Green Hydrogen Plans Clouded by Uncertainty
December 8, 2024
Despite the massive hype surrounding Power-to-X (PtX), most of the world's announced green hydrogen projects lack financing. The market is deemed far too risky by stakeholders.
According to the authors of a study from the University of Copenhagen, actors must be compelled to invest in a genuinely green manner.
PtX, which converts green electricity into hydrogen and other molecules, has been referred to as a cornerstone of climate policy. However, the current costs of producing PtX products are significantly higher than those of producing fossil-fuel alternatives.
While one grand hydrogen project after another has been announced, both in Denmark and around the world, widespread private investment has yet to materialize. As such, many hydrogen projects have been delayed or abandoned. Globally, projects that have reached a final investment decision account for only 4% of the projected hydrogen production in 2030.
As of 2022, only 0.1% of the world’s 95 million tons of hydrogen production is green. Natural gas (grey hydrogen) and coal (black or brown hydrogen) account for 83% of global hydrogen production, while the rest comes from fossil-based refinery byproducts.
The International Energy Agency (IEA) estimates that green hydrogen will need to account for 34% of total hydrogen production by 2030 in order to align with global climate goals.
Social scientists Oliver Bugge Hunt and Joachim Peter Tilsted from the University of Copenhagen’s Department of Food and Resource Economics examined why these investments have yet to materialize at scale. Through hours of interviews with industry stakeholders, reviews of documents and their participation in conferences and workshops, the researchers have identified the main reasons behind the lack of investment in green hydrogen.
“What our study shows is that green hydrogen is simply seen as a bad investment,” says Hunt. Overall, the study concludes that, among investors and energy developers, the prevalent view is that the risks associated with hydrogen projects far outweigh any expected returns.
Investor uncertainty partly stems from the fact that the electrolysis technology that PtX relies upon is still relatively untested at the necessary scale. This raises doubts about whether PtX plants can perform as expected, making the costs and revenue potential – which run into the billions – highly uncertain. Furthermore, it is a new field with ever-evolving regulations.
“Investments are dependent upon requirements for environmental approval, safety and determining when a product can be classified as green hydrogen. And then there's the infrastructure. When will pipelines be laid to transport hydrogen? What will it cost to use them? These questions remain unanswered and are in constant flux,” says Hunt.
For instance, in October, the Danish government announced that a planned hydrogen pipeline to Germany would not be established until 2031 at the earliest, whereas the previous target was scheduled for 2028.
In addition to pension funds and private equity firms, potential green hydrogen investors also include oil and gas companies. Although most oil and gas giants have announced large-scale PtX projects, very few allocate them more than a fraction of their investments.
According to the study, large oil and gas companies are actually better positioned than green energy companies to finance large-scale hydrogen projects, as the hydrogen industry has more in common with the oil and gas sector than with, for example, wind and solar. These companies can leverage their expertise, infrastructure and established relationships with potential buyers.
“Moreover, in recent years, oil and gas companies have generated enormous profits and are well-capitalized to make these types of investments,” says Hunt, while highlighting the downside of their advantageous position as well.
While subsidies could mitigate risk and make the market more attractive for investors, the researchers emphasize that climate change demands far more robust action.
Tilsted points out that “oil and gas companies have no interest in reducing their fossil fuel profits. Subsidies alone won't suffice. Without concurrent efforts to phase out fossil fuels, expand renewable energy sources like wind and solar and ensure climate-literate use of green hydrogen, PtX risks becoming another layer on the fossil energy system. Besides not ensuring a genuinely green transition, a subsidy-only approach would lead to a limited number of private actors reaping any rewards.”
