POWER-TO-X

Can green hydrogen firms tame inflation in 2024?

More than one new green hydrogen project was announced every day in 2023, but the cost of producing green hydrogen has risen by up to 65% too. We look at how developers can tackle inflation and a shortage of crucial infrastructure investment in 2024.

RICHARD HEAP

January 8, 2024

  • 372 new green hydrogen projects were unveiled in 10 months to October 2023
  • But only 26% of the 1,418 projects in development have reached financial close
  • The cost of green hydrogen production rose 30%-65% in 2023, research shows

 

More than one new green hydrogen project was announced every day in 2023.

Last month, the Hydrogen Council reported that developers revealed plans for 372 green hydrogen projects globally between January and October 2023. That means the global pipeline has grown by 36% in the last year to 1,418 announced projects, which are set to represent combined investment of $570bn. There has been most activity in Europe (540 projects) and North America (248).

And yet developers are continuing to find it tough to take projects to financial close, especially those with headline capacity of 1GW or more. The Hydrogen Council has said 370 projects have reached this milestone, or 26% of those in the development pipeline, but that these represent total investment of $39bn, which is just 7% of the total pipeline by value. Developers have so far taken final investment decisions on just seven giga-scale green hydrogen projects.

Tomorrow, Tamarindo will reflect on these challenges with senior executives in the green hydrogen industry at the first 2024 gathering of our Power-to-X Leadership Council in London, and discuss strategies for how to navigate them.

 

Impacts of inflation

One of the biggest issues facing companies in the green hydrogen sector today is the impact of inflation on their projects. The Hydrogen Council’s analysis reported that the levelised cost of producing green hydrogen is now between $4.50/kg and $6.50/kg, and that costs have risen by between 30% and 65% in the last year.

This is the result of inflation in key areas, including the cost of capital, electrolyser prices, labour and renewable energy. Developers are also struggling with delays to their projects caused by uncertainties around political support, delays in securing permits, and the need for regulatory certainty.

For example, companies in the US green hydrogen industry have spent most of the last 18 months waiting for clarity from US federal government about tax credits promised in the Inflation Reduction Act, which has delayed investments in the US green hydrogen sector in 2023. The US Treasury Department and Internal Revenue Service finally gave this clarity on 22nd December.

The levelised cost of producing green hydrogen is predicted to fall this decade, to between $2.50/kg and $4/kg in 2030, as a result of advancements in electrolyser technology, manufacturing capacity and lower costs for renewable power.

Another challenge is the imbalance between the investment earmarked for green hydrogen production projects, which represents around 75% of total investment in the sector, and the investment in increasing the use of green hydrogen (15%) or in the wider green hydrogen infrastructure (10%).

This is important because the green hydrogen industry will only be able to realise its full potential if the systems exist to store, transport and use the fuel produced. The Hydrogen Council has warned of a $210bn shortfall in the investment that will be needed in wider infrastructure compared to what has already been announced, with the actual figure for investments so far standing at only around 20% of that figure. It said the shortfall in investment in end use applications was around $160bn.

The upshot is that deployment of green hydrogen production has not grown as fast as the industry previously predicted. Forecasts in 2021 suggested that there would be 6GW of green hydrogen production in operation by the end of 2022, but the industry had only reached 1.1GW by October 2023.

It is all very well to focus on the announcements of major projects and partnerships. We saw a series of big announcements at the COP28 climate talks that concluded in Dubai last month; and we have also seen the UK Government award support of £400m to 11 green hydrogen schemes on 14th December. But the green hydrogen industry needs more projects to reach financial close if it is to achieve its potential.

We have no doubt that the green hydrogen industry will continue to get stronger in 2024 – but it will only be able to do so by tackling its big challenges. Making green hydrogen is one thing. Making a market for green hydrogen, supported by the right infrastructure, is a far bigger challenge, and one that cannot be ignored.