Hydrogen’s Pragmatic Turn: A balanced path for a hydrogen economy

Hydrogen’s role in decarbonization is shifting toward realistic, sustainable growth, with projections adjusted to reflect achievable milestones. Despite recalibrated forecasts, global progress—from expanded projects to hydrogen hubs—underscores hydrogen’s potential as a vital component of a clean energy future.

Monday, 11 November 2024
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A balanced shift in expectations

Hydrogen is increasingly viewed as a crucial element in global decarbonization efforts. However, the sector has encountered significant challenges in advancing at the pace projected just a few years ago. As a result, there has been a shift toward more realistic assessments and projections within the industry—an approach that ultimately benefits long-term planning and execution.

Hydrogen forecasts, as part of the energy mix by 2050, are being revised downwards globally. Take the Hydrogen Strategy for Canada, for example, which was launched in 2020. A progress report released earlier this summer highlights some adjustments to the initial targets. According to the latest forecast, low-carbon hydrogen could contribute up to 18% of the country’s total energy usage by 2050. This is a notable recalibration from the 30% share projected four years ago, with most estimates now ranging between 3% and 12%. Globally too, the forecasts now indicate a slowdown. Goldman Sachs, in its latest Carbonomics publication, has revised its 2021 forecast of >600 Mtpa by 2060 to current forecast of >470 Mtpa by 2060.

Despite this downward revision, stakeholders in the hydrogen economy have reasons to remain optimistic. The world has made substantial strides in its hydrogen development over the past few years, laying a solid foundation for future growth and innovation. Instead of being seen as a setback, this recalibration reflects a more mature understanding of the sector’s capabilities and limitations.

Proud milestones of progress

Despite facing global headwinds that affected clean energy projects development – such as supply chain disruptions, rising costs of raw materials and policy uncertainty – the world is making some progress. Below are examples of the global advancements in hydrogen as a cornerstone of a clean energy future.

According to International Energy Agency, there are 60 countries, that account for 82% of energy-related CO2 emissions, with hydrogen strategies now; production of low emissions hydrogen has seen a growth of 50% since 2021; and 9 times growth in electrolyser installed capacity.
Hydrogen Insights 2024, a report by Hydrogen Council and McKinsey &Co informs clean hydrogen projects in the pipeline globally increased from 228 projects in 2020 to 1,572 projects as of May 2024, representing investments of USD 680 billion. Of which, there are 434 committed stage projects. This translates to a production volumes of 48MT p.a., of clean hydrogen production capacity through 2030, of which 9% volume is in the committed stage.
Countries are progressing through policies and programs. A recent unique program includes pay-as-bid auctions by the European Hydrogen Bank. The Commission awarded nearly 720million Euros to seven renewable hydrogen projects.
There has been significant progress in conceptualizing, planning and implementing hydrogen hubs as a key strategy for accelerated adoption of hydrogen. A good example is the announcement of $7billon funding for the development for seven regional clean hydrogen hubs in the US.

The realization that is happening

Hydrogen is promoted as a clean fuel alternative due to its high energy density and zero emissions at the point of use. Hydrogen’s versatility also makes it suitable for applications ranging from heavy industry and transportation to energy storage. However, challenges such as production costs, infrastructure needs, scaling hurdles, offtake agreements and regulatory barriers have been underestimated, resulting in overly optimistic projections.

There is a growing recognition that successful decarbonization relies on asset-based solutions, where clean energy projects – like those in the hydrogen sector – require considerable time to evaluate, plan, permit, design, build and operate. Unlike digital innovations that can be rapidly deployed and scaled, these infrastructure-intensive projects inherently have longer development cycles due to their complexity and scale. The adoption of new and emerging technologies further adds to these timelines, as the low carbon hydrogen sector lacks extensive historical data to inform best practices, safety standards and performance benchmarks. This need for patience is particularly useful for the hydrogen sector. Any significant incident or safety failure by rushing through projects could undermine public and investor confidence, potentially setting the entire sector back by a decade or more.

