Hydrogen will struggle to span beyond refining and industry

  • Clean hydrogen will mainly be used to replace fossil fuel-based hydrogen in the refining and industrial sectors, which account for almost all hydrogen demand at present. 
  • Transportation is an important new sector for increasing hydrogen consumption, but cost and infrastructure challenges will make adoption difficult. 
  • Availability of commercially established decarbonisation technologies make the use of hydrogen unattractive in many sectors. 
  • Government support would be necessary to bring down the costs of producing clean hydrogen and stimulate demand in hard-to-abate sectors. 

The International Energy Agency (IEA) estimates that global hydrogen consumption needs to reach 150m tonnes by 2030, from 95mt in 2022, for the world to reach net-zero emissions by 2050. From a clean energy transition perspective, the challenge is not just to spur new demand for hydrogen but to do it in sectors that currently do not consume hydrogen at scale, such as transportation and aviation. There is also an urgent need to make the hydrogen production process emissions-free, producing more ‘green’ and ‘blue’ hydrogen rather than the fossil-fuels-based ‘grey’ hydrogen that dominates at present. Less than 1% of all the hydrogen consumed in 2022 can be considered clean or low-emissions.  

In 2022 almost all hydrogen consumption came from refining and industry. However, according to the IEA, to reach net-zero by 2050, 40% of global hydrogen demand by 2030 should come from alternative sectors, such as transportation, power generation, buildings and other industrial applications. EIU believes that this aspirational objective will be missed by a huge margin owing to a multitude of issues related to the production of clean hydrogen and its limited appeal as a decarbonisation technology compared with other substitutes.   

Chart showing 2022 estimate for sectoral hydrogen demand and 2030 in a net-zero scenario

Non-energy use accounts for almost all hydrogen consumption currently

The refining industry accounts for close to half of global consumption of hydrogen, which is used primarily as an input material to clear impurities from hydrocarbons. The other major use of hydrogen is in the fertiliser industry, where hydrogen is synthesised into ammonia—a key ingredient in fertiliser production. Other uses of hydrogen within the industrial sector include methanol production and in the iron and steel industry for a process called direct reduced iron (DRI) whereby a combination of gases including hydrogen is used to separate oxygen from iron ore. Replacing grey hydrogen with the green or blue variety in these sectors would be a big step forward towards scaling up demand for clean hydrogen. 

BEVs outpace FCEVs but heavy vehicles can increase hydrogen uptake

Technology to use hydrogen in the transportation sector does exist but its adoption remains limited. Fuel cell electric vehicles (FCEVs), a type of alternative-fuel vehicle, use a chemical reaction to convert hydrogen and other elements into electrical energy which powers the vehicle. Even so, the global market for FCEVs is but a fraction of that for battery electric vehicles (BEVs). According to the IEA, currently there are about 80,000 FCEVs on the road at a global level, with the largest share in South Korea for cars and in China for trucks. In comparison, the total global fleet of BEVs reached an estimated 18m units by 2022. 

BEVs have become more commercially viable supported by government subsidies and mandates for manufacturing and sales, a relatively simpler charging infrastructure as compared to hydrogen refuelling stations for FCEVs, as well as a rapid decline in the cost of lithium-ion batteries. These factors have made BEVs the preferred technology to decarbonise transport, therefore we believe that there is limited scope for hydrogen powered vehicles in the passenger cars segment, where they will continue to lag behind BEVs.    

However, heavy-duty and long-haul commercial transportation could emerge as a promising sector for hydrogen demand. FCEVs benefit from far quicker refuelling stops (similar to diesel), whereas BEVs have limited range and lengthy recharging times. In the logistics sector, where timelines are tight and drivers have limits on their working hours, these are important factors. Trials are also ongoing for hydrogen combustion in vehicles, pure hydrogen or e-fuels made with hydrogen and carbon,  to generate power—a technology that would also require few infrastructural overhauls—although they currently remain far from wider deployment. 

Hydrogen use in aviation remains elusive

Similar issues related to costs and supporting infrastructure are impediments to hydrogen adoption in the aviation and shipping industries. Sustainable aviation fuels (SAFs), which can be created using low-emission hydrogen and can easily replace hydrocarbon jet fuel, remain highly expensive. Production is difficult to scale up in the absence of guaranteed off-take agreements with potential buyers. Trials to use hydrogen for direct combustion in aircrafts are also ongoing, including by prominent players such as Airbus with its ZEROe concept aircraft. However, multiple challenges, from high costs to safe storage of compressed hydrogen, limit the appeal of hydrogen planes. In the shipping industry, the highest interest lies in using ammonia-based fuels which offer higher energy density than hydrogen but ammonia combustion can result in emissions of nitrous-oxide, a potent greenhouse gas. 

New industrial users may emerge; use in power and heat generation to remain unviable 

There’s also potential to expand hydrogen use in industry beyond its existing applications. DRI can be produced using higher concentrations of hydrogen and some high-heat industrial processes can be conducted using hydrogen or ammonia combustion. Likewise, low-emissions hydrogen or ammonia combustion for power generation, either directly or in co-generation plants, can help maintain base-load during periods of low renewables generation. However, the reverse transformation of green-hydrogen to clean-electricity would lead to major energy losses in the process, making it inefficient. That would leave blue hydrogen, produced from fossil fuels with emissions captured, as an alternative option. Even so, we expect that its use will remain negligible in the power generation sector as the objective of maintaining base-load could be better served with existing low-emissions technologies such as nuclear or hydro power plants.    

Hydrogen can also be mixed with or can even completely replace natural gas for building-heating, however energy losses during the conversion, transport and storage of hydrogen to urban demand centres make it an unattractive prospect. Alternatively, electric heat pumps have gained commercial maturity in most markets as a viable technology to decarbonise the building-heating sector and are receiving generous policy support, particularly in Europe, to scale-up. 

Demand growth will come from switching to clean hydrogen by current users

We expect that most of the growth in low-emissions hydrogen demand during this decade will come from replacing grey with clean hydrogen within existing users in the refining and industrial sectors. These clients would not require major infrastructural upgrades or technological innovation to adopt clean hydrogen, but could be encouraged to switch through a combination of policy tools including mandates for minimum share of clean hydrogen and subsidies to cover part of the costs. Such a move would also help to bring down the cost of clean hydrogen, a trend that is unlikely to materialise without off-take guarantees from potential buyers. 

Map showing selected policies to stimulate hydrogen demand

Several governments are setting targets and exploring various policy tools, including subsidies for clean hydrogen usage, mandates for minimum shares of clean hydrogen and tax credits for large project developers. But that may not be enough to stimulate demand in key sectors. So far, policy attention has favoured the production of clean hydrogen instead of a right balance with demand creation for all that projected supply. The IEA estimates that globally, government targets for production of low-emission hydrogen add up to 27-35mt, whereas targets for demand creation total only 14mt. 

Without policy support, new demand centres for clean hydrogen will struggle to emerge, particularly in an economic environment marked by high interest rates for financing and high commodities costs. We see that there is scope to deploy hydrogen in sectors  such as aviation and long-haul transportation, where emissions are hard-to-abate with existing technologies, but conducting necessary research and development would be a challenge in the absence of government backing. 

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.