Bridging the Gap Between Potential and Practicality in Green Hydrogen
FEATURED BLOG
Bridging the Gap Between Potential and Practicality in Green Hydrogen
—
By Naam Chakravorty
December, 2024
Green hydrogen, often called the fuel of the future, offers a zero-emission solution for decarbonizing hard-to-abate sectors and is becoming a cornerstone of global energy strategy. As the clean energy transition accelerates, regions rich in renewables—particularly the Gulf, Europe, and Africa—are competing to lead in green hydrogen production. This race underscores its transformative potential to diversify energy portfolios and cut emissions. However, turning this promise into reality requires overcoming challenges in cost, infrastructure, and market demand.
Green hydrogen, produced via renewable energy-powered electrolysis, is entirely emissions-free but remains costly and resource-intensive. Current production costs average $5-$6 per kilogram, far exceeding the $1/kg benchmark required to compete with natural gas. Even with the recent subsidies in the U.S. and EU aimed at reducing costs, production remains economically prohibitive, with U.S. estimates hovering near $5/kg and European bids ranging from €5.8 to €8.8 (~$6 - 9) per kg. These figures highlight the pressing need for scalable solutions to bridge this cost gap and make green hydrogen competitive as a fossil fuel alternative.
Beyond cost, the supply of green hydrogen is constrained by underdeveloped production infrastructure and logistical hurdles. Hydrogen’s high diffusivity, flammability, small molecular size, and low liquefaction temperature make its transportation and storage more expensive and technically challenging than natural gas, further complicating its path to widespread adoption.
Policy efforts to date have largely subsidized production, neglecting demand-driven strategies that once fueled the growth of renewables like wind and solar. To fulfill its promise, green hydrogen must be adopted in hard-to-abate sectors like steel, chemicals, and long-haul transportation—industries critical for decarbonization but currently unmotivated by its high costs. Achieving this will require more than subsidies; it also demands attention to the geopolitical dynamics that are impeding its adoption on a global scale.
Green hydrogen is increasingly viewed as a strategic asset, both for energy security and diplomatic leverage. Over 30 countries have formulated hydrogen strategies, signaling a shift towards cross-border trade and partnerships. This new era of hydrogen cooperation is enabling previously unseen alliances, marking a departure from the hydrocarbon-driven relationships of the past.
Energy-importing nations like Germany and Japan are forging supply agreements, signaling their long-term interest, while exporters like the UAE and Saudi Arabia aim to position themselves as global suppliers. However, the high costs of green hydrogen have led many countries to rely on fossil-based hydrogen (grey and blue, as opposed to green), which is at least 50% cheaper, to meet immediate demand. Additionally, major oil companies like Shell and Total are lobbying the EU to shape hydrogen policies to stay relevant in a decarbonizing market, aware that hydrogen will remain largely fossil-based for now. This creates a risk of grey and blue hydrogen filling the gap, as green hydrogen falls short of meeting demands.
Amid these challenges, China’s dominance in electrolyzer manufacturing—a key technology for green hydrogen production—adds another layer of complexity to the global hydrogen economy. This dominance not only intensifies competition for Western manufacturers but also raises concerns about supply chain vulnerabilities. In response, Western nations are ramping up domestic electrolyzer production, despite higher costs, to reduce dependency and build resilience. The urgency for energy security and diversification has grown, especially after Russia's invasion of Ukraine exposed weaknesses in global energy supply chains. Scaling green hydrogen will require coordinated efforts to overcome cost, infrastructure, and demand challenges, with governments, industries, and international organizations working together to realize its full potential.
Central to this policy approach is the establishment of clear supply and demand mechanisms that go beyond symbolic agreements. A well-structured demand framework is critical to green hydrogen’s commercial viability. Tools like Contracts-for-Difference (CfDs), where governments bridge the gap between market prices and an agreed strike price, could provide the price stability needed to scale production. CfDs have already proven effective in accelerating offshore wind adoption and could be adapted for green hydrogen with long-term commitments to attract investment.
In parallel, carbon pricing mechanisms and emissions trading systems can push industries toward adopting low-carbon alternatives like green hydrogen, especially in emissions-intensive sectors, such as cement, ammonia, and heavy transportation. Adjusting carbon prices to reflect the true environmental costs of fossil fuels would make green hydrogen more competitive, driving its integration into critical industries. Additionally, public procurement policies mandating green hydrogen use in specific applications could serve as a demand anchor, catalyzing private-sector adoption and enabling market stability.
Several emerging markets are making significant investments in green hydrogen with an eye on future exports. However, for these efforts to translate into real-world impact, the global policy toolkit must also prioritize infrastructure development and international collaboration to overcome logistical and technical barriers. Investments in transport and storage infrastructure, alongside measures to strengthen supply chains, will be pivotal to the green hydrogen ecosystem’s success.
Naam Chakravorty is Gulf Lead at Botho Emerging Markets Group