On the positive side, the sector is gaining valuable insights as it works to develop the hydrogen economy. While hydrogen as a resource has been around for a long time, the industry is now focused on ensuring that its adoption and growth are handled effectively and sustainably. The goal is to build a robust foundation for the hydrogen economy, learning from experiences and avoiding potential pitfalls to ensure long-term success and wide-scale acceptance.

Author

Sagar Kancharla

Canada

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Accelerating with a measured approach: A roadmap to Final Investment Decisions

As the global energy landscape shifts toward low-carbon solutions, the hydrogen economy has emerged as a critical component of achieving net-zero ambitions. However, while hydrogen projects are gaining momentum, many are facing delays in reaching Final Investment Decisions (FID). These delays do not negate the urgency of hydrogen development. On the contrary, they highlight the need for a methodical, accelerated approach that balances speed with diligence. For hydrogen developers, this means taking concrete steps to strengthen business cases and de-risk investments while advancing toward FID.

A measured yet accelerated approach requires thorough preparation and strategic execution across several key areas:

1. Leveraging Enabling Policies and Incentive Programs

Hydrogen developers must stay attuned to evolving government policies and programs designed to stimulate the hydrogen economy. Various regions offer significant incentives for green energy projects, including hydrogen. By understanding and incorporating these enabling policies, developers can optimize project financing, enhance profitability, and de-risk their investments. Securing financial support through grants, subsidies, and tax credits can make the difference between a stalled project and a thriving one. Engaging early with regulatory bodies to ensure alignment with policy trends is critical for smooth project progression.

2. Strategic Participation Across the Hydrogen Value Chain

Successful hydrogen projects depend on more than just production; they require a holistic strategy across the entire value chain—from feedstock sourcing to production, conversion, and storage. Developers must assess where they can best contribute to or leverage value chain activities. The location of a hydrogen project becomes very important based on the business model being pursued. For example, securing reliable sources of renewable energy for hydrogen production and ensuring efficient storage and transportation solutions are crucial. Aligning these stages with long-term market demand—whether for domestic use or export—is essential for reducing risk and maximizing returns.

3. Comprehensive Market Studies for Hydrogen and Its Derivatives

Developers need to conduct in-depth market analyses to fully understand the evolving demand for hydrogen and its derivatives, such as ammonia and methanol. This involves not only assessing potential domestic consumption but also exploring export opportunities in key regions, such as Europe and Asia, which are investing heavily in green hydrogen imports. Understanding the applications of hydrogen across industries—from power generation and transport to heavy industry—helps clarify where the greatest demand lies. This insight supports the optimization of production capacities and ensures the project aligns with future market needs.

4. Optimizing Energy Flows for Operational and Financial Efficiency

Efficiency in energy usage is a critical determinant of both operational success and financial performance in hydrogen projects. By optimizing energy flows throughout the production and conversion process, developers can minimize waste and reduce costs, directly impacting the project’s bottom line. This involves maximizing the integration of renewable energy sources, improving production technologies, and ensuring that the energy inputs and outputs are balanced for peak efficiency. Financial modeling based on optimized energy flows will further strengthen the project’s viability and attract investment.

5. Executing a Robust Project Development Process

Achieving FID requires a disciplined approach to project development, including feasibility studies, engineering design, and securing offtake agreements. This stage-gated process ensures that each phase of the project—from pre-feasibility to detailed design—meets critical milestones. Risk mitigation strategies, including technical validation and financial due diligence, must be employed throughout the project lifecycle. Developers should ensure clear governance and accountability across all phases of development to meet timelines and avoid costly delays.

The hard work still needed to build a hydrogen economy

While the pace of hydrogen project development is accelerating, there remains significant work across the entire ecosystem before projects can reliably reach the implementation stage. The hydrogen economy will only thrive if progress is made simultaneously across all parts of the value chain. Uneven development could lead to stranded assets and missed opportunities, highlighting the importance of coordinated efforts. Below are key areas where crucial work remains.

