Green hydrogen – made with renewable energy, mainly solar photovoltaic and wind, and considered to be the cleanest and most sustainable hydrogen – is largely viewed to be key to the energy transition, particularly in hard-to-abate sectors, namely industry, shipping and aviation.
Due to its high cost and the lack of sufficient demand, governments worldwide intend to accelerate its uptake via regulations and economic incentives. According to the World Bank, OECD countries and China had already pledged approximately US$100 billion in subsidies in 2023, potentially drawing investments away from emerging markets. However, projects continue to face delays worldwide amid market and regulatory uncertainty, and difficulties in securing off-take agreements.
Regulation in force
2023 was marked by the EU’s definition of green hydrogen and renewable fuels of non-biological origin. The third revision of the EU’s Renewable Energy Directive, adopted in November 2023, set targets of 42% of green hydrogen in industry by 2030 and 60% by 2035. It also set a target of 1% in transport.
Additional legislation aimed at driving demand in shipping and aviation – FuelEU and REFuelEU Aviation – also came into force. The updated rules now allow green hydrogen producers in Europe to claim and sell free allowances in the EU Emissions Trading System. For example, 50,000 tonnes of green hydrogen would yield €37 million and decrease over time.
The EU’s Carbon Border Adjustment Mechanism came into force in late 2023, albeit for statistical purposes. A tax on imports of carbon-intensive products based on the weekly EU Emissions Trading System average auction price will be applicable as from 2026.
Support mechanisms
Late 2022 and 2023 saw the introduction of market creation and production support mechanisms, notably Germany’s H2Global which recently announced subsidies totalling €3.5 billion, and the European Hydrogen Bank which launched an €800 million pilot followed by a second auction in 2024 amounting to €1.2 billion. Subsidies awarded in the pilot phase range from €0.37/kg to €0.48/kg depending on the project which falls below the USA’s Inflation Reduction Act where tax credits start at $0.60/kg and go up to $3/kg of clean hydrogen.
Meanwhile, in the UK, the winners of the first auction of the Contracts for Difference scheme with a budget of £2 billion will receive subsidies of £9.49/kg. Elsewhere, to stimulate demand, the US government has allocated US$7 billion to the H2Hubs program which aims to establish clean hydrogen hubs across the country.
India’s Green Hydrogen Mission auction results were published in early 2024 and, with a maximum of $0.60/kg, this is well below Europe, the US and Australia’s Hydrogen Production Tax Incentive which has announced subsidies of AUD2/Kg of green hydrogen (approximately US$1.32/kg). Japan’s Hydrogen Society Promotion Act pledges subsidies of US$19.24 billion for the clean hydrogen economy, including production and imports.
2030 supply forecast
Despite these measures and subsidies, many projects are delaying final investment decisions under the current conditions. Consequently, government targets, such as the EU’s ambition to produce and import 10 million metric tonnes (Mt) – 20 million Mt in total – of green hydrogen by 2030, are likely to be missed as warned by the European Court of Auditors.
The International Energy Agency has revised down its forecast for renewable energy generation for hydrogen production. In its Renewables 2023 report published in January 2024, it estimates that only 7% of that which has been announced by developers will be installed by 2028.
According to a study conducted by research firm BloombergNEF (BNEF) titled Hydrogen Supply Outlook 2024: A Reality Check, of the 1,600 projects analysed, some of which are in early stages of planning, 70% do not yet have an off-taker, indicating that weak demand is currently one of the main challenges which will lead to delays in final investment decisions.
BNEF predicts that China, the EU, and US will account for 80% of low-carbon hydrogen by 2030, with Australia and Latin America playing a minor role in exports due to less policy support and weak import demand.
See also: The pros and cons of hydrogen fuel as a decarbonization instrument | Experts’ Opinions
China is anticipated to hold 37% of the world’s electrolysis capacity by 2030, while the EU will be in second place with 27%. The US is predicted to lead the field in blue hydrogen (produced with natural gas, including carbon capture and storage) with approximately 37% of global supply.
In BNEF’s report, global green hydrogen supply is expected to reach 9.6 million Mt per year by 2030. Adding blue hydrogen to the forecast results in 16.4 million Mt/year of low-carbon hydrogen by 2030 which is sufficient to meet 17% of current grey hydrogen demand.
Fig.1. Forecast annual green hydrogen production by market/commissioning year.
Source: BNEF
Production challenges
An earlier report by Capgemini, titled Reducing Low Carbon Hydrogen Investment and Operating Costs, highlighted high operating costs which represent ~60% of the levelised cost of hydrogen (LCOH). Based on industry consultations, Capgemini expects the LCOH to fall below €7/Kg by 2030, in the range of €3/Kg and €5/kg, while the price of unabated hydrogen will be between €1.5/Kg and €3/kg.
Rising interest rates are also affecting projects as the weighted average cost of capital (WACC) has an important impact on the LCOH and this is especially relevant for emerging markets that are characterised by higher interest rates. According to the OECD, WACC for green hydrogen projects varies from 6.5% to 24% depending on the project and the location.
Another challenge faced by the sector is the lack of global carbon pricing for unabated hydrogen which would help green hydrogen to become more competitive.
See also: Carbon pricing in Latin America: How is this market growing?
In Latin America and Caribbean (LAC) countries where there is ample renewable energy technical potential such as in Chile, Brazil, Colombia, and Argentina among others, there is a significant pipeline of export-oriented projects but no substantial off-take agreements have been secured in Europe or Asia.
Several international cooperation initiatives and technical assistance programs are active in the region, such as Germany’s PtX Hub and the European Commission’s Team Europe Initiatives on green hydrogen as well as the Global Gateway strategy to mobilise investments up to €45 billion to support the development of green hydrogen along with other strategic sectors in LAC. These interventions help governments to improve strategy and regulations, support partnerships along the value chain, and could accelerate the uptake of green hydrogen and derivatives in the medium term.
However, in view of the fact that regulation-driven demand and support mechanisms are more developed in the global north, it is highly likely that, apart from China, the US and European markets will play a more significant role by 2030.
