What's holding up the green fuel value chain?

Green hydrogen fuels are crucial for addressing the decarbonisation gaps that electrification alone cannot fill. There are some applications for which no real alternative to hydrogen (in a net-zero economy) exists: fertiliser, high-temperature heat for industrial processes, and decarbonised fuel for electricity generation to support battery development are a few examples.

As such, demand will grow. A PwC analysis found that while demand growth will be moderate and steady through niche applications until 2030, it will accelerate rapidly from 2035 onward. This demand will be particularly driven by hard-to-abate sectors like heavy industry and long-haul transportation.

To unlock the full potential of green hydrogen, we must:

A) Create a comprehensive green fuels ecosystem

B) Enable efficient delivery of major projects 

However, several factors are currently holding up progress in the green fuel value chain.

The current high cost of supply for green hydrogen is prohibitive

A primary barrier to widespread green hydrogen adoption is its high cost of supply. What causes those high prices, you ask? Let’s explore.

Efficiency challenges

The efficiency of green hydrogen production remains relatively low compared to conventional fossil fuel-based methods, largely due to energy losses in the electrolysis process and power conditioning and transmission. Around 40% of the energy is lost when renewable electricity is converted into hydrogen — which is why hydrogen is most promising in applications where direct electrification is not possible.

Overcoming efficiency challenges will require technical innovations. Advanced electrolyser designs and further development of AEM technology, novel catalyst materials, and process optimisations will all play a role in improving the ratio of energy produced per unit of energy invested. While iterative improvements have been made, disruptive breakthroughs are needed to achieve substantial efficiency gains.

High renewable power supply needed

The energy intensity of the electrolysis process directly impacts the cost and sustainability of green hydrogen production. Typically, 45–65 kilowatt-hours of renewable energy are required to produce one kilogram of hydrogen. This means that an industrial-level hydrogen project could easily require over one gigawatt of renewable power daily. With those kinds of energy needs, we need to be sure it is put to efficient use.

Addressing this challenge will necessitate further technical innovations, including advanced electrolyser designs and novel catalyst materials, as well as process optimisations to reduce energy consumption. Again, many have tried to improve existing systems; but what’s needed are disruptive improvements, not iterative ones.

Necessary scale-up of production capacity

We must work towards achieving economies of scale. This starts with international target setting for electrolyser capacity. The International Renewable Energy Agency (IRENA) predicts a total installed electrolyser capacity of 5 TW by 2050, up from today's 300 MW. But national hydrogen strategies have varying levels of commitment, and scaling up will require steadfast targets as well as supportive policies to achieve the necessary installed capacity by 2050.

According to McKinsey, this scale-up needs to happen four times as quickly as the ramp-up of solar photovoltaic manufacturing. Today there are high costs associated with producing and installing electrolysers, and inflation and subsidy delays aren’t helping. However, as manufacturing is optimised and equipment scale up is enabled, there will be an opportunity to greatly reduce costs.

A lack of policy measures

Like other nascent industries, dedicated industrial policymaking is necessary to make green hydrogen competitive. Supportive policies can help to force stakeholders’ hands, making fossil fuel options unattractive and likewise, making investing in green fuels attractive through incentives.

Incentives for renewable energy use, subsidies for green hydrogen projects, and carbon pricing mechanisms can level the playing field and encourage stakeholders to invest in green fuels. International target setting and a sense of urgency to move forward with projects are critical.

Infrastructure

We can look towards lessons learned from the natural gas industry's growth in the 1950s to understand the importance and feasibility of infrastructure development for the widespread adoption of green hydrogen. In 1950, outside of the United States, natural gas was barely used anywhere. Markus Wilthaner of McKinsey believes that we are in the same place with hydrogen today as we were with natural gas in the 1950s.

Meaning, we’re at the beginning of a fundamental shift. Hydrogen will be expensive to start, but will eventually become cheap. It will be abundant in some places, and will need to be imported in others.

McKinsey found that in a cost-efficient hydrogen economy, approximately two-thirds of hydrogen will be transported over long distances, with about half going through pipelines (some new, some refurbished) and the other half transported by ship. 

Massive investments, estimated at $950 billion, are needed in these value chains — about 60% of which will go to upstream components like renewables, electrolysers and reformers. 15% will need to go midstream to transportation. However, this is a key component due to a forecasted cost difference of 40% between transported and ‘no-trade’ local hydrogen. This means we need transport infrastructure to make hydrogen economical.

Moving the green fuel value chain forward

There is no green hydrogen without a massive buildout of transport infrastructure. There is no economically viable green hydrogen without a scaleup of upstream equipment and downstream demand. And we cannot bring down the levelised cost of hydrogen without disruptive improvements to existing efficiency challenges, including energy losses in the electrolysis process and high renewable power requirements.

Overcoming these barriers will require coordinated efforts from industry, policymakers, and stakeholders across the value chain. By addressing the intensity of renewable energy needs and scaling up production capacity, the green fuel value chain can move forward meaningfully. 

It is only through committed target setting, collaboration, and action fueled by urgency that we will pave the way for a sustainable, decarbonised future. Hydrogen is just one piece of the puzzle — we must move beyond the green hydrogen technology block to enable a net zero economy.