efficiency, natural solutions, electrification, and increased renewable penetration of the energy system to drive deep decarbonization of the energy and industrial sectors.
Hydrogen's use cases are evolving, with the most promising use cases in power generation and long duration storage, medium and heavy-duty transport, and industrial processes with specific hydrogen requirements or large thermal loads. For example, the EU Hydrogen Strategy adopted in July 2020 emphasizes the benefits of focusing hydrogen usage on those sectors that are not suitable for electrification.
What are the key market, financial, and operational challenges?
Given the nascent nature of the renewable hydrogen (formerly known as “green hydrogen”) market globally, there are several key challenges to overcome. These vary across regions, depending on government policies, market conditions, and technology readiness. Here are some of the most important:
- Significant market scale-up is required to rapidly reduce the costs of renewable hydrogen generation and usage.
Electrolyzer equipment has limited deployment to date, with most of the electrolyzers deployed in chlor-alkali production facilities, semi-conductors, power generation, as well as niche applications such as oxygen generation for spacecraft and submarines. While these are typically seen as mature applications, electrolyzer production capacity has not reached scales necessary to significantly decrease equipment costs—similar to what has been observed in other renewable industries such as wind and solar. Government incentives and mandates have proven to be key in stimulating this early investment to install more equipment production capacity to bring down prices.
Outside of equipment, investment in hydrogen transport and consumption will be needed to ensure widespread expansion of renewable hydrogen production capacity across countries—including pipeline interconnections—and end-user markets. This also has major implications for the expansion of renewable electricity production and transmission to source significant quantities of renewable electricity for the electrolyzers. The EU Hydrogen Strategy forecasts that around a quarter of European renewable electricity production could be used for renewable hydrogen production by 2050.
In the EU, however, investors have said that current private sector and government development efforts are insufficient on their own to achieve the growth ambitions of the EU Hydrogen Strategy. Competition for investment money from other regions such as the U.S., Middle East, and Australia may also be a drag on investment within the U.K. and EU.
- High production costs for renewable hydrogen and uncertainty within incentive and mandate programs presents challenging financing conditions for investors and industry.
Currently, a cost gap (or “green premium”) exists for renewable hydrogen. The inability to close this gap without government incentives or mandates limits both the ability and interest of investors. This premium results primarily from the lack of production scale leading to high cost per unit metrics, the high cost of electrolyzers, concerns about renewable electricity availability at required pricing, and, critically, uncertainty concerning future revenue streams associated with avoided carbon emissions, particularly trading schemes such as the EU ETS (Emissions Trading Scheme).
- Limited support has impacted many regions, leading to difficulties in securing financing. However, the landscape is rapidly evolving.
Many markets lack support mechanisms and policies, creating uneven economic conditions for investors in different regions and countries. Also, many support schemes have focused on R&D. Whereas for renewable hydrogen, support for pioneer commercial facilities—where buydown of capital cost or subsidy for operating costs—is vital to overcome the production cost gap between incumbent fuels or fossil hydrogen.
Similarly challenging is funding to construct or retrofit connective infrastructure between hydrogen generation and demand centers—some of which, like heavy duty fuel cell electric vehicles (FCEV), are still emerging themselves.
- Renewable hydrogen requires a supportive policy and regulatory framework to build investor confidence and reduce the risk profile.
Across many markets, there is a lack of regulatory clarity on key hydrogen development aspects, increasing risks to investors. This applies both to the development of standards (e.g., in Europe technical and safety standards remain unclear, particularly for the transport and storage of hydrogen), but also state aid regulations related to decarbonization efforts. These need to be carefully coordinated, particularly to align renewable energy supplies with hydrogen demand and/or to ensure infrastructure availability to support early market scale-up.
European hydrogen efforts under Fit for 55—including RED II amendments for 50% renewable fuel of non-biologic origin and 2.6% in transport by 2030; ReFuelEU Aviation and FuelEU Maritime mandates; and revision of the Energy Tax Directive—are key to provide demand side support for hydrogen. Upcoming legislation on the Carbon Border Adjustment Mechanism, revision of the Directive on Deployment of Alternative Fuels Infrastructure, amendment of CO2 emission standards for cars and vans, and revisions of the EU ETS to include the production of hydrogen using electrolyzers and support PtX projects could provide much additional support in the years to come.
While the aforementioned hydrogen policies are certainly encouraging, it is critical that European policymakers also provide some regulatory certainty so that these policies can be used to support the financing of hydrogen projects. Implementation of many of these policies is done at the nation level, such that policy disagreements, deferments of or downward revisions of mandates, and questions on implementation guidelines will likely slow adoption if not prioritized by the EU and Member States.
Hydrogen support solutions for the real world
Developing hydrogen support schemes to advance technology boundaries and scale up the market across the value chain in a coordinated way is vital. Here are some examples of how this can be done.
In Europe, currently only a handful of national public schemes exist or are planned to support operational costs. These include the established Stimulation of Sustainable Energy Production and Climate Transition scheme (SDE++) in the Netherlands, which can support electrolytic hydrogen production, and a €50B Carbon Contracts for Difference (CCfD) scheme in Germany launched in June 2023 to support industries to decarbonize including shift to hydrogen usage. The European Commission is planning to launch the first EU-wide auction or competitive bid in December 2023, supporting the production of renewable hydrogen. Winners will receive a fixed premium for each kilogram of renewable hydrogen produced over a period of ten years to cover the green premium or funding gap involved with renewable hydrogen production. Planned “contract for difference” schemes are also envisaged in France (to support low-carbon hydrogen production) and the U.K. (the Hydrogen Production Business Model), with both schemes anticipated to come into play later in 2023. Once deployed, these schemes are intended to have a similar impact as the Production Tax Credit for clean hydrogen in the U.S., where the Inflation Reduction Act (IRA), amongst other support mechanisms, is now helping to stimulate commercial production projects.
In India, the National Hydrogen Mission (NHM) was launched to promote renewable hydrogen use and reduce fossil fuels reliance. It aims to achieve renewable hydrogen production capacity of at least five million metric tonnes per annum, and 125 GW additional renewable energy capacity. The NHM has two phases: the first focuses on stimulating demand and enhancing domestic manufacturing capacity, while the second explores commercial-scale projects in various sectors. The government has allocated $2.3 billion towards the NHM and aims to put in place elements including incentives worth at least 10% of costs to renewable hydrogen fuel producers. Producers of renewable hydrogen/ammonia from projects commissioned before January 2031 will also be exempted from interstate transmission charges for 25 years.
To achieve the most efficient allocation of investment and coordinated development, hydrogen supply and demand should ideally be planned in parallel across regions and/or countries. Currently, in the EU, some countries have several projects ready to be deployed, yet lack sufficient public support, while others have funding but lack the pipeline of bankable projects to implement.
The advantages of having centrally managed support that works with country-specific interventions are clear. It can also provide market insights to policymakers and regulators by requiring applicants to declare key details of their production costs and offtake agreement. This creates transparency and increases the efficiency of public policy interventions, while not crowding out private sector investment.
Governments, regulators, and hydrogen producers should work together to make safely adopting hydrogen as a clean energy source a reality. The proposed blending of natural gas and hydrogen—the required standards for the use of gas pipelines for large-scale hydrogen transport—are an example of this in action.
Key financing mechanisms to support renewable hydrogen production in the EU, U.K., India, and U.S.
The table illustrates renewable hydrogen production support across various regional markets and emphasizes the convergence of financing mechanisms that are now seeking to underpin mass market development.