1. Understanding the Power-Hydrogen Relationship

Electrolysis, which uses electricity to produce hydrogen, is central to many hydrogen strategies. However, this approach creates complex interdependencies between power generation and hydrogen production that need to be well understood.

Power Availability: Can enough power generation be built in the right locations, along with the grid infrastructure needed to transmit electricity to electrolysis sites? Without this, hydrogen production could falter due to power shortages or bottlenecks in the transmission network.
Competition for Electricity: Hydrogen production via electrolysis will compete with other high-demand applications for electricity, including electrification technologies like heat pumps, data centers, and even cryptocurrency mining. Will electrolytic hydrogen be able to compete in regions with limited renewable energy resources?
Intermittency and Efficiency: The intermittent nature of renewable energy further complicates hydrogen production. What will be the impact of optimizing hydrogen production with power and hydrogen storage solutions, especially when considering efficiency losses in the energy cycle?

This feedstock-hydrogen challenges are relevant for other pathways too.

2. Addressing Demand-Pull Challenges

While supply-side policies and incentives have been developed, the demand side remains underdeveloped. To attract financing, developers need more certainty in terms of offtake agreements. The demand-pull mechanisms that could close this gap are still in their infancy, and their design will be critical to future growth.

Long-Term Contracts and Policy Support: Many potential hydrogen buyers are reluctant to commit to long-term contracts because they anticipate technology costs will fall. However, developers need these contracts to secure financing. Could targeted policy interventions help bridge this gap, offering support to developers while protecting buyers from overpaying?
Contracts-for-Differences (CfDs): Programs like Canada’s contracts-for-differences, which use carbon prices as the basis for financial stability, could be expanded. Could a similar mechanism be developed, tied to the price of hydrogen or its derivatives, to provide greater market certainty? Demand could be stimulated especially in hard-to-abate sectors such as cement, steel and chemical sectors.
End-Use Infrastructure: The shift to hydrogen in key sectors will often require substantial upgrades to infrastructure. Government support for these upgrades—both in terms of funding and policy incentives—will be essential to catalyzing demand and creating a reliable end-market for hydrogen.
Industrial demand: It is quite possible that hydrogen demand for industrial decarbonization could grow and become a baseload, considering the pressure on the industry to decarbonize and the options available.

3. Developing Midstream Assets

A critical gap in the current hydrogen ecosystem lies in the infrastructure needed to transport hydrogen from production sites to end-users. Unlike solar or wind power, where existing electrical grids can transport energy, hydrogen lacks established infrastructure for long-distance transport.

Leverage Existing Infrastructure: The natural gas pipeline network could be repurposed to transport hydrogen, but this will require extensive testing to ensure safety and performance standards. Accelerating testing and regulatory approval for blending hydrogen into natural gas pipelines could help fill this gap.
Exploring Alternative Transport Modes: Pipelines may be the most efficient and safe method for hydrogen transport, but rail and road transportation options also need to be developed. Further, the form in which hydrogen is transported—whether as gaseous hydrogen, liquid hydrogen, or a derivative like ammonia—must be carefully evaluated. Accelerating the development of regulations and policies in this area could unlock new transport pathways.
Permitting and Construction Delays: Infrastructure projects that cross property lines, particularly pipelines, often face significant delays due to complex permitting processes. Streamlining these processes could help accelerate the development of a hydrogen transport network.
eFuels potential: Hydrogen is challenging product to transport. In these circumstances, when technological options are being developed, it could be valuable to evaluate the conversion of hydrogen to eFuels or other derivatives that could be safely transported.

4. Harmonizing Regulations, Standards, and Certifications

Governments have made significant strides in supporting hydrogen through policies and programs. However, the regulations, standards, and certifications that will underpin a global hydrogen market are still fragmented and evolving.

Uniform Carbon Intensity Standards: Global hydrogen trade will hinge on consistent standards for measuring and certifying carbon intensity across different production methods. A uniform approach to life-cycle carbon intensity assessments and verification is essential for the industry’s credibility. The introduction of ISO/TS 19870 is a good start for standardizing GHG emissions assessment specific to various hydrogen production and delivery pathways and going beyond the generic LCA modeling.
Safety and Public Awareness: Ensuring the safe handling of hydrogen is paramount, including the development of global safety standards and proper training for first responders. Additionally, public education will be key in overcoming safety concerns and building trust in hydrogen technologies.

