This is an extract from a recent paper “Turning the European Green Hydrogen Dream into Reality: A Call to Action” presented by BCG.
Green hydrogen is a critical element to achieving net-zero emissions. Low-carbon hydrogen and associated synthetic fuels like methanol and ammonia are indispensable to decarbonizing large sectors of the global economy. While a broader range of low-carbon hydrogen colours will be needed during the decarbonization journey, a fossil-free target state will require green hydrogen. To enable the continent’s ambitious climate targets, Europe’s green hydrogen market finally needs to scale within this decade.
Europe’s hydrogen market is beginning to take shape. After a decade of much debate, a meaningful hydrogen market and a multibillion-euro market for green hydrogen now seems to be emerging on the horizon. A good deal of this is driven by a flurry of regulatory activity across the hydrogen value chain:
- Subsidy schemes are emerging to support investments in hydrogen production, such as the Dutch SDE++ for domestic projects or the European Hydrogen Bank and H2Global for imports.
- Infrastructure access is starting to become clearer, as the development of first elements of the European hydrogen backbone is being expedited in several countries—with the support of the EU IPCEI scheme.
- Hydrogen demand is being stimulated by investment subsidies (such as for the thyssenkrupp DRI steel plant) and by ongoing discussions on consumption subsidies (such as the German carbon contracts for difference for potential industrial offtakers).
Germany is also planning auctions for its first hydrogen-only backup power plants.
- The recently agreed RED III imposes the mandatory use of RFNBO (including green hydrogen) for EU industry consumption by way of quotas. Further, a combined subtarget of 5.5% for advanced biofuels and RFNBOs was agreed upon, with a minimum requirement of 1% RFNBOs supplied to the transport sector in 2030.
Meaningful demand is expected to emerge if planned regulations come into effect. Several industrial sectors, primarily current gray hydrogen consumers, may be willing to pay around or above €6/kg for green hydrogen by the end of the decade.
Refineries will contribute significant volumes to this demand. Despite some uncertainty regarding RED III implementation details, oil players are already taking action. For instance, BP and Total are willing to pay a €12.6B premium for 7 GW offshore wind power generation that secures them green hydrogen at a cost above €6/kg.
Additional sectors such as ammonia and methanol production are also relevant, along with the portion of Europe’s steel industry capable of selling premium green steel. In Germany and the Netherlands alone, this “high-price plateau” could drive approximately 1 Mt of green hydrogen demand annually by 2030, equivalent to over 10 GW of electrolyzer capacity.
As demand is taking shape, so is hydrogen supply. A number of project developers are currently driving industrial-scale green hydrogen projects to final investment readiness. Again in Germany and the Netherlands alone, a total pipeline of 23 GW in electrolyzer capacity by 2030 is currently in planning, with 4 GW already at least in the FEED phase.
And yet, investment decisions are still pending. Europe’s hydrogen market still needs to overcome several major barriers to reach its actual potential.
Optimistic cost projections are not materialising. Just a few years ago, the consensus view expected green hydrogen production costs below €3/kg. Meanwhile, a deteriorated macroeconomic context, higher energy market prices, and structural challenges in the wind power and electrolyzer supply chains prove these costs are unrealistic, at least for the coming decade. As a result, real hydrogen asset projects currently in development suggest green hydrogen production costs in the range of €5–8/kg in 2030 for central Europe.
Even at the lower end of these costs, green hydrogen is not competitive with alternative decarbonization technologies for most potential consumers. At the higher end, green hydrogen producers would struggle to find offtake at all.
Cost sensitivity to green hydrogen production
The cost of delivered green electricity still remains the largest factor determining overall green hydrogen economics. As a result of a higher cost of capital and structural supply chain challenges of wind power system manufacturers, the levelized cost of power has significantly risen in recent years and is likely to remain above pre-crisis levels during this decade. Also, given that green hydrogen in most European countries has to be produced from additional non-subsidized renewables, electrolyzers are competing for green power with skyrocketing wholesale prices on the captured-power market.
High electrolyzer utilisation can be a major lever for decreasing hydrogen production costs—but will come at a trade-off with green power costs in most locations. However, by following an integrated approach to location choice, renewable electricity production, electrolyzer configuration, and power market situation, hydrogen project developers can achieve significant production cost advantages over their competitors.
Electrolyzer system costs have not dropped yet and are not likely to fall as fast as expected a few years ago.
Structural supply chain constraints on the part of electrolyzer manufacturers as well as more-complex-than-expected system designs result in persistently high electrolyzer system costs. Updated assessments also suggest limited cost reduction potential for many components already being used today on an industrial scale, such as power electronics or gas conditioning. Decreasing electrolyzer system costs can be achieved by streamlined project development processes and capabilities, closer collaboration across the value chain, and scale in the project portfolio.
Optimising electrolyzer efficiency can help push down the cost of hydrogen production. However, large improvements in these factors will entail a trade-off with electrolyzer CAPEX.
