Part two of this article, discussing the developments and trends in the usage of hydrogen, is now available here.

For many, 2023 was supposed to be the year when green hydrogen went from idea to reality, with a wave of government subsidy schemes due to enter into force that would all but guarantee profitability for renewable H2 projects.

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But the world’s most significant subsidy programmes — the US clean hydrogen production tax credit, the EU’s green H2 auctions, the German-led H2Global scheme, the UK’s Contracts for Difference tenders, India’s National Green Hydrogen Mission and Australia’s Hydrogen Headstart — have all been taking longer to reach fruition than expected, delaying final investment decisions (FIDs) by developers, with knock-on effects for investors and electrolyser makers.

Nevertheless, while large-scale clean hydrogen production may not have yet become a reality, a new realism has emerged among industry players and governments — in terms of both the cost of producing green H2 and the sectors that should be subsidised to use it.

The US aim of producing green hydrogen for $1 per kilo by 2031 now seems more like wishful thinking than an achievable goal; blue hydrogen seems to be very much a second-best option being trumpeted only by those with vested interests in fossil fuels; while natural H2 extracted from the ground has unexpectedly risen from obscurity to become high on many countries’ political agenda.

Government subsidies

The US remains the most attractive market for green hydrogen developers outside China, despite unexpected delays in its main subsidy scheme, due to the fact that all producers will be eligible for production tax credits of up to $3/kg, rather than just those submitting the lowest bids at auctions.

However, despite being signed into law in August 2022 as part of the Inflation Reduction Act, the rules surrounding how to qualify for the credits have still not been finalised, leaving many project developers unable to take final investment decisions.

The rules had been expected to be announced in August 2023, but it took until 22 December 2023 for the regulations to be revealed — and in draft form only.

The announced rules, which include the controversial “three pillars” of additionality, hourly matching and geographic correlation, are now subject to a public consultation until late March 2024, and it is still not known when they will be finalized, causing further delays to producers’ final investment decisions.

And while the Biden administration made headlines around the world in October when it revealed the seven regional Hydrogen Hubs to receive $7bn of government funding, under a scheme set out in the 2021 Bipartisan Infrastructure Law, these awards are still subject to negotiations, and it may take a year or more for the first payments to be made to developers.

The EU finalised its own definition of green hydrogen and its derivatives (the so-called Renewable Fuels of Non-Biological Origin, or RFNBOs) back in June, which included the original three pillars.

This enabled the European Commission to open its pilot €800m European Hydrogen Bank auction this November for up to €4.50 of fixed payments per kilo of renewable H2 produced, with the lowest per-kg bidders set to win funding. Germany added an extra €350m to the tender only last week, which will only be available to producers within the country’s bidders as part of an “auctions-as-a-service” model . Winners are likely to be announced in April 2024, with a second €2.2bn auction due to open in the spring.

The UK opened the world’s first national clean hydrogen subsidy auction back in July 2022, but it took until mid-December 2023 to announce the winners.

The allocation of more than £2bn ($2.53bn) of subsidies to 11 projects totalling 125MW across Britain was a significant development, setting an effective strike price of a whopping £9.49 ($12) per kilogram of H2. So while the amount of subsidy in this Contracts for Difference (CfD) scheme will fluctuate according to the price of natural gas, the winning developers will be guaranteed this level of income for 15 years.

But the UK was not the first to announce the winners of a green hydrogen production subsidy scheme — that honour went to Denmark in late October, when it unveiled the six winning projects in its DKr1.25bn ($177m) green hydrogen (and derivatives) auction.

Other subsidy schemes have seen movement this year, with Australia revealing the six green hydrogen projects making the final shortlist of its A$2bn ($1.35bn) Hydrogen Headstart programme only last week; and India announcing the list of bidders in its oversubscribed first green hydrogen auction a few days earlier.

The first tender for Germany’s H2Global scheme for hydrogen (and derivative) imports opened back in November 2022, but the winners have still not been announced. A spokesperson for the H2Global Foundation told Hydrogen Insight in October that it hopes to reveal the winners of the first three auctions between January and June 2024.

Germany and the Netherlands have meanwhile announced a joint €600m H2Global auction to be launched next year, a possible prelude to a Europe-wide rollout of the scheme.