These areas of focus—power integration, demand stimulation, mid-stream infrastructure development, and regulatory harmonization—are just a few of the critical challenges that must be addressed. A regional approach to hydrogen development, with coordination across all parts of the value chain, will be essential to ensuring balanced progress.

Decarbonization solutions shouldn’t be boxed into specific applications. While the assessment could eventually lead to those applications, regional assessments are critical to determine applicability. Hydrogen is often considered as an application for hard to abate sectors. In some regions, passenger vehicles might find hydrogen as a viable option; some regions might find electric arc furnaces preferable to hydrogen-based solutions. In some regions, for space heating, it is neither heat-pumps nor hydrogen blending but renewable natural gas blending!

Promising world of hydrogen hubs and corridors

The shift toward a more pragmatic approach is not only necessary but beneficial. The lessons learned over the past years have underscored the value of hydrogen hubs, which have emerged as a potential key driver for success.

Characteristics of Hubs

Integrated Ecosystem: Streamlined investments in infrastructure, including production facilities, transportation, and storage.
Collaborative Working: Bring together a diverse range of stakeholders—governments, industries, research institutions, and local communities—focused on a shared goal.
Multiple Pathways: Leveraging regional resources, allows for different production pathways for hydrogen and derivatives.
Diverse Applications: Supports various end-uses, such as industrial processes, power generation, transportation and residential heating.

Benefits of Hubs

Encourages Efficiency: Concentration of activities and aggregation of demand allows for lower production and transportation costs.
Pursues Decarbonization: Choice of policies, strategies and technologies leads to reduction of emissions.
Expanding Growth: With enhanced viability, creates awareness, increases participation and provides regional economic growth.
Stimulates Innovation: Attracts talent and accelerates technological advancements.
Energy Security: With production and consumption locally, provides energy independence.

Challenges of Hubs

Initial Investments and Production: Requires high initial investment for establishing hubs. Relative to alternatives, high production costs for hydrogen and derivatives.
Demand Uncertainty: Immediate demand may not exist and could lead to potential underutilization of hub infrastructure.
Feedstock and Infrastructure: There could be still deficiencies of feedstock availability and access to infrastructure.
Polices and Regulations: Absence or evolving policies and regulations for this nascent sector.
Competing Projects: Lack of immediate demand and integration complexity could lead to delayed decision-making and development.

There are several hydrogen hubs under development globally, leveraging the unique characteristics of that region and basing on anchor tenants. Nations should think beyond hub development to hydrogen corridors as a key strategy for scaling up hydrogen as a mainstream energy carrier and resource. Hydrogen corridors are strategic networks connecting these island hubs, where hydrogen is produced, stored, and distributed. These corridors enable reliable supply routes and facilitate the use of hydrogen across various sectors. The multi-application nature of hydrogen corridors helps amplify demand, leading to higher production volumes and lower overall costs. One of the main challenges in scaling hydrogen is fragmented and limited demand, which drives up production costs. Hydrogen corridors can address this by creating an interconnected infrastructure that ensures consistent fuel availability.

The optimism to hold on to

In this context, while headlines about withdrawn or canceled hydrogen projects might dominate the news, it’s critical to look beyond these short-term setbacks and focus on the bigger picture. The learnings from the past few years—and the ability to recalibrate as needed—offer a hopeful path forward. Progress in policies and investments continues to fuel the development of a robust hydrogen economy.

To thrive, we must embrace the uncertainty, lead as first movers, and form partnerships that drive the hydrogen ecosystem forward. Aligning expectations with practical realities on local basis, while maintaining focus on affordability, security, and decarbonization, will be vital as the world, works to establish hydrogen as a viable component of the global energy mix.

Hydrogen’s Pragmatic Turn