IEA sounds alarm on lack of effort to replace fossil hydrogen with clean H2 — amid rising sector emissions
Low-carbon hydrogen only represents 0.7% of today’s demand, with little government or industry momentum to drive clean H2 use in chemicals and refining
Stay ahead on hydrogen with our free newsletter
And little is being done by government or industry to fix this problem.
While countries across the globe have set lofty targets for clean hydrogen production, adding up to around 27-35 million tonnes of annual production, policies to stimulate demand only account for 14 million tonnes — “less than half of which is focused on existing hydrogen uses”, the IEA warns.
Similarly, the agency notes that two million tonnes of clean hydrogen have been contracted for offtake by companies — but more than half of this is under preliminary, non-binding agreements. And an additional three million tonnes of annual production capacity is being developed by some companies to meet their own demand.
This falls well short of what the IEA predicts will be needed to reduce global emissions in line with net zero by 2050.
And when it comes to production coming on line to meet that demand, project development is still lagging behind.
But only 4% of this capacity has seen final investment decisions (FIDs) taken.
A total of 2GW of electrolysis capacity is due to be installed globally by the end of this year, capable of producing around 200,000 tonnes a year of renewable hydrogen — up from 700MW at the end of 2022.
Inflation
The impact of inflation on the cost of equipment and financing is expected to be a major roadblock for development in the short term, the IEA adds.
The IEA estimates that increasing a 5% weighted average cost of capital (WACC) to 10% would result in an almost 40% increase in the cost of renewable hydrogen production, depending on the electricity source.
Inflationary pressure has already led to the initial cost of projects that have taken FID — such as the Neom green hydrogen and ammonia complex in Saudi Arabia or the Bad Lauchstädt Energy Park in Germany — to be revised upwards by 50% or more.
Electrolyser manufacturing
However, the IEA forecasts that if electrolyser manufacturing capacity increases in line with announcements, the cost of installing this equipment could decrease due to economies of scale and mass productiony 50% by 2025 and by 60% by 2030.
But while announced electrolyser manufacturing capacity adds up to 155GW per year by 2030, only 8% of these expansions have taken FID. Today, there is only 14GW of annual electrolyser manufacturing capacity, but the IEA estimates that only 1GW of electrolysers were produced in 2022.
Half of today’s electrolyser manufacturing capacity is in China — one of the few countries to see a massive ramp-up in deployment.
In 2020, the country installed less than 10% of the world’s electrolysis capacity, but it has since deployed 200MW in 2022 and is on track to have 1.2GW on line by the end of this year — equivalent to more than 50% of global capacity.
Recommendations
Outside of China, the IEA notes that while entities such as the US and the EU are offering substantial subsidies, there is a time lag between when these are announced and when projects can actually access them.
As such, the agency puts forward four recommendations for governments and companies:
- Urgently implement announced support schemes for low-emission hydrogen production and use;
- Take bolder action to stimulate demand creation for low-emission hydrogen, particularly in existing hydrogen uses, such as via quotas or mandates to drive adoption in existing use-cases, technology-neutral regulations in “priority sectors where alternative mitigation options exist” (such as steel, shipping, aviation, and long-distance road transport), or public procurement;
- Foster international co-operation to accelerate solutions for hydrogen certification and mutual recognition of certificates, a lack of which the IEA had previously raised would present a barrier to traded volumes;
- Update regulatory barriers, particularly for project licensing and permitting, to ensure they are as efficient as possible and to minimise their impact on lead times — particularly for pipelines, terminals and underground storage;
- Support project developers to maintain momentum during the inflationary period and to extend regional reach, such as via loan guarantees, export credit facilities or public equity investments.