Green hydrogen: Hype? Fad? Where are we with green hydrogen?

The last decade has seen rapid growth in awareness of the climate challenge. Policy responses to address the threat of global warming have also multiplied, following the goals of the Paris Agreement, which seeks to limit warming to below 1.5ºC as a reference.

One of the decarbonization initiatives that has garnered the most headlines and public attention has been the development of green hydrogen. The media has echoed a future where hydrogen could replace natural gas to generate industrial heat, for buildings heating or to store electricity.

The reason is that hydrogen has a very interesting characteristic: It is an energy vector that can produce heat (by combustion) or electricity (through a fuel cell) without generating any type of greenhouse gas. This means that it is often presented as the ultimate solution to eliminate CO2 emissions. This hype has been fueled both by governments - which have established increasingly ambitious H2 strategies - and by companies in the energy sector, which see hydrogen as a new business suitable for a decarbonized future.

However, from the end of 2023, there has been growing market skepticism about the real capacity of our economies to produce, transport and consume so much green hydrogen in the timeframes set by the European Union, governments and companies in the sector.

Large-scale renewable hydrogen: A considerable technological and economic challenge

Hydrogen is available in nature in very limited quantities (white hydrogen), and therefore has to be produced from other sources. The existing demand for hydrogen (concentrated in refining, the chemical industry, the production of fertilizers and steel) is met mostly with grey hydrogen, derived from breaking down natural gas molecules, a process that generates large amounts of CO2.

In a decarbonized world, both the existing demand for hydrogen and the new uses of this gas will have to be supplied with green or renewable hydrogen, i.e. produced by electrolysis of water with renewable electricity, or blue hydrogen, produced from natural gas but storing the CO2 generated in the ground.

The government of Spain, in its latest revision of the National Integrated Energy and Climate Plan (PNIEC), sets a target of 11 GW of installed electrolysis capacity by 2030 to produce close to one million metric tons per year of renewable hydrogen in the country. Experts agree that this goal, which is very ambitious, will be very difficult to achieve for several reasons:

• Incorporating such a large electrolysis capacity into the electricity system requires the development of significant dedicated renewable capacity (and the corresponding electricity grids), in addition to the capacity required by the electrification and decarbonization objectives of the country's economy.
• To date, no electrolysis plant with a capacity above 30 MW has been commissioned in the Western economies, and the challenges to start and operate mega H2 plants of more than 200 MW are enormous; albeit they are necessary to reach the goal of 11 GW.
• Financing of electrolysis projects is another major challenge. These plants are very Capex intensive at about 2 million euros per MW installed, which means that a mega plant of 500 MW will require an investment of around one billion euros. And they are industrial projects of great technical complexity, much higher than that of wind or solar plants.
•  In addition, green hydrogen is expensive: the most advanced projects are reaching a final hydrogen price above €5/kg or €150/MWh, while gray hydrogen costs €1.5/kg and natural gas €30/MWh. For this reason, green hydrogen makes no economic sense without regulation that helps boost it through subsidies for production or demand.

The demand for renewable hydrogen: Regulation creates the market

The European Union envisages the promotion of hydrogen development by combining: 

• Regulatory binding targets for the penetration of renewable hydrogen. The latest revision of the Renewable Energy Directive (RED III) sets a 2030 target for hydrogen-consuming industries to have at least 42% renewable H2 in their portfolio. It also requires the transport sector to use a minimum of 1% renewable hydrogen and its derivatives for fuel by 2030, with sub-targets of up to 1.2% in the maritime sector and 1.5% in aviation. Failure to achieve these goals should result in penalties.
• Subsidies for Capex or hydrogen production, through auctions for example.

That is why it is very likely that, in this decade, the demand for renewable hydrogen will materialize mainly in industries that already consume H2 (fertilizers, chemicals, steel, refining) and in the transport sector, i.e. those sectors where European regulations seek to bring about change.

There is less "buzz" but renewable hydrogen has a secure future

The difficulties that many renewable hydrogen projects have encountered in advancing their development, due to the complexity of producing renewable H2 on a large scale and the small number of industries/sectors actually able to (or incentivized to) afford renewable H2 price, have caused a surge of skepticism to settle in the sector.

However, many observers agree that this less widespread enthusiasm around green hydrogen is very healthy because it will allow the sector to focus its efforts on the priorities set by the regulation: Decarbonizing existing hydrogen consumption and using green hydrogen as a decarbonization vector for the transport sector. In addition, it should also help to direct the public funding effort towards the most economically competitive and technically mature projects.

While many of the policy goals for the development of green hydrogen by 2030 seem difficult to achieve (the first, RePower EU's target of producing 10 million metric tons in Europe, and importing another 10 million), there is no doubt that large-scale projects will see the light of day in the coming years.

BBVA is actively positioning itself to advise its clients and finance their renewable hydrogen projects, which are as complex as they are necessary for the success of the decarbonization of our economies.