The number of announced projects for low-emission hydrogen production is rapidly expanding. Annual production of low-emission hydrogen could reach 38 Mt in 2030, if all announced projects are realised, although 17 Mt come from projects at early stages of development. The potential production by 2030 from announced projects to date is 50% larger than it was at the time of the release of the IEA’s Global Hydrogen Review 2022. Only 4% of this potential production has at least taken a final investment decision (FID), a doubling since last year in absolute terms (reaching nearly 2 Mt). Of the total, 27 Mt are based on electrolysis and low-emission electricity and 10 Mt on fossil fuels with carbon capture, utilisation and storage. 

After a slow start, China has taken the lead on electrolyser deployment. In 2020, China accounted for less than 10% of global electrolyser capacity installed for dedicated hydrogen production, concentrated in small demonstration projects. In 2022, installed capacity in China grew to more than 200 MW, representing 30% of global capacity, including the world’s largest electrolysis project (150 MW). By the end of 2023, China’s installed electrolyser capacity is expected to reach 1.2 GW – 50% of global capacity – with another new world record-size electrolysis project (260 MW), which started operation this year. China is poised to further cement its leading position in electrolyser deployment: the country accounts for more than 40% of the electrolysis projects that have reached FID globally.

Equipment and financial costs are increasing, putting projects at risk and reducing the impact of government support for deployment. Inflation is increasing capital and financial costs, threatening the bankability of projects across the entire hydrogen value chain, which are highly capital intensive. For hydrogen produced from renewable electricity, for example, an increase of 3 percentage points in the cost of capital could raise total project cost by nearly one-third. Several projects have revised their initial cost estimates upwards by up to 50%. Inflationary pressures have coincided with a recent fall in natural gas prices, particularly in Europe, and with supply chain disruptions that affected project timelines. This means that announced government funding will support a smaller number of projects than could be expected previously, as greater investment is needed to close the cost gap between low-emission hydrogen and unabated fossil fuels-based hydrogen.

Governments have started to make funding available to support the first large-scale projects, but slow implementation of support schemes is delaying investment decisions. North America and Europe have taken the lead in implementing initiatives to encourage low-emission hydrogen production. Large amounts of government funding are being made available through schemes such as the US Hydrogen Production Tax Credit, the EU Important Projects of Common European Interest and the UK Low Carbon Hydrogen Business Model. However, the lengthy time lags between the announcement of the schemes and the moment at which funds are made available to project developers is delaying project execution, and even putting projects at risk. This has been aggravated by the lack of clarity about regulation, which has only very recently been resolved in some jurisdictions.

Electrolyser manufacturers have announced ambitious expansion plans. Manufacturers have announced that around 14 GW of manufacturing capacity are available today, half of which is in China. Electrolyser production in 2022 is estimated to be just over 1 GW. Manufacturers have announced plans for further expansion, aiming to reach 155 GW/year of manufacturing capacity by 2030, but only 8% of this capacity has at least reached FID. Realising manufacturers’ ambitious plans will depend on solid demand for electrolysers, which today is highly uncertain. Such uncertainty is already resulting in delays to these expansion plans, some of which are being put on hold.

Hydrogen demand reached a historical high in 2022, but it remains concentrated in traditional applications. Global hydrogen use reached 95 Mt in 2022, a nearly 3% increase year-on-year, with strong growth in all major consuming regions except Europe, which suffered a hit to industrial activity due to the sharp increase in natural gas prices. This global growth does not reflect a success of policy efforts to expand the use of hydrogen, but rather is linked to general global energy trends. Demand remains concentrated in industry and refining, with less than 0.1% coming from new applications in heavy industry, transport or power generation. Low-emission hydrogen is being taken up very slowly in existing applications, accounting for just 0.7% of total hydrogen demand, implying that hydrogen production and use in 2022 was linked to more than 900 Mt of CO₂ emissions. Prospects are better in industry, particularly for ammonia production, with refining lagging behind.

Measures to stimulate low-emission hydrogen use have only recently started to attract policy attention and are still not sufficient to meet climate ambitions. Government action has been focused on supporting low-emission hydrogen production, with less attention to the demand side. The sum of all government targets for low-emission hydrogen production accounts for 27-35 Mt today, but targets for creating demand account for just 14 Mt, less than half of which is focused on existing hydrogen uses. Even if these targets are met, they represent only one-fifth of the low-emission hydrogen use in the Net Zero Emissions by 2050 Scenario (NZE Scenario) by 2030. Without robust demand, producers of low-emission hydrogen will not secure sufficient off-takers to underpin large-scale investments, jeopardising the viability of the entire low-emission hydrogen industry.

