Hydrogen Market Pathways: Scaling up the hydrogen market | IEF

The hydrogen market is still in its infancy, and development is needed along the entire supply chain. Low-carbon hydrogen production and utilization must increase from ~1 million tons per annum (Mtpa) today to hundreds of Mtpa by 2050.

Market growth will involve expansion and development in production, transportation, storage, and end-use. Scaling-up hydrogen will require new business models, pricing, contracts, regulations, standards, certificates, and policies.

• The first immediate step will be to replace hydrogen made by unabated fossil fuels with low-carbon hydrogen. This will remove the challenge of creating new demand while reducing CO2 emissions from unabated fossil fuels in hydrogen production. • Hydrogen’s high-cost relative to its alternatives is the most significant obstacle to market development today.

Costs will need to decrease significantly during the coming decade. Production from renewables is currently around $3-8/kg (equivalent to $26-70/mmBtu, LHV). Policy support is key to lowering production costs and incentivizing consumers to switch to hydrogen.

Different tools will be at the disposal of policymakers, including contract for difference, production tax credit, carbon pricing, and carbon neutrality targets for specific sectors. • International partnerships will be an essential component of developing the hydrogen economy, providing off-take certainty, and enabling scale. Broad-based collaboration within and across industries and governments will be needed as well as a commitment to 5 capital and sharing resources and technology.

In addition, partnerships will help facilitate long-term contracts that will be key in scaling-up, accessing financing, and establishing proven business models. • Hydrogen development is primarily a means to support decarbonization. Future hydrogen markets and trade rules will have to consider the carbon intensity of hydrogen and any carriers or derivatives. The hydrogen market will be based on carbon-intensity and not ‘color’ designations. Therefore, measuring and tracking carbon intensity needs to be standardized, and corresponding certifications and guarantees of origin will be essential elements enabling international trade.

There is value in studying the development of business models used in the renewables and LNG sectors. Lessons from the evolution of these sectors can support the scale-up of hydrogen and serve as a model for the formation of initial long-term contracts, such as including modified take-or-pay commitments to support projects’ CAPEX that are adapted to the specificities of hydrogen development.

Despite parallels between hydrogen and other market development pathways (such as natural gas/LNG), regulation should not be systematically imposed in the same way, especially in the early stages. There is still room for innovation in hydrogen technology and business models that over-regulation could hinder. Regulation that is “fit for purpose” can help mitigate risk inherent in a new market. Providing regulatory certainty will be essential to attract investment early on. However, a delicate balance is needed to leverage hydrogen in the energy transition but also ensure hydrogen becomes competitive and cost-effective.

Energy policies should remain technology-neutral to allow accelerators that leverage public finance rather than crowd it out. Technology-neutral funding will help enable a faster market launch and long-term cost-efficient supply. • Hydrogen molecules have an important advantage over electrons, they can transfer energy over time and distances and be stored more efficiently. Hydrogen can unlock otherwise stranded energy assets such as remote and isolated renewable energy sites. It can connect places with ample renewable energy resources but no effective means of delivering it to market with concentrated demand hubs. Infrastructure and transportation developments will be needed to unlock these arbitrage opportunities.

• Hydrogen market data is currently limited and lacks standardized definitions and conventions. Greater data transparency and standardization are needed to empower analysts, investors, and policymakers to make informed decisions.