OBS Report: Research on the current state of the hydrogen industry
Green hydrogen awaiting quotas set by the EU
- Today, hydrogen is not competitive in any of the sectors in which it could be an alternative.
- Subsidies are not working properly: they are insufficient in amount and do not select the winning projects with the best chances of success.
- The quota policy will mean that only projects with a good strategy and the best relationship with the European Union will survive.
- Chinese electrolyzers are overcoming the reluctance of European developers while waiting for the EU to set conditions.
August 2024. OBS Business School publishes the report Research on the current state of the hydrogen industry, directed by the professor and industrial engineer Marcos Rupérez. It analyzes the natural selection that is occurring in the sector due to the lack of competitiveness of hydrogen in the sectors in which it postulates to be an alternative.
The green hydrogen sector is currently characterized by uncertainty and long-term risks. The rapid and disruptive transition from laboratory research to industrial applications has outpaced the technology's readiness for profitable mass production. As a result, many projects promised three years ago are still not under construction.
A key obstacle is the insufficient number of electrolyzer factories, which hampers cost reductions necessary for project viability. Moreover, market conditions are unfavorable—fossil fuel prices remain relatively low compared to electricity costs, preventing hydrogen from reaching market parity.
In this context, public support is crucial to making hydrogen projects attractive to investors. However, current subsidies are both inadequate and poorly targeted. Not only is the funding insufficient, but the selection process for projects does not prioritize those with the highest likelihood of success, profitability, or secure customer bases.
The Future of the Hydrogen Sector
As is often the case when incentives fall short, the EU will soon resort to enforcement measures, including mandates and quotas. Much like the current requirement for diesel fuel to contain a legislated percentage of biodiesel—often more expensive than fossil diesel—airlines in the coming years will likely be required to use a quota of synthetic fuel. Similarly, ships will indirectly incorporate a percentage of methanol or ammonia (derivatives of green hydrogen), and fertilizer plants or similar industries will be mandated to use a portion of green hydrogen. This hydrogen will be sold at the minimum production cost plus a commercial margin, regardless of its competitiveness with fossil fuels. In other words, hydrogen may remain uncompetitive with fossil fuels, but it will no longer compete directly with them. As Marcos Rupérez states, “The actual creation of a separate hydrogen market in the EU will depend on how well the Commission can balance a moderate ambition for quotas with sufficient penalties to enforce compliance.
The EU is already moving toward stricter regulations, penalties, and mandatory requirements, which will soon demand compliance with specific targets and impose quotas. While the exact approach is yet to be defined, it will undoubtedly stimulate the market. However, it will also burst the current bubble of expectations, separating the wheat from the chaff, and in this journey toward profitability, only projects with a solid strategy will endure. According to the OBS report, a good project is one that understands the importance of a long-term plan, with steps taken today to position itself as the best-optimized, best-designed, and most adaptable to changing circumstances. And, of course, those with preferential treatment and strong relationships with the European Union will have an advantage.
The Role of Electrolyzers
The costs of European and American electrolyzers are not decreasing as expected; in fact, they are rising. Amid this backdrop, a new competitor is emerging in the market: China, with investment costs up to four times lower than those of its European counterparts. Chinese electrolyzers are low-pressure alkaline models (<15 bar), a technology that might initially be considered "outdated" or at least less advanced than current European technology. However, while a European alkaline electrolyzer is priced around €1,000/kW (for the equipment), a Chinese one with similar specifications is offered at €300/kW or even less. The reluctance of European developers to purchase Chinese electrolyzers due to concerns about quality is gradually diminishing. Once again, the "European State" will set the pace, depending on the conditions it imposes on the adoption of electrolysis technology from Asia.
The cost of energy
Under the conditions set by the European Union for certifying hydrogen as green, it can be inferred that energy prices will not be uniform across all projects. Starting in 2030, origin guarantees will require hourly correlation for projects, meaning that renewable energy must be generated no more than one hour before being consumed by the electrolyzer. This stipulation implies that electricity with these certificates of origin will become more expensive the longer the electrolyzer operates. However, it's also true that the more hours the electrolyzer is in use, the more hydrogen it produces, thereby spreading out the investment cost per kilogram of hydrogen generated. The most successful projects will likely be those that manage to balance these energy cost curves and secure the lowest possible price, making them competitive in the market.
The new energy model we are developing as a society involves rapidly deploying many technologies that are not yet optimized and are therefore significantly more expensive. These costs will ultimately be borne by citizens, either through higher prices or increased taxes—there's no alternative.
Content written by:
Carmen García-Trevijano
OBS Business School's Press Office