The road to the hydrogen economy is plagued with potholes

  • Hydrogen is a key technology for achieving climate change goals and many governments are rushing to boost production capacity, setting ambitious targets.
  • But this rush could exacerbate challenges in renewable energy supply chains, as many key raw materials are shared by both industries.
  • Production of green hydrogen will compete with other sectors of the economy for scarce renewable energy output, potentially jeopardising the energy transition.
  • It is unlikely that current hydrogen production targets will be achieved.

Like gasoline and natural gas, hydrogen is an energy carrier, meaning that it allows the transport of energy from one place to another. Unlike its fossil-fuel cousins, hydrogen does not emit CO2 or other greenhouse gases when it is converted into usable energy. It can also be stored without losing its energy content, which could help energy grids to cope with intermittent supplies from renewables. In liquid form, it can be transported via pipelines or trucks. These qualities have made hydrogen critical to global decarbonisation efforts, particularly in reducing emissions in sectors that so far have been difficult to decarbonise, such as heavy industry, aviation, shipping and long-haul transport.   

It is not surprising then that many countries are aiming to scale up their hydrogen production capacity as part of their energy transition plans (see chart below). For the world to reach net-zero emissions by 2050, hydrogen production will have to almost double in less than ten years, from about 95m tonnes in 2022 to 155m tonnes in 2030, according to the International Energy Agency (IEA). But the challenge lies in not just boosting hydrogen production, but also decarbonising the production process.

Hydrogen policy comparison

Not all hydrogen is clean

Generally, hydrogen can be produced through fossil-fuel reforming (a process that relies on a reaction between natural gas and steam) or by separating water molecules into hydrogen and oxygen in an electrolyser powered by electricity. If emissions associated with the fossil-fuel reforming process are sequestered and stored through carbon capture and storage (CCS) technologies, the resulting hydrogen is denominated ‘blue hydrogen’. When those emissions are released into the atmosphere it is called ‘grey hydrogen’

By contrast, the electrolysing process does not generate any direct CO2 emissions, although it can produce indirect emissions if the electricity used comes from fossil-fuel power plants. However, if the electrolyser is powered by renewable energy, the resulting hydrogen is denominated ‘green’, and when powered by nuclear energy it is labelled ‘pink’.

Blue, green and pink hydrogen are considered clean hydrogen. According to the IEA, less than 1% of current hydrogen produced can be considered clean. The agency estimates that emissions associated with current hydrogen production–which is consumed mainly in the refining and chemical sectors–are equivalent to those of the UK and Indonesia combined. 

So the need to decarbonise the hydrogen sector is imperative. The IEA estimates that, in order to reach net-zero by 2050, clean hydrogen production needs to rise from just 0.5m tonnes in 2022 to 73m tonnes in 2030 —more than a 140-fold increase in ten years. However, based on announced projects, the agency forecasts that clean hydrogen production will reach 16-24m tonnes a year by 2030, which would still be monumental growth. 

Hydrogen targets map

Boosting hydrogen production will pose more supply-chain challenges

The rapid growth in clean hydrogen production will require massive expansion in electrolysis capacity. Globally, it is set to reach between 170 gigawatts (GW) and 365 GW by 2030, from just 3 GW expected by the end of this year. China aims to reach 100 GW of electrolysis capacity by 2030, from about 220 megawatts (MW) in 2022, while the European Commission estimates that to meet its green hydrogen production targets, EU electrolysis capacity should expand from only 135 MW in 2021 to 120 GW by 2030–a target we expect to be missed.

One problem with boosting electrolyser production is that it is mineral- and metal-intensive, sharing some of the main raw materials (like nickel and platinum group metals) with the manufacturing of renewable energy technologies. A rapid expansion in electrolyser production is likely to boost mineral and metals prices, which in turn will raise the cost of renewable energy generation, posing new challenges to the energy transition effort.

Critical minerals map

Furthermore, production and processing of those minerals is highly concentrated, with Indonesia, China, Russia and South Africa playing leading roles. This will pose further supply risks for countries that do not have access to those resources. Meanwhile, China accounts for 40% of global production of electrolysers and wants to increase its market share. The US and the EU have announced aggressive policies to increase domestic output of energy transition technologies, electrolysers among them, but they are unlikely to break Chinese dominance of this market.

Hydrogen production will require vast amounts of renewable energy

The vast amount of renewable electricity required to meet green hydrogen targets raises concerns that the hydrogen sector will eventually compete against other industries and the residential sector for scarce renewable energy, probably outpricing them. According to BHP, a mining company, moving Japan’s steel industry from fossil-fuels to green hydrogen would require more than twice the country’s current total renewable energy supply. If the EU were to meet its goal of producing 10mt of green hydrogen, it would need to generate the same amount of electricity from wind and solar power as its 27 members combined produced in 2021.

This heavy demand could jeopardise progress on the energy transition, with a risk that renewable energy may not be used in the most efficient way. Around 30-50% of the energy used during the production of green hydrogen is lost, either when the molecular bond between hydrogen and oxygen in water is broken, or when the resulting hydrogen is burned in turbines. 

The bet for blue hydrogen

As for blue hydrogen, it would avoid the supply-chain issues associated with electrolysers, and would also support demand for natural gas. However, the necessary CCS technology to turn grey hydrogen to blue is not yet commercially viable at a large scale. As a result, the IEA forecasts that by 2030 production capacity for blue hydrogen will stand at just 22mt, less than half the 50mt forecast for green hydrogen. This reflects the fact that most government targets relate to electrolysis capacity, rather than to total clean hydrogen production.

However, if green hydrogen production fails to ramp up as planned, blue hydrogen will be needed to fill the gaps. Many countries will rely on imports, with gas-rich countries such as those in the Middle East increasing their blue hydrogen production in order to diversify and add value to their exports. The Middle East and Asia would develop a strong trade link in blue hydrogen, mimicking their current LNG trade. This would also spur Middle Eastern producers to invest in CCS technology, helping it to become viable sooner. 

Hydrogen is undoubtedly a key technology for achieving a net-zero economy as it can help reduce emissions in sectors of the economy that are hard to decarbonise. However, many challenges–from supply chains to geopolitics to the dynamics of electricity prices–will make it hard to deploy the technology fast enough to achieve the countries’ targets. Overcoming these barriers will require long-term strategy, policy flexibility and deep pockets.

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.