Major offtakers are themselves at risk
Cheaper green end-product imports pose a significant threat to offtakers in sectors like ammonia, methanol, and steel. The European ammonia industry already lost significant market share during last year’s energy crisis. At domestic green hydrogen prices beyond €4–5/kg, European producers would hardly be able to compete with green ammonia imported from regions with better renewable power conditions. And this threat may only intensify over time. As the global hydrogen market matures and regions with better renewable conditions achieve steeper production cost declines, increasing European production volumes of products such as ammonia, methanol, or iron sponge will be at risk—potentially diminishing Europe’s future hydrogen market potential.
Offtakers are unable to commit to long-term contracts.
With the common market expectation of decreasing production costs from new projects over time, off takers of green hydrogen are very reluctant to commit to long-term contracts of more than a few years. Yet without secure long-term offtake, early hydrogen project developers face the risk of stranded assets, undermining investment prospects. This deadlock perpetuates a chicken and-egg problem, preventing the hydrogen market from gaining faster momentum.
Policymakers aren’t done yet, despite all progress:
Under Europe’s current regulatory environment, domestic green hydrogen will remain the fuel of the future. Ambitious national implementation of EU regulation is needed now to create incentives throughout the hydrogen value chain.
Regulations should help bring green hydrogen costs to offtakers at least below €5/kg, given that higher costs than that would severely threaten the international competitiveness of key offtake industries, particularly chemicals and steel—even compared to green imports. To achieve this, double-sided auctioning initiatives like the European Hydrogen Bank and H2Global could be expanded in their financial volume and extended in their scope to also support large-scale domestic projects. To increase the competitiveness of domestic projects in these auctions, policymakers should continue granting CAPEX funding (e.g IPCEI) for the coming years and consider allowing green hydrogen producers to source power from new renewable generation with state-backed price guarantees like carbon contracts for different schemes. Beyond 2030, other green hydrogen costs decreasing toward €3/kg will require electrolyzers operating at maximum capacity at the lowest possible green power costs. Turning this European hydrogen dream into reality will require regulators to immediately accelerate the deployment of low-carbon power, grid, and storage infrastructure, and to stimulate demand-side flexibility.
Upcoming demand-side regulation needs to create sufficient willingness to pay.
For existing gray hydrogen producers such as refineries and chemical companies, RED III is planning firm quotas for green hydrogen shares. To generate a willingness to pay beyond €5/kg, this would need to carry hefty noncompliance penalties of around €450/t CO2 . In parallel, Europe should establish frameworks that enable producers of green commodities to sell at a premium. For example, green steel or fertilizer quotas would allow key green hydrogen offtakers to pass additional costs down the value chain. Finally, any demand-side subsidy schemes should be tailored to specific industries. For example, if Germany’s carbon contracts for different tenders were industry-agnostic, a company aiming to shift from natural gas to hydrogen-based steel production would have to compete against a company electrifying its heat generation at a much lower cost. In practice, this would decelerate decarbonization efforts in all industries where decarbonization is comparatively expensive and drastically limit short-term hydrogen demand.
The development of hydrogen infrastructure must not be delayed. To create infrastructure clarity for producers and offtakers alike, policymakers need to impose ambitious planning through grid agencies, create favourable investment conditions through incentive regulation and public funds, and prioritise the rapid deployment of transport and storage infrastructure. Connecting EU industrial centres with the lowest-cost hydrogen production sites should be a priority for the decade ahead.
Hydrogen players should also embrace action
The absence of decisive regulation should not prevent hydrogen players from taking action. The emerging hydrogen market is a rare market opportunity. The question is not whether it will flourish, but rather exactly when in the coming years, where, and how. Proactivity will empower hydrogen players to seize immense potential and establish a leading position in this transformative market.
Market players should embrace risk-taking and get a robust pipeline of hydrogen projects FID-ready. This will require risking significant development expenditure—but for the likely reward of faster capability buildup, privileged access to the most promising offtakers, strategic partnerships with equipment manufacturers, and higher credibility with key regulatory bodies. In earlier emerging industries like offshore wind and electromobility, early movers have reaped lasting dividends. Hydrogen seems to be the same.
The cost of green hydrogen needs to fall faster. Players should push to streamline project development and scale up collaborations with electrolyzer OEMs and EPCs. They should also reemphasize technical and economic integration between electrolyzers and renewable generation assets, often requiring close collaboration across business units.
Producers should reassess their target customer base. The emerging regulatory environment is (re)shaping Europe’s demand market. Future producers should revisit their go-to-market approach and make sure they understand how upcoming regulations will impact potential offtakers’ hydrogen appetite, their willingness to pay, and their (partial) default or relocation risk.
The industry should conduct factual and well-informed advocacy. Scaling hydrogen in otherwise hard-to-abate applications is in society’s interest. In recent years, much of advocacy has centred on formulating ambitious goals to create the needed transformative momentum. Now that regulation and public funding need to be focused on finally kick-starting the green hydrogen market, regulators are increasingly receptive to facts about the key obstacles ahead and to pragmatic solutions to remove them. Unrealistic claims about the cost of green hydrogen, its competitiveness, and time to scale will do the hydrogen industry, its customers, and society at large a disservice.
Europe’s (green) hydrogen market has made major progress in recent years, but without additional funding and a regulatory framework, hydrogen still risks remaining the fuel of the future. Ambitious national implementation of EU regulation is needed now. Policymakers and market players alike need to increase momentum to make sure this transformative industry reaches its full potential.
Access the paper here