By Michael Liebreich, Senior Contributor, BloombergNEF
My last column was the first half of a two-parter on how the net zero transition would be both harder and easier than we might think. The second part will appear early next year.
In the interim, however, the sixth Hydrogen Energy Ministerial in Japan announced a target of 150 million tons of hydrogen demand by 2030, of which 90 million metric tons would be renewable and low-carbon. Now, normally I would shrug my shoulders and ignore this sort of silliness. However, given the overblown expectations being placed on hydrogen at the COP28 Summit in Dubai – COP28 President Sultan Al Jaber had even floated a higher 180-million-ton target in the run-up to the event – I thought I needed to dig in.
I want to show how absurd these figures are, and in doing so explain why so few proposed hydrogen projects are actually being built.
Where did the Hydrogen Energy Ministerial target come from?
As so often with hydrogen targets, it is not easy to identify where the 90 million-ton figure originated. It seems to have been first announced at the previous Hydrogen Energy Ministerial in September 2022, apparently based on a 95 million-ton figure cited by the International Energy Agency (IEA) as the amount required in 2030 for the world to achieve net zero by 2050.
The IEA’s October 2021 Net Zero by 2050 Roadmap, however, had contained an even more inflated figure of 212 million tons of hydrogen by 2030, of which 150 million needed to be low carbon. This year’s update of that roadmap saw the IEA reduce the total figure to 150 million tons, and the low carbon figure to 70 million.
Whatever the source, 90 million tons of clean hydrogen by 2030 would be enough to sustain claims that the world is on track to limit warming to 1.5C over pre-industrial levels. But is it at all plausible? On the surface, it may seem so – after all, 150 million tons in 2030 would be a 50% increase over the current 100 million tons of annual demand in seven years, only requiring a 6% compound annual growth rate.
Look at the detail, however, and the targets fall apart. You would need to retrofit with CCS or replace almost half of the existing fossil-fuel-based hydrogen production; build 60 times more clean hydrogen production capacity than has been funded to date; and create 50 million tons of annual demand in sectors that do not currently use hydrogen at all.
How are we doing today?
As of today, there are only 700 megawatts of operating electrolyzers, producing around 110,000 tons of green hydrogen annually. There are still no operating blue hydrogen plants (blue hydrogen being that made from natural gas with the carbon captured and permanently sequestered).
Expectations have raced far ahead of reality. Over the past two years, electrolyzer manufacturers have expanded manufacturing capacity from 6.8 gigawatts to 33.7GW and by the end of 2024, BloombergNEF is expecting capacity of 52.6GW. Orders in 2023, by contrast, struggled to hit 2GW. Share prices of electrolyzer manufacturers have plummeted up to 95% from their 2021 peaks, and industry bellwether Plug Power, after 24 years without profits, has warned investors that it may not survive to see its 25th birthday without new funding.
There is no shortage of hydrogen projects in the pipeline. BloombergNEF’s Clean Hydrogen Database contains projects that could produce over 170 million tons of hydrogen, of which 47 million could in theory begin production by 2030. The IEA’s 2023 Global Hydrogen Review reported a slightly lower figure of 38 million tons – but whichever data set you prefer, just 1.5 million tons worth of projects have reached final investment decision or are already producing.
BloombergNEF also maintains a database of clean hydrogen offtake agreements, the client contracts without which developers can’t raise finance. It turns out there are identified offtakers for just 7.9 million tons of hydrogen, and of this just 1 million tons per year is covered by binding contracts.
It’s the cost, stupid
Every one of the 52 national hydrogen strategies around the world is predicated on one fundamental assumption: that the cost of clean hydrogen will fall – substantially and quickly.
The EU’s 2020 Hydrogen Strategy stated that “in regions where renewable electricity is cheap, electrolyzers are expected to be able to compete with fossil-based hydrogen in 2030”. The US’s Hydrogen Shot program, launched in June 2021, aimed for “three ones”: clean hydrogen at $1 for 1kg in one decade. Japan’s updated its hydrogen strategy, released this year, aimed for domestic green hydrogen production at a cost equivalent to $2.20/kg by 2030.
There are three reasons why these expectations are proving hopelessly optimistic. First, while the relentless logic of the experience curve will eventually deliver very cheap electrolyzers, the time it takes to get there depends on how quickly that experience is accumulated. The EU Hydrogen Strategy posited 5GW of European electrolysis capacity by 2024 but BloombergNEF’s hydrogen-project tracker suggests the number will barely reach a tenth of that.
Second, electrolyzers account for only around one third of the cost of green hydrogen. The rest is driven either by the cost of green electricity – already far down its own experience curve – or by the cost of heavy engineering components – stuff like compressors, tanks, valves, pipes, power supplies and site infrastructure, which are not about to fall off a cliff.
The third reason is the current spike in inflation and interest rates. Over the past two years the European Central Bank and the Federal Reserve have hiked their main rates from zero to 4.5% and 5.5%, respectively. The wind industry has been hit particularly hard as the business model that drove its profits for a decade – bidding low and letting equipment cost reductions deliver profits – fell apart. The rise in interest rates has caught many developers unawares, and manufacturers cannot pick up the slack: inflation, product proliferation, technical problems and extreme cost pressure have driven them to unprecedented losses.
