The hydrogen finger-pointing game

Policy-makers in both the EU and the UK have been rolling out legislation to facilitate the creation of a hydrogen market, but the matter is still surrounded by a great deal of uncertainty around implementation. 

BCG findings suggest that only three per cent of EU industrial consumers surveyed would commit to off-take contracts exceeding five years, as it remains unclear whether Member States will follow through with what they frequently frame as costly climate action and risk decreasing competitiveness. 

Some production of low carbon and renewable hydrogen is necessary to decarbonise hydrogen feedstock and some forms of energy demand, but a gap sustains between the price for which producers can provide hydrogen and that which consumers are willing to pay. 

Still costly

Pairing hydrogen production with carbon capture and sequestration (CCS) doubles its price, while renewable hydrogen’s costs are double that, yet again. 

Albeit, these are dubious estimates as technological and economic risks related to the deployment of both forms of hydrogen linger. The energy intensity, efficacy, and reproducibility undermine confidence in CCS, while providing green electricity for renewable hydrogen remains a challenge.

EU policy-makers introduced the Hydrogen Bank to channel public money and mobilise private capital to fill the gap between the cost of producing low carbon and renewable hydrogen and the price buyers are willing to pay. Combined with sectoral quotas set by member states as mandated by RED III provides lift for the technology, but experts tend to agree that this is still far from enough.

The UK Government launched a similar funding scheme with the Hydrogen Production Business Model. The EU’s and the UK’s approaches offer support for the sector, but their scale does not correspond to targets and resources allocated by key geoeconomic competitors, such as the USA or China.

Insufficient European hydrogen demand also stunts the electrolyser sector’s growth, despite European industrial policy regularly underscoring its importance (see the Draghi report, for instance). 

Backed-out

The EU and European governments channeled tremendous resources towards national champions, such as the UK’s ITM Power or Germany’s Sunfire and Siemens Energy, but these face headwinds as global electrolyser manufacturing capacity is forecasted to expand to twice as much as demand by 2030. 

Accordingly, there is sense of gloom within the sector, as executives point fingers to buyers, policy-makers, and fierce competition.

The broader issue is that slower action from (potential) hydrogen consumers and green hydrogen producers paves the way for the extension of an emitting fossil fuel-based energy system. 

Oil and gas companies were eager to propose hydrogen as solution that rendered them relevant in the energy transition and a net zero energy system, but the shift in priorities to energy security, insufficient public support, and the lack of long-term offtake agreements has curtailed their ambitions. 

Most prominently, Norwegian Equinor recently backed out of developing and providing low carbon fossil hydrogen to Germany as a part of a multi-billion euro project. Shell took on a similar decision as well. 

Substituted

Maintaining a reliance on fossil gas even if this is paired with CCS is not a desirable option in my mind, but seeing the challenges with renewable hydrogen, a lack of investment in this field paves the way for a continued reliance on unabated fossil gas. 

Oil and gas companies have limited incentives to take on hydrogen-related risks as selling fossil gas to Europeans has never been so lucrative and welcomed by politicians following Europe’s pivot from Russian imports. 

Executives continue to engage in dialogue with policy-makers and potential hydrogen buyers, with some projects moving forward (e.g. Humber in the UK), but the overall pace of the sector’s growth is far from what incumbents and politicians foresaw a few years ago.

The sweeping ambition and enthusiasm that oil and gas companies conveyed towards hydrogen has been substituted with their waiting for the state to step in and financially support their energy transition. 

Waiting

There is something deeply troubling in that society established and maintains a social system where public funds will be channeled to oil and gas companies – they will – to develop a technology that continues their wealth extraction despite their being the prime enablers of global heating.

Discourse on the necessity and future prominence of hydrogen has thus been abundant, but as the energy carrier’s market needs to be established no set of actors seem to be willing to take on the risks necessary to scale the technology in accordance to preset goals. 

Buyers await subsidies and regulatory stability, producers are waiting on buyers to make long-term commitments and the state to provide ample funding for project development, while policy-makers point to the lack of funds in support of the cause. 

Hydrogen may be a necessary component of a decarbonised energy system, but as its loudest advocates are unwilling to risk investing in respective technologies, one must raise the question to what extent it will be necessary and whether supply should be anything but green.

This Author

John Szabo is a Fellow at the Centre for Economic and Regional Studies, HUN-REN as well as a Fellow at DIW Berlin. His research focuses on the energy-society nexus, especially in the context of the energy transition.