Hydrogen, the most abundant element in the universe, offers vast potential to transform the global economy by significantly reducing carbon emissions. Despite its challenges such as high costs and insufficient storage and transport infrastructure, technological advancements and government support are paving the way for hydrogen to become a cost-effective and sustainable energy solution.
Hydrogen use cases
Hydrogen has many use cases, both current and potential. The potential demand demonstrates how hydrogen can make a substantial impact on the energy transition, particularly due to its scalability of production. Greater production reduces per unit cost, which can unlock additional use cases in sectors like shipping, aviation, heating, and more.
Traditional applications of hydrogen, particularly in oil refining and chemicals, will be key drivers of clean hydrogen demand in the near term due to mandates and regulations. By 2030, these applications are projected to consume about 100 megatonnes (Mt) of hydrogen, including 14-16 Mt of clean hydrogen, representing 23-40% of total projected clean hydrogen demand. The European Hydrogen Bank’s first-round subsidy auction shows significant momentum, with over half of the winners intending to produce green hydrogen for oil refining or green ammonia.
Traditional applications' low-carbon hydrogen demand as percentage of total low-carbon hydrogen in 2030 by forecaster
Sources: BNEF, “New Energy Outlook 2024”, May 2024; International Energy Agency (IEA), “Global hydrogen demand in the Net Zero Scenario, 2022-2050”, September 2023; McKinsey, “Global Energy Perspective 2023: Hydrogen outlook”, January 2024; Macquarie Asset Management analysis.
Green hydrogen’s cost-saving potential
Today, green hydrogen (produced from renewables via electrolysis) is generally more expensive than grey hydrogen (produced via fossil fuels) and blue hydrogen (grey hydrogen with added carbon capture). However, because green hydrogen uses zero fossil fuels as inputs, it therefore has the theoretical potential to be cheaper than both. Technological advancement and scaling production offer the opportunity for green hydrogen cost reduction.
The cost of producing green hydrogen is influenced by the cost of electrolysis systems and renewable electricity. Significant cost reductions in these areas, along with increased production volumes, can make green hydrogen cost-competitive with other forms of hydrogen and other decarbonisation options.
Cost declines needed to reach $US2.0-2.5 per kg
Source: Macquarie Asset Management analysis. LCOH = levelised cost of hydrogen.
Hydrogen transport and storage
The delivered cost of hydrogen depends on more than just production. Storage and transportation costs also play important roles in shaping the final price paid by end users, which can vary widely depending on storage and transmission infrastructure availability, logistical constraints, and hydrogen consumption patterns.
The cost of hydrogen for consumers factors in the cost of production, of course, but also the critical processes involved in transporting and storing it. Developing infrastructure such as pipelines and storage facilities is essential for the widespread adoption of hydrogen.
Hydrogen transportation options and cost ranges
Source: BNEF, “Hydrogen: The Economics of Pipeline Transport”, May 2022.
Government policy and support
The global hydrogen market is evolving due to ambitious targets set by major economies. Additionally, substantial funding through production credits, subsidies, grants, and contracts-for-difference (CfD) is stimulating the market, while policy leaders in the EU, Japan, and South Korea are paving the way for decarbonising hard-to-abate sectors like industry, transportation, and power generation.
The adoption of hydrogen will ultimately rely on pivotal government policies and support. Various mechanisms such as subsidies, tax incentives, and mandates are being utilised to stimulate the market and develop the necessary infrastructure.
Hydrogen production targets in selected markets
Sources: Economist Intelligence Unit (EIU), Baker McKenzie, European Parliament, Macquarie Asset Management analysis.
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