Infrastructure investors turning their backs on green hydrogen

2024 was the year the green hydrogen bubble burst. The S&P Kensho Global Hydrogen Economy Index fell to mid-2020 levels, erasing gains from the green energy surge of late 2020 and early 2021.

Share prices in hydrogen companies such as Green Hydrogen Systems and Plug Power fell by more than half to historic lows after repeated losses.

As major energy companies scaled back or cancelled existing green hydrogen projects, there was an 80% reduction in new project announcements relative to 2023, ING's hydrogen analyst and economist Gerben Hieminga told Net Zero Investor.

Mckinsey cut its 2030 green hydrogen forecast for the US by 70%, while the European Court of Auditors warned that the EU's ambition to produce 10 million tons of green hydrogen by 2030 needed a reality check.

Meanwhile, BNEF recently revised its forecast to find the gas will remain stubbornly expensive over the coming decades, costing as much as $5.09 per kilogram. Even this is cheap compared to the $6-12 per kilogram that green hydrogen currently costs. In Europe, subsidies account for only 50c per kilogram.

In comparison, “grey hydrogen”, which is produced using fossil fuels as opposed to electrolysers and currently accounts for 99% of hydrogen production worldwide, costs on average $1.5 per kilogram, according to chemical engineer and hydrogen expert, Paul Martin.

Martin, who heads the thinktank Hydrogen Science Coalition, said the real surprise was not that investors are finally waking up to the negligible role green hydrogen will play in the energy transition but that there should have been so much hype to begin with.

“Hydrogen isn’t like solar or wind where you experienced massive cost reductions over time due to technological innovations,” he explained. “The technology for hydrogen production has been around for years and won’t get much cheaper. The use cases that make sense are the ones that already exist, namely ammonia and methanol production and iron reduction.”

Green hydrogen developers should therefore focus on decarbonising the gas for existing uses rather than touting “fanciful and unrealistic” uses in the energy transition.

In other words, hydrogen is “not a decarbonisation strategy but a decarbonisation problem”, he argued.

The hydrogen vehicle industry is essentially dead in the water, he added, while the gas companies that claim that hydrogen will replace fossil gas in the gas infrastructure are basically greenwashing. Even using green hydrogen in the production of steel, specifically the reduction of iron ore, which lacks an electric alternative today,  remains expensive, meaning major steel users will not pay for it unless they are forced to.

"Using hydrogen to produce ammonia, methanol, and for iron reduction is essential, but greening hydrogen is costly per tonne of CO2 emissions so we should electrify everything we can first before even bothering with it," he said.

Anna Hancock, executive director at Pollination Group, struck a more upbeat note: “The green hydrogen opportunity was misunderstood early on, but literacy is building as investors and observers gain a better sense of the competing technology pathways and relative economics of use cases.”

Any industrial or small-scale energy need that can be directly electrified must pursue that pathway to deliver efficient decarbonisation at scale, she added. But there remain significant emissions categories that green hydrogen can and will serve.

“2025 may yet see some realignment but also enough policy supports to keep high quality projects moving forward,” she said. “Their success will be essential for the decarbonisation of vast value chains, from ammonia to green steel.”

Chris Berkouwer, portfolio manager at Robeco, acknowledged green hydrogen’s “disappointing performance in the net zero value chain”.

“Blue hydrogen looks more promising than green hydrogen,” he said. “Green hydrogen is still very difficult to make commercially viable even with all the Inflation Reduction Act subsidies in place.”

The only difference between blue and grey hydrogen is that blue hydrogen plants capture the C02 emissions.

Why is green hydrogen so expensive?

One of the main reasons for green hydrogen’s lack of value proposition is an intractable scientific barrier, Martin explained.

“You’re taking a high value energy source – electricity – and downgrading it into a form that isn’t easy to transport or distribute. It really doesn’t make any sense to burn hydrogen as a fuel,” he said.

Trade tensions won’t help bring down prices either, according to Hieminga. “One way for European green hydrogen producers to reduce costs is to import cheap Chinese electrolysers,” he said. “But that’s unlikely to happen if trade tensions play out.”

Current EU anti-subsidy investigations are targeting Chinese green technology products, as the EU’s Net Zero Industry Act aims to reduce dependence on China and promote domestic production.

A way round the cost issue is to bolster demand by supporting off-takers and guaranteeing sales of the gas.

In the past, few companies have wanted to purchase the expensive gas, and now, as the bubble bursts, fewer developers want to make it.

While green hydrogen, even amid the hype, has always been too niche for the vast majority of institutional investors, that small interest may now evaporate.

However, large investors still have a taste for large scale private infrastructure investments. Such investors, who own gas pipe lines, may now face a hard reckoning as claims made by gas companies about converting their network to hydrogen could turn out to be nothing more than hot air.

“There was a lot of what I call ‘hopium’ in the market place,” Martin said. “There were many project announcements and intentions to fund memorandums of understanding, and so on, but few actual purchase orders issued for equipment. Now developers are pulling out because the economic value proposition does not exist.”

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