And as Hydrogen Insight exclusively revealed last week, the European Investment Bank — the EU’s lending arm — is also set to provide investment grants for renewable H2 production in developing countries after Germany provided it with a €434m ($475m) cash injection.

South Korea and Japan revealed this month that they will also introduce their own subsidies in the coming year.

The Japanese government has allocated ¥3trn ($20.86bn) to a CfD-style scheme, while South Korean Prime Minister Han Duck-soo said the country will “expand tax support” for clean hydrogen, hinting that it would introduce production tax credits modelled after those in the US.

In short, billions of dollars of subsidies are being lined up around the world for clean hydrogen, which will make many large-scale projects bankable. Final investment decisions should therefore follow in 2024, with billions of dollars of financing flowing into company coffers.

Final investment decisions delayed

Without major subsidies in pocket or even clarity that they could receive them, almost all US and European developers delayed FIDs on projects.

But there were notable exceptions.

In May, FID was reached on the 2.2GW Neom green hydrogen and ammonia project in Saudi Arabia, with the developers — US industrial gases firm Air Products, Saudi state-owned Neom Green Hydrogen Company and Saudi renewables developer ACWA Power — signing financing deals worth $8.4bn with local, regional and international lenders.

Air Products bagged the $6.7bn engineering, procurement and construction (EPC) contract for the project, which is due to begin operations in 2026 — and the US company will also buy all the H2 produced for 30 years.

The Neom FID was also a huge win for German electrolyser maker Thyssenkrupp Nucera, which is supplying all the electrolysers for the project.

And while not at the same scale, in late November, Australia’s Fortescue — led by iron-ore billionaire Andrew Forrest — took FID on its first two green hydrogen projects, the 80MW Phoenix Hydrogen Hub in the US and a 50MW project in Queensland, Australia.

There was also some joy for blue hydrogen proponents, with two project FIDs announced — both at the Dutch port of Rotterdam — in the past two months.

In early November, Air Products said it had taken an FID to convert an existing 300-tonnes-a-day grey hydrogen plant to blue H2 by retrofitting carbon capture technology, with its French rival Air Liquide taking FID on a similar project at the Port of Rotterdam last week, although the scale of its output is not yet clear.

Not a great year for electrolyser makers

With subsidy delays translating to project delays, the predicted uptick in electrolyser orders did not materialize, with almost all publicly listed electrolyser makers seeing lower than expected income and subsequent drops in their share prices.

French manufacturer McPhy has seen its share price fall by more than 73% this year, with US-based Plug Power also seeing its stocks slump by more than 60%. Shares have also fallen for Norway’s Nel (down about 53%), Italy-based Enapter (around 48%), ITM (down about 40%), and Bloom Energy (down around 20%).

While Thyssenkrupp Nucera heralded a €2.5bn IPO in July, buoyed by its 2.2GW Neom order, its share price has since dipped from €23.52 on the first day of trading to €18.10 per share at the time of publication — a fall of just over 23%.

Nevertheless, factory expansion plans have only grown this year, with several gigawatts of extra production capacity announced, especially in the US.

Nel has pledged to build a 4GW facility in the state of Michigan, while Belgium’s John Cockerill has already started construction on a 1GW factory in Texas with an eye on beginning production next summer.

The spectre of cheap Chinese electrolyser makers flooding the global market has haunted both Western manufacturers and some governments this year, with Hydrogen Insight learning last month that the European Commission wants to introduce rules that would prevent EU subsidies for green hydrogen from being used to buy Chinese electrolysers, in order to protect European manufacturers.

Such a move had been requested by 21 European hydrogen companies back in January this year, but Germany is apparently blocking the measure.

While recent auction results within China have indicated eye-poppingly low costs for electrolysers, Hydrogen Insight learned earlier this month that the country’s flagship green hydrogen project, the 260MW Kuqa facility — the largest yet to start operations — none of the installed Chinese-made electrolysers have been working properly.

While this might put off Western developers from buying Chinese equipment, some US- and European-made electrolysers have also seen technical problems.

