In the race to decarbonize industries, clean energy is losing ground to fossil fuels, largely because of the high hopes pinned on hydrogen. Theoretically, this abundant element could serve as a climate game-changer, enabling zero-emission production of essential materials like fertilizer, steel, petrochemicals, and cement. Such a transformation would be monumental, as industrial plants—not power stations or vehicles—are responsible for about a quarter of global carbon emissions.
If one process could decarbonize all these industries, it would be as revolutionary as solar power, wind farms, and electric vehicles. However, the current reality of hydrogen doesn’t align with its potential. Presently, less than one in a thousand metric tons of hydrogen used is “green hydrogen,” produced by splitting water into hydrogen and oxygen using electricity.
The overwhelming majority is “gray hydrogen,” made from natural gas, oil, or coal, which emits significant amounts of carbon dioxide. Optimists have hoped that the cost of water-splitting electrolyzers and the clean energy needed to power them would fall rapidly, similar to other green technologies. Unfortunately, the opposite seems to be happening, and without intervention, dirtier hydrogen variants are gaining traction.
First, consider the cost dynamics. The recent years of high inflation and interest rates have been challenging for many clean technologies, but wind, solar, batteries, and EVs have managed to scale efficiently and keep costs down. This isn’t the case for green hydrogen. Instead of dropping from around $3 per kilogram to the U.S. government’s target of $1/kg—a price point at which it could compete with natural gas—costs in the U.S. have risen to nearly $5/kg, according to a study by the Hydrogen Council and McKinsey & Co.
Even the substantial incentives in President Joe Biden’s Inflation Reduction Act aren’t enough to make it competitive. A similar situation is unfolding in the European Union. Brussels has tried to establish a Hydrogen Bank to build a green hydrogen supply chain, but the first auction in April resulted in winning bids ranging from €5.8/kg ($6.34/kg) to €8.8/kg. Likewise, a recent auction for ammonia by Germany’s H2 Global Foundation saw the lowest bid at more than double the cost of ammonia produced from fossil fuels.
Meanwhile, Big Oil is making moves. An alternative way to reduce hydrogen’s carbon footprint is by capturing carbon dioxide and injecting it into depleted oil wells to extract more crude. This “blue hydrogen” cuts gray hydrogen’s emissions by 60%-70% and appeals to consumers seeking a cleaner option without the high costs of green hydrogen. It’s also attractive to the mainstream oil industry, which currently has more resources to invest in new technologies than green hydrogen startups.
Saudi Arabian Oil Co. is already preparing its first carbon-capture project, with bids from Japanese and Korean buyers expected soon. BP Plc is in the final planning stages for a blue hydrogen hub in northeast England, and Shell Plc has issued contracts for a project in Oman. Currently, blue hydrogen seems to be leading the race. More than half of the green hydrogen expected to be operational by 2030 is in the early development stage and could easily be canceled.
In contrast, about half of the blue hydrogen supply has been approved for construction, compared to just 15% of green hydrogen projects. While blue hydrogen is certainly an improvement over gray, the green variety seems unlikely to meet existing demand, let alone achieve its potential to decarbonize additional sectors. Addressing this issue won’t be straightforward.
Government policies have mostly subsidized producers rather than mandating major consumers to use green hydrogen—the opposite approach that helped kickstart the renewable energy boom in the 2000s. Trade tensions may also be discouraging project developers from purchasing cheaper Chinese-made electrolyzers, which could offer a significant cost advantage.
Lower interest rates are needed to reduce financing costs, and stronger official support for clean power is essential to encourage investment in this high-risk, early-stage technology. These challenges may seem daunting, but they are similar to those overcome by solar power, wind, lithium-ion batteries, and EVs. There’s no reason the same success can’t be achieved with green hydrogen. However, if political support falters, Big Oil is poised to step in and dominate the field.
