Hydrogen production and use is expected to grow in 2024, but it remains very expensive to produce and transport, making progress slow.
Efforts to decarbonise the global economy reached a milestone at the COP28 climate conference, where there was a concrete pledge to reduce reliance on and make the transition away from fossil fuels.
But the potential for renewables is limited in energy-intensive sectors, where very high temperatures and carbohydrates are needed to make products like steel, plastics, pharmaceuticals and fuels for aviation, shipping and trucking.
Hydrogen does, on the other hand, hold that promise as it is a substitute for fossil fuels – especially green hydrogen – but 2023 was disappointing as costs to make green hydrogen, produced using renewable energy, remain stubbornly high, ING said in a note.
“Project developers delayed investments in earlier announced pilot projects, especially for green hydrogen. It took politicians more time to work out the complex details of policies to build and scale-up a hydrogen economy. Europe and Asia still face high energy prices, making the energy-intensive hydrogen production and transportation process a costly business. Finally, new expensive and unproven electrolysers don’t get a lot cheaper in just one year, especially when pilot projects are postponed,” ING said.
The prices of green hydrogen still put tears in taxpayers’ eyes, in particular in Europe. Even with proposed subsidies in the range of €3/kg, it fails to be cost competitive with blue or grey hydrogen in many cases, which are made from methane but with and without capturing the greenhouse gases (GHG) produced in the process respectively.
And the costs are going up, not down. Higher interest rates have increased rather than decreased electrolyser costs in 2023. The anticipated learning curve for electrolyser costs has not materialised as expected due to fewer projects that reached final investment decisions in 2023, says ING. And while wholesale power prices came down last year, grid tariffs have increased considerably in many countries.
“Strong cost declines for hydrogen are anticipated once there is a large global hydrogen market in which hydrogen users benefit from low-cost production regions. Currently the market is still very local, especially for green hydrogen, and it will take years to develop import and export hubs across the globe,” says ING.
It's still too early in the development cycle for cost gains to appear. It took three to four decades to make renewable power cost competitive with power from coal or gas fired power plants. The solar and wind industry went through major boom and bust cycles during that process.
“The challenge for hydrogen is to reach this stage of market maturity twice as fast and without major market setbacks. We expect a lot more realism about the scale of such a challenge in 2024,” says ING.
No silver bullet
Green hydrogen does not per se lead to lower CO2 emissions compared to using fossil fuels like gas. The CO2 intensity of the power grid determines whether green hydrogen is good or bad for the climate. This is very relevant as power systems in many countries still depend to a large degree on fossil fuels, reports ING. As a result complex regulation to define the emission performance of hydrogen has emerged.
In Europe, for example, the Renewable Energy Directive now includes rules for green hydrogen production with renewables:
Developers are likely to comply with these guidelines if they want the highest possible subsidies for their project. Apart from green hydrogen, progress in Europe is also being made on defining low carbon hydrogen from natural gas and CCS (blue hydrogen) or nuclear power (purple hydrogen).
The ‘Hydrogen and Decarbonised Gas Market Package’ defines emission thresholds that include standards to deal with upstream methane leakage and downstream hydrogen leakage as well as accounting rules for indirect emissions (the nuclear power and energy use of CCS). This regulatory clarity could boost activity in blue and purple hydrogen in 2024 and the years beyond.
The industry and politicians have been very focused on the supply side, but demand-side incentives have lagged far behind support for hydrogen production. Developers struggle to secure offtake agreements which then adds risk to the project, causing project sponsors to postpone the final investment decision (FID) and further slowing progress.
But that may change in 2024. In the US, Colorado and Illinois have introduced a subsidy of about $1 per kg for users of clean hydrogen, which is particularly aimed at stimulating hydrogen demand in hard-to-abate sectors like manufacturing. Pennsylvania has released a tax credit of $0.81 per kg of clean hydrogen purchased from a regional production hub, ING reports.
And in Europe, the EU’s Fit for 55 strategy and EU Emissions Trading System carbon trading scheme are starting to drive clean hydrogen demand in the coming years.
Users of grey hydrogen must replace 42% of their hydrogen volume with green hydrogen. Under the ReFuelEU Aviation initiative, 1.2% of fuels supplied to aircrafts at EU airports must be hydrogen-based by 2030. And the FuelEU maritime initiative requires shipping companies to reduce emissions by 2% by 2025 and to pay a carbon price under the EU ETS scheme by 2026, which already increases demand for hydrogen-based fuels like ammonia and methanol.
Shipping and aviation companies operate globally and can tap into the lowest-cost hydrogen markets. Air France, KLM and Delta Air Lines signed a seven-year sustainable aviation fuel offtake agreement with US-based synthetic fuel producer DGFuels, made from over 800 megawatts of electrolysers, according to Bloomberg New Energy Finance. Maersk has signed the largest green shipping fuel offtake contract so far through a binding offtake agreement for methanol with Chinese renewable energy developer Goldwind.
But a lack of transparent pricing currently is another barrier for demand to kick off. Hydrogen offtake contracts are often bilateral and are undisclosed to other players. The market can benefit from initiatives to increase market transparency, for example by providing demand, supply and pricing statistics. The EEX Hydrogen Index in Germany is a good start, though development is still at an early stage.
“We expect and hope to see more progress on the demand side in 2024. The hydrogen economy simply won’t take off without it. And increasing demand will feed into the supply side again, as more hydrogen storage facilities need to be built and exploited,” says ING.