Hydrogen Insight revealed in August that US-based Cummins had ordered a shutdown of multiple HyLyzer 500 PEM electrolysers installed throughout Europe for repairs owing to due to gas mixing inside the unit.

And ITM Power had seen 15-40% of its manufactured electrolysers failing their pre-shipment tests between March and July this year.

Developers get real on costs

Last year, both policymakers and analysts were bullish on driving down the cost of hydrogen production below $2/kg, with the US setting its “Hydrogen Shot” target of $1/kg by 2031. Much of this cost reduction was expected to come from economies of scale for both H2 projects and the electrolyser factories supplying them, as well as more efficient equipment.

However, in 2023, developers have admitted that not only are the expected costs due to be far higher by 2031 — but the cost of green hydrogen is actually rising today, due to inflation on the cost of not only electrolysers, but the wind turbines and solar panels supplying electricity to projects, which represents around 60-75% of the levelised cost of H2.

And, according to a peer-reviewed scientific study published in September, the EU’s (and soon-to-be US’s) requirement for hourly correlation is expected to increase the cost of producing hydrogen by 27.5% compared to more lenient matching on an annual basis.

Foot off the gas for blue hydrogen?

Blue hydrogen, produced from natural gas with carbon capture and storage, has been controversial for years, with environmental groups and researchers arguing that it would encourage the continued use of fossil fuels and increase the risk of planet-destroying methane emissions.

Earlier this month, the US Department of Energy published a report suggesting that based on these emissions, blue hydrogen producers may not be eligible for even the lowest rate of the production tax credit.

This came despite four of the seven winning US Hydrogen Hubs including the production of blue H2.

There also seems to be few potential offtakers for blue hydrogen outside the fossil-fuel sector, which uses H2 for oil refining. Quite simply, most potential users would rather have green hydrogen.

For instance, the world’s biggest oil company Saudi Aramco revealed in May that it was struggling to find European buyers for its planned blue hydrogen output.

There are currently no subsidies in the EU for blue hydrogen producers or importers, and four directives signed off this year — the Renewable Energy Directive, the Alternative Fuel Infrastructure REgulation, FuelEU and ReFuelEU Aviation — all mandate the use of green hydrogen, not blue, thus creating huge demand for renewable H2 and none at all for blue.

However, while blue H2 in the US might not qualify for the production tax credits due to methane emissions, developers in the States do have the option of applying for the 45Q tax credit for carbon capture instead.

And Canada is handing out substantial amounts of taxpayer money to blue hydrogen producers there, with Air Products last month netting C$475m ($351m) of federal and provincial funding for its planned $1.6bn “net zero” blue hydrogen complex in the fossil fuel producing region of Alberta.

And while Air Products and Air Liquide have recently both taken FIDs on blue H2 projects in Rotterdam, as previously mentioned, developers have also shelved major blue hydrogen projects this year, citing poor economics.

Fertiliser giant Nutrien told a quarterly earnings call it would postpone taking FID on a 1.2 million tonnes-a-year blue ammonia plant at its complex in Geismar, Louisiana for a “minimum of 24 months”, while Shell admitted to Hydrogen Insight that its 700MW Project Cavendish in the UK had been discontinued.

First natural hydrogen explorers strike gold

Few people had even heard of natural hydrogen — also known as “white” or “gold” hydrogen — just a year ago. But this year saw a boom in interest in exploring for naturally occurring H2, which could offer extremely low costs of production and lifecycle emissions.

This month, French President Emmanuel Macron promised “massive funding” to explore the potential of natural hydrogen, soon after France agreed its first exploration licence for this “energy of the future”.

In April, Anglo-Spanish company Helios Aragón said it had discovered a giant underground hydrogen reservoir in the foothills of the Pyrenees, and a month later, “significant concentrations” of naturally occurring H2 were found in northeastern France at a previously drilled well.

Even the US government has opened a funding call worth $20m towards technologies to measure and extract natural hydrogen.

But the most important developments in natural hydrogen have come in South Australia, where start-up Gold Hydrogen found “significant concentrations” of H2 during drilling at its Ramsay 1 and 2 exploration wells.

All eyes will be on the company this year as it fast-tracks the development of a pilot project to extract and sell this H2.