So what does clean hydrogen really cost?
While there is a wealth of literature on what clean hydrogen is expected to cost at some point in the future, there is a dearth of data on the prices actually paid to the small number of projects that have secured finance.
A recent report by consultancy BCG estimates the figure at between €5 and €8/kg (between $5.40 and $8.60/kg). BloombergNEF’s July Levelized Cost of Hydrogen report shows green hydrogen costs of $1.80 to $4/kg in most countries of the world by 2030, but that does not reflect financing conditions in the second half of this year, which have deteriorated.
The IEA’s 2023 Global Hydrogen Review still maintains that green hydrogen could be produced in Europe for €1.60/kg by 2030, but the assumptions needed to achieve that – such as a cost of renewable electricity in Europe of €13/MWh or a 3% cost of capital – are simply not credible. Use more reasonable assumptions and the cost of European green hydrogen comes out in the €3 to €5/kg range ($3.30 to $5.50/kg). The EU’s Hydrogen Bank appears to have accepted this, setting a ceiling price for its first auction, launched last month, of €4.5/kg.
Prices in the US, Saudi Arabia and Australia – places with tremendous renewable resources and low costs of capital – may come in somewhat lower but look unlikely to dip much below $3/kg by 2030 (excluding subsidies and IRA tax rebates). Inflation and higher interest rates have also hit blue hydrogen projects. Once more, there is a dearth of data, but again at current interest rates it is hard to see a price much below $3/kg, even in the US or the GCC region.
For any clean hydrogen project operating by 2030, therefore, you need to count on production costs being in the $3 to $5/kg range, depending on location, at a minimum.
What about imported hydrogen?
If you think importing cheap green hydrogen from places where it can be made particularly cheaply – like Australia, Namibia, Chile, the GCC region or North Africa – can deliver hydrogen at prices below $3/kg, I have bad news for you.
In my December 2022 piece the Unbearable Lightness of Hydrogen, I highlighted the McKinsey & Co. Hydrogen Flows report on behalf of the Hydrogen Council, which promised 400 million tons of internationally traded hydrogen by 2040. They have just halved that forecast (not their last downgrade, I’ll wager) but are still forecasting 20 million tons of hydrogen imports by 2030.
It is of course technically feasible to liquify hydrogen and put it on a ship, but the cost doing so will be somewhere between $3 and $8/kg, even by 2040. Hydrogen on a ship is, frankly, less plausible than Snakes on a Plane.
What about shipping ammonia instead? Today 16.5 million tons of ammonia are transported by ship, according to shipping services provider Clarksons. Setting aside the need to build new ammonia plants in far-away lands, 20 million tons of hydrogen translates into 113 million tons of ammonia, so sending it by ship would constitute a sevenfold increase in volume. A twofold increase by 2030, plus a few ships powered with ammonia, I could believe; a sevenfold increase by 2030 is not going to happen.
As for pipelines, the gas industry is promising that they can repurpose existing pipelines, but by the time you account for hydrogen’s extremely low density, the reduction in pressure required to avoid embrittlement and the increase in power requirement for big new compressors, their energy carrying capacity could easily be reduced by 75%. Most hydrogen pipelines will be purpose-built, and it is hard to see any commissioned this side of 2030. When they are built, a sensible cost estimate would be between $0.40 and $0.80/kg of hydrogen transported.
Whichever way you look at it, you are back at a minimum cost of $3 to $5/kg.
Now you have to get customers
Suppose you have managed to produce or import 90 million tons of clean hydrogen by 2030. Now you need to figure out how to get customers to use it.
For producers of fertilizers and petrochemicals, that is fairly straightforward, because they already use hydrogen. While a few of their customers may be prepared to pay a so-called green premium – perhaps some FMCG companies that want to be seen using some zero-carbon fertilizer – most won’t. This means you will have to match what they currently pay for fossil-based hydrogen, plus any carbon price to which they are subject. And that means selling clean hydrogen for at least $2/kg below your production or import cost.
As for sectors which are not currently using hydrogen – such as steel, heating and transport – getting them to use hydrogen will take more than just matching the current cost of gray hydrogen. After all, they could have switched to gray hydrogen at any time, but they did not.
For heat-related use cases, even if you ignore the cost of converting equipment, you will have to sell clean hydrogen at the same price on a heat-adjusted basis as natural gas. That is $0.35/kg in the US, $1.40 in Japan, and $1.70/kg in Europe (or $2.45/kg in sectors covered by the European Union’s Emissions Trading System). On average, to make the numbers easy, this means selling clean hydrogen at about $2.50 below production or import cost.
For the steel industry, getting manufacturers to switch will require each of them investing billions of dollars to retire and replace existing coking-coal based plants, and then hundreds of millions more per year in higher running costs. Sweden’s H2 Green Steel has raised €5.3 billion ($5.6bn) for its first plant, but that does not include running costs. Turning the levels of support required across the industry into a cost-per-kilo of hydrogen is hard, but conversion is so staggeringly expensive that even providing free hydrogen (geological white hydrogen anyone?) would be insufficient to drive uptake.