The private sector has started moving to adopt low-emission hydrogen through off-take agreements, but efforts remain at very small scale. Companies have signed off-take agreements for up to 2 Mt of low-emission hydrogen, although more than half are preliminary agreements with non-binding conditions. Some companies are developing projects for an additional 3 Mt of low-emission hydrogen production for their own use, without the need for off-take agreements. But even with the addition of these quantities, low-emission hydrogen use is still far from what is needed to meet climate goals.

International co-operation initiatives can help to aggregate demand for low-emission hydrogen, but demand signals from these initiatives are unclear. Governments and companies have launched a series of co-operation initiatives to foster deployment of low-emission technologies, including hydrogen. Based on the commitments made by these initiatives, they could create 0.8-3 Mt of low-emission hydrogen demand by 2030. However, the real impact of their pledges remains to be seen. These initiatives predominantly target new applications of hydrogen, and there is no dedicated coalition targeting the chemical and refining sectors, which are better placed to adopt low-emission hydrogen at scale in the short term.

Scaling up low-emission hydrogen use is also key to enabling the nascent hydrogen trade. International trade of hydrogen and hydrogen-based fuels is expected to be an important feature of a net zero future. In the NZE Scenario, more than 20% of demand for merchant hydrogen and hydrogen-based fuels is internationally traded by 2030. Based on announced export-oriented projects, 16 Mt of hydrogen equivalent could be exported all around the world by 2030, but only three projects have reached FID. The realisation of these announced trade projects will depend on securing off-takers for the long run, as well as the implementation of certification schemes and deployment of the necessary infrastructure. Progress on infrastructure is moving slowly. There have been announcements for around 50 terminals and port infrastructure for hydrogen and hydrogen-based fuels, and for up to 5 TWh of underground storage capacity aiming to be operative by 2030, but none of them has reached FID. Infrastructure projects typically have very long lead times, so it is critical to start developing them now to have a chance of them being available by 2030.

Political momentum behind low-emission hydrogen remains strong but deployment is not taking off. A total of 41 governments now have a hydrogen strategy in place and some of the early movers are updating their original strategies, raising ambitions. There is consensus that low-emission hydrogen is a key opportunity for decarbonising sectors where emissions are hard to abate. The energy crisis arising from Russia’s invasion of Ukraine has also turned a spotlight on the role that low-emission hydrogen can play in enhancing energy security. In addition, several major economies have recently adopted new industrial strategies, in which hydrogen technologies play a key part. Government policies and private sector plans are translating into an expanding flow of capital into the low-emission hydrogen sector. However, despite this momentum, low-emission hydrogen still accounts for less than 1% of global hydrogen production and use, and will need to grow more than 100-fold by 2030 to get in line with the NZE Scenario.

Regulation and certification remain key barriers to adoption, but strong international co-operation can be crucial to finding solutions. Several countries have started putting in place regulations on hydrogen’s environmental attributes and developing associated certification schemes. These have some commonalities, but also significant divergences, which may lead to market fragmentation. Intergovernmental forums like the G7 and the G20 have recognised this risk and committed to work towards mutual recognition of certificates, which can facilitate market and regulatory interoperability. Referring to the emissions intensity of hydrogen production in regulation and certification – based on agreed methodology – can enable mutual recognition.1

Governments need stronger policy action on multiple fronts to tap into the opportunity that low-emission hydrogen offers. Low-emission hydrogen can be an opportunity for countries to boost their economies for the future by creating industries along the supply chains of hydrogen technologies. In the Stated Policies Scenario, the market size of the low-emission hydrogen sector rises from USD 1.4 billion today to USD 12 billion by 2030, equivalent to the spending on offshore wind in Europe in 2022. Increasing ambitions in line with the NZE Scenario could expand the market size up to USD 112 billion, roughly the size of the market for rooftop solar PV installations in the Asia Pacific region in 2022. However, there are challenges around the expansion of technology manufacturing, as well as for creating demand and securing off-takers for low-emission hydrogen production. These challenges are to be expected in a sector that needs to build up complex value chains, but have been exacerbated by inflation, the fall in fossil fuel prices and sluggish policy implementation. Overcoming these challenges requires governments to act across the whole value chain, or progress will be disjointed and lead to cancellations and setbacks.