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The Edge

Who will lead in low-carbon hydrogen supply?

4 minute read

Bridget van Dorsten

Senior Research Analyst, Hydrogen and Emerging Technologies

Bridget is a hydrogen-focused research analyst in our Energy Transition Practice.

View Bridget van Dorsten's full profile

Low-carbon hydrogen will play a critical role in decarbonisation, contributing at least 4% of global energy demand by 2050. An avalanche of policy support in the last two years has made over US$300 billion of government funding available for hydrogen production. Who are best placed to become market leaders? I asked Bridget van Dorsten, who led our hydrogen benchmarking analysis, published in October 2023.

How big is the opportunity?

Today the market is tiny. Operational capacity of low-carbon hydrogen facilities is less than 1 Mtpa and dwarfed by the 100 Mtpa legacy, carbon-intensive hydrogen market that meets the needs of the refining, fertiliser and methanol sectors.

Demand for low-carbon hydrogen is set to grow to about 200 Mtpa by 2050, driven mainly by the energy sector. But this growth is not linear. We expect around 16 Mtpa of low-carbon supply by 2030, with 60% blue, 40% green – blue has a significant cost advantage this decade. Demand growth accelerates into the 2030s, driven by green hydrogen, which contributes around three-quarters of supply by the 2040s.

Are developers piling in?

There’s huge interest with over 100 Mtpa of announced projects, mostly green hydrogen, as of Q3 2023. And new announcements are coming in daily adding to the 1,300-plus projects we track in our Lens Hydrogen tool.

The pipeline shows the appetite, but developers are struggling to get projects to FID. Most are at an early stage, with 60% of announced capacity yet to complete pre-FEED (preliminary front-end engineering design) feasibility studies.

What’s holding back progress?

High costs, lack of offtakers and incomplete policy throughout the value chain. As with any new transition technology, we expect costs to fall as innovation and capacity scale up. However, gas costs and renewables constitute around 60% to 70% of the levelised cost of hydrogen (LCOH) for blue and green, respectively. Recent high interest rates, gas price volatility and higher renewables costs have failed to deliver LCOH cost declines as forecast and customers have been unwilling to pay a premium. Without an offtake agreement, projects won’t get financed.

Another major problem for buyers is a lack of clarity on policy through the value chain. Policy support has been skewed towards production, but there’s been little to none for transportation, storage and distribution or the broader infrastructure to support market development of hydrogen and derivatives such as ammonia and ethanol.

Are incumbents well placed to overcome these challenges?

The big industrial gas players such as Air Liquide, Air Products and Linde dominate the current market for carbon-intensive hydrogen. They are well placed to leverage existing relationships, including those with oil refiners, and build low carbon market share with legacy buyers as demand for low-carbon hydrogen grows.

Integrated oil companies see low-carbon hydrogen as part of a broader ‘molecule strategy’. They can capitalise on existing hydrogen expertise, tap into equity gas supply to experiment with pilot-scale blue hydrogen projects, sell into new energy demand sectors and decarbonise existing hydrogen demand in their refineries. Certain geographical locations will be advantaged, such as the US Gulf Coast, where projects can access cheap Henry Hub gas. European Majors, including Shell, BP and TotalEnergies, are also positioning to integrate renewables capacity with green hydrogen production.

The incumbents have moved cautiously so far – industrial gas players and oil Majors currently have just 3% and 8% of the project pipeline, respectively. The strategy has been to build partnerships and pilot projects while mapping out how best to integrate low-carbon hydrogen and its derivatives into their portfolios prior to committing investment and scaling up.

The Majors’ exposure to low-carbon hydrogen is heavily skewed in favour of blue hydrogen (5:1 versus green projects), which they will seek to pair with their developing CCS assets. Equinor and ExxonMobil lead the way among Majors in terms of equity in blue hydrogen projects.

What about disruptors?

Numerous companies are vying for a piece of the action, and the energy transition needs the impetus. We track more than 750 companies investing in low-carbon hydrogen, from industrial giants through to start-up developers founded in the past five years. These aspiring disruptors dominate the project pipeline and are almost entirely focused on green hydrogen projects. Few, though, have a substantive track record in producing or trading hydrogen.

Who will be the winners?

Irrespective of its growth potential, hydrogen isn’t for the faint-hearted or for those with limited financial capacity. Many of the challenges to commercialisation are outside investors’ control, not least developing the nascent market to sell into.

The incumbent oil Majors and industrial gas players look well placed to gain an early foothold with blue hydrogen. Competition will intensify as green hydrogen costs come down, opening the door for disruptors. The oil Majors will look to diversify their portfolios into electrolytic hydrogen next decade both organically and through M&A – consolidating what’s becoming a crowded landscape of disruptors.

Majors and NOCs are dark horses in the race to capture low carbon hydrogen market share

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