Getting hydrogen used for land transportation is even harder. First, you have to get people to buy vehicles that cost significantly more than the petrol or diesel equivalent. Second, you have to retail hydrogen at a cost equivalent to diesel or petrol – around $5/kg – even though hydrogen filling stations cost $1-2 million each and it takes 16 hydrogen tube trailers to replace each diesel or petrol fuel distribution tanker. Third, you have to do this in competition with electric vehicles – which are faster, simpler, more roomy, and already offer broadly the same total cost of ownership as their fossil equivalents. Again, even providing free wholesale hydrogen would be insufficient to drive uptake, just given the costs involved in distribution.
So how much subsidy are we talking about?
With all this information, we can now produce a ball-park estimate for the total volume of subsidy or support that would be needed in order to hit the Hydrogen Energy Ministerial target of 90 million tons of clean hydrogen per year by 2030.
Of the 90 million tons, you will recall that 40 million are meant to go to existing use cases and 50 million to new uses. Multiplying the $2/kg cost penalty for existing use cases by 40 million tons and you get $80 billion per year. For new use cases, let’s be incredibly generous (and make the maths easy), and assume an average of $3/kg of subsidy will be sufficient to drive uptake. Multiply that by 50 million tons, and you get an additional $150 billion per year. So the total subsidy needed is $230 billion per year.
But it is actually worse than that – much worse – because of the way project finance works. To get to final investment decision, one year of contracted revenue is not enough. The median offtake agreement in the BloombergNEF Hydrogen Offtake Database is 15 years long, with a range from seven to 30 years. Again, let’s be incredibly generous and make the maths easy, and assume that an average term of 10 years will be sufficient for projects to get built.
That means that for the Hydrogen Energy Ministerial target to be hit, finance ministries of the world would need to slap no less than $2.3 trillion dollars on the table, and do it in time to build the projects before 2030.
How does this compare with committed funds today?
The biggest provider of support for hydrogen projects today is the US, thanks to its 2022 Inflation Reduction Act (IRA). At the time it was passed, the US Congressional Budget Office estimated its total cost at $390 billion, of which just $13.2 billion was expected to go to hydrogen production. However, the figure was uncapped, and the real number will clearly be many times higher. BloombergNEF estimates a hydrogen figure of $137 billion, although that is for disbursement over the next ten years, not just until 2030.
BloombergNEF estimates the figure for Europe at $125 billion. The EU Hydrogen Bank is funded to the tune of €3 billion. Germany is set to commit €3.6 billion to its H2Global plan for disbursement over 10 years, and it is working on a €50 billion, 15-year contract-for-difference plan for industrial decarbonization. The EU is earmarking €100 billion, the UK £900 million ($1.1 billion) and so on.
Japan is planning to spend ¥7 trillion ($47 billion), China $10 billion and India $2 billion; BloombergNEF estimates that so far all of Asia has actually committed just $12 billion of firm spending.
In total, therefore Bloomberg estimates that just under $280 billion has been committed to fund clean hydrogen around the world. Although more is likely to be added to this pot in the next few years, not all will be disbursed in time to move the needle for 2030. My estimate for the total funding flowing in time to produce clean hydrogen in 2030 would be no more than $200 billion.
That means that the world is $2.1 trillion short of the funding that would be needed to deliver the Hydrogen Energy Ministerial’s 90 million tons of clean hydrogen by 2030, a shortfall of over 90%. This is why more hydrogen projects are being abandoned or delayed than are reaching final investment decision and being built, and why that will continue to be the case for the foreseeable future.
How much clean hydrogen might we actually see in 2030?
It turns out that the leaders of the world’s biggest economies are not taking the Hydrogen Energy Ministerial’s 90 million-ton target particularly seriously.
BloombergNEF’s Hydrogen Strategy Tracker shows government of 52 leading countries with hydrogen strategies are targeting total production of just 20.4 million tons by 2030. The US is hoping to produce 10 million tons, Japan 3 million and South Korea 4 million. The UK recently upped its target to 10GW of production, equivalent to about 1.5 million tons. The 20.4 million ton total, however, does not include the EU’s entire stated target of 20 million tons – 10 million tons of local production and 10 million tons of imports from outside the EU. Even when you add those, and you still get less than 40 million tons.
My own best estimate for the production of low-carbon hydrogen in 2030 would be no higher than 15 million tons. Take our $200 million of committed and likely-to-be disbursed support, divide it into ten-year offtake agreements, divide it again by the $2 to $3/kg of subsidy required to drive clean hydrogen into the market, and you get just 8 million tons.
If inflation and interest rates continue to ease, we might see a bit more than that. Twenty million tons by 2030? I’ll take the under on that. Forty million tons? No way. Ninety million tonnes? Nothing short of delusional.
So there you have it. Next time you hear a politician or promoter talking about the hydrogen economy and what it can deliver by 2030, remember this reality check. Let’s look back in 2030 and score my predictions: fewer than one in ten of the projects currently in Bloomberg’s database will have been built. Until then, please can we be realistic about how much to rely on hydrogen to do the heavy and difficult work of decarbonization
Selah!