Green Hydrogen: Measuring the Outlook for a ‘Boom or Bust’ Scenario
Is hydrogen overhyped as the fuel of the future? Given the massive government incentives and venture capital funding pouring into green hydrogen in 2022, we were determined to find out.
I conducted this research in collaboration with Buoyant Ventures, an early stage venture fund investing in digital technologies that address climate change across both mitigation and adaptation. Founded by Amy Francetic and Allison Myers, Buoyant invests in digital solutions across renewable energy, mobility, the built environment, agriculture, water, climate intelligence, and the circular economy.
Uniquely, the development and deployment of green hydrogen spans across many of these sectors. In this post, I will be sharing my perspective on the developing green hydrogen economy and suggest areas where digital solutions enable its growth.
Green Hydrogen State of Affairs: Announcements, planning & attractive incentives, but mixed reviews on expected demand
To start, how do we unpack what actually qualifies as “green”? Broadly, green hydrogen is thought of as hydrogen produced via an electrolyzer that uses a renewable electricity source. But recent industry infighting would suggest, it’s actually a much thornier question than it presents. Unfortunately, our color-coded hydrogen naming schema (ever heard of turquoise or pink hydrogen?) is much too simplified to convey a true carbon intensity measurement, especially when RECs and PPAs are involved. The US Treasury Department and the IRS are currently hashing out what will qualify as “green” going forward, given the complexities associated with grid connected production plants in particular.
Green hydrogen is gaining attention because of its broad array of applications and potential to decarbonize industries that are particularly hard to abate. This potential has driven a massive uptick in investment dollars in recent years, with upwards of $240B of announced investments in 2022. The majority of these investments are going towards scaling up global hydrogen production capacity, with the minority going towards end use applications (25%) and transportation and distribution (10%).
Government incentives have driven even more interest. In the last year alone, the US government outlined $9B in funding for the development of regional hydrogen hubs and it’s already clear that these hubs will shape the US hydrogen economy for decades to come.
Hub planning groups are in the midst of multi-round applications and are operating full steam ahead with their planning process. With the passing of the Inflation Reduction Act (IRA) in mid-2022, the US government introduced a $3 per kilogram tax credit for green hydrogen, further incentivizing companies to make the transition towards lower carbon intensity hydrogen. These tax credits are the most ambitious elements of green hydrogen incentives to date. As a result, we are seeing more and more production capacity announced. Most recently, AES and Air Products unveiled a $4B mega-project in Texas, making it the largest green hydrogen project in the US. The wide consensus is that yes, we will surely benefit from green hydrogen production at scale. But there’s an implied caveat: Will demand for green hydrogen materialize at the pace and scale anticipated?
Currently, there is roughly a total of 1 Mt of global green hydrogen production capacity. For the net zero scenario, some anticipate upwards of 95 Mt will be required. We are hearing from some, like Bloomberg NEF’s Nat Bullard, that planned export capacity now significantly outpaces demand. But, despite that backdrop, there have been reports that new production announcements aren’t slowing down anytime soon. And given the market nascency, it could be years until we see how things unfold.
Green Hydrogen’s Role in a New Zero Future
A few in the industry reference hydrogen as the all-purpose “Silver Bullet” for the green economy. Others are cautiously watching the market boom and expecting a bust, as demand and supply shake out and reach market-ready levels. Those in the “bust” camp are betting that demand won’t materialize given competing solutions and a declining, but present, green premium. My view is that hydrogen will indeed be our key to decarbonizing otherwise hard to abate industries such as steel or ammonia. However, I also anticipate this scenario: green hydrogen will struggle with adoption into further end use applications given the competing ‘electrify everything’ momentum, the improving but present green premium, and the significant transportation constraints due to its ultra low volumetric energy density.
So, will digital solutions play a role in bringing green hydrogen to market viability? To better understand how digital opportunities will support the scaling of the green hydrogen economy, I first mapped the value chain and the key players below. This mapping is meant to be largely demonstrative and not exhaustive. We welcome thoughts on additions to this list, and in particular would love to hear from entrepreneurs and operators who are actively impacting this space.
Developers — The Epicenter of Action
At present, project developers are leading the way on attracting attention — and capital — to the green hydrogen market. This category includes hydrogen project developers and companies involved in planning the broader hydrogen hub ecosystem. Most of today’s market activity lies here. There are countless startups currently competing to develop new electrolyzer technologies that allow for low-cost green hydrogen production and many are partnering with prominent, established energy developers to execute on their scale up plans.
However, given the nascent nature of the green hydrogen economy, many will likely fall victim to increasingly competitive production costs, and early mover disadvantages. As a result, many projects have been announced and are in planning stages but are at risk due to the inherent financial uncertainty. Only a few have actually reached final investment decision, the last major hurdle prior to breaking ground.
Digital Innovations for Developers
These industry players are likely to benefit greatly from digital technologies to de-risk and streamline new project development. These technologies can help validate project siting and designs and provide more certainty with expected production rates and associated costs — giving investors more assurance on their financial returns.
Among the challenges developers face are the critical resources needed for large scale green hydrogen and the coordination among future producing and off-taking parties to build the most efficient hydrogen supply chains. As an example, developers must source enough fresh water to support large scale plants, and estimates have suggested that the renewable energy needs to support a green hydrogen economy could be massive. We have seen products from a few startups aimed at better facilitating collaboration and resource planning during this critical period of scale up, Paces being one.
Producers: Facing Scale-up and Pricing Issues
Hydrogen producers are anticipated to be a mix of incumbents and new startups that will take on the role of owning and operating green hydrogen production assets. The production scale-up challenges are numerous, including high capital costs with expensive electrolyzers, reliability challenges with the nascent technologies, and tricky integration with potentially intermittent energy supplies but a desire for continuous production. The market will rely on this producer segment to address the issues related to reducing operational spend, in hopes of reducing the green premium.
Digital Innovations for Producers
These producers may rely on digital twins and artificial internet of things (AIoT) solutions to find production efficiencies and reduce OPEX spend. Given that electrolyzers are a simple technology, one would expect these applications to be more broadly integrated into the hydrogen system, looking beyond just the production process and into how to integrate electricity supply, hydrogen production, and downstream processing. There are a few digital twin solutions offered by either start ups or by incumbents that service this space but, as you could imagine, the businesses standing up these solutions don’t need to be hydrogen-sector specific.
Transportation & Storage: Short-Term Hyper Local, Needs Digital/Physical Infrastructure
Transportation and storage infrastructure have claimed a much smaller percentage of announced hydrogen investment dollars to date, but there is much work left to be done in these sectors to enable a green hydrogen economy.
Players in transportation and storage provide the infrastructure and services that enable efficient movement of hydrogen and, later, for either domestic or international exchange. Among the main issues around integrating hydrogen into existing infrastructure is that systems today are largely designed for natural gas. These facilities are largely incompatible with hydrogen, limiting the wholesale transition between the fuels.
This means that, for the next decade, hydrogen distribution will likely be hyper local. This model is largely promoted by the development of the hydrogen hubs, and in many cases green hydrogen will be produced and consumed at essentially the same sites. This follows the current market structure, in which incumbent hydrogen producers like Air Liquide or Linde often share fence lines with off-takers and operate under long-term contracts.
Beyond that near-term horizon, some in the industry expect a fully globalized hydrogen market. But before global players can start to build the terminal infrastructure needed for international trade or the large-scale storage facilities to allow for longer range transport, the market must first determine how to transfer something with such stubbornly low volumetric energy. Right now, the anticipated solution is to truck liquefied hydrogen, but others like liquid organic hydrogen carriers (LOHCs) and ammonia are still being discussed.
Digital Innovations for Transportation & Storage
Digital infrastructure must exist to support the exchange of hydrogen, largely to complement certification of origin schemes that provide the transparency necessary for international trade and the development of marketplaces and exchanges that facilitate efficient buying and selling while the market still lacks liquidity. Phoenix Hydrogen and BlackCurrant are startups currently providing marketplace solutions.
In a reaction to much of the recent news in carbon markets, it’s possible that measurement and verification for the carbon intensity of hydrogen is never privatized. Certification of origin schemes are often developed by trusted non-profits or industry consortiums and now non-profit partnerships like MiQ are taking verification and measurement in their own hands. For now, MiQ provides measurement and verification for methane carbon intensity; this approach could easily be taken for the hydrogen supply chain.
End Users: Adoption Expected From Hard to Abate Industries, Otherwise ‘Electrify Everything’ Will Dominate
There are many competing opinions on which end use applications will be the largest adopters of green hydrogen. While hydrogen is often referred to as the “Swiss Army Knife” for the green economy because of its many potential applications, it will compete with the “electrify everything” trend already in place across many end use sectors. Sure, hydrogen can be used to decarbonize home heating or passenger transport, but it’s unlikely to compete with electric solutions such as battery EVs or heat pumps that already have a foothold.
I remain optimistic that green hydrogen, when helped by support of the IRA tax credits and further production cost reductions, will take hold in applications that:
- have few other abatement alternatives (e.g. steel production)
- reduced switching costs (e.g. chemical production, refining)
- have an unmet need with limited solutions (e.g. multi-day energy storage)
Digital Innovations for End Users
Digital solutions such as digital twins can be used to understand the inherent performance and reliability risks associated with specific end use applications. For example, we understand less about the performance and reliability issues associated with new hydrogen-fueled engines than we do with incumbent technologies. These technical solutions will likely need to be deeply tailored to particular applications and can be largely served by incumbents. We don’t expect to see many digitally focused startups playing a role in this segment of the market.
Green Hydrogen for a Cleaner Energy Future
It’s no doubt that green hydrogen will play a dominant role in decarbonization over the coming decades, and we will be watching closely to see how it develops. Like almost all things in our global economy, digital applications will be used to scale, produce, and deploy green hydrogen more efficiently. For now, I don’t expect to see many truly novel and sector-focused digital solutions. If you disagree, I’d love to hear from you.
I want to thank the Buoyant team for their support over the past few months — it has been an absolute pleasure working alongside the team. I’ve also loved interacting with the broader climate-tech startup and investing community throughout the research process. Please feel free to reach out with questions, comments, or feedback. I’d love to connect!
