The IEA has urged governments to address a growing imbalance between projected supply and demand in the hydrogen market that threatens to hamper the growth of production and the industry’s supply chains.

Globally, government targets for low-emission hydrogen production call for 27–35mt/yr by 2030, but targets for creating demand account for just 14mt/yr, only half of which is focused on existing hydrogen uses, the IEA said in its Global Hydrogen Review 2023.

That imbalance could hamper the progression of announced production projects to FID and impede the development of supply chains, the IEA said.

“To rectify this situation, governments must clarify their ambitions with regards to demand,” it said. “This should include synchronising targets for low-emission production and consumption, as well as expediting the implementation of concrete supportive policies that can reduce risk in order to foster adoption among first movers.”

“A challenging economic environment will now test the resolve of hydrogen developers and policymakers to follow through on planned projects” Birol, IEA

Uptake of low-emission hydrogen remains “very limited”, accounting for only 0.6% of total hydrogen demand, the IEA added.

It conceded that an imbalance in favour of hydrogen production targets may be acceptable to countries that could become major hydrogen exporters—such as Australia, Chile or Middle Eastern countries.

The IEA’s warning on demand chimes with recent claims by other analysts that national hydrogen strategies, including recent policy updates from Germany and Japan, are too heavily weighted towards the supply side.

The US government, which is offering highly attractive tax credits to production projects under the Inflation Reduction Act, recently acknowledged the need to focus on growing demand to unlock investment in the sector. The Department of Energy announced a $1b funding programme aimed at “jumpstarting” the hydrogen economy by stimulating demand.

Project developers and financiers globally have claimed repeatedly over the last couple of years that difficulties securing long-term offtake deals are hampering efforts to de-risk projects and bring them to FID. “Direct purchase agreements with private sector consumers are beginning to emerge but remain at a very small scale,” the IEA said.

Only 4% of announced production projects have so far reached FID, according to the IEA. More large-scale projects are expected to reach that stage in Europe and North America as a result of major policy initiatives and associated funding, which have been strengthened due to the ongoing energy crisis and regional ambitions to secure value chains, the agency added.

Headwinds

Hydrogen project developers face significant headwinds including inflation and higher borrowing costs. “Against the backdrop of a global energy crisis, high inflation and supply chain disruptions, new projects face rising costs, at least temporarily, that threaten long-term profitability,” the IEA said.

However, investment in the sector maintained momentum in 2022. Global spending on electrolyser installations hit a record of $0.6b—double the 2021 total—according to IEA estimates. An additional $0.5b was spent in 2022 on projects under construction to produce low-emission hydrogen with CCUS.

However, reaching the $41b of spending on electrolyser installations in 2030 envisaged in the IEA’s Net Zero Emissions by 2050 Scenario would require 70% annual investment growth for the remainder of this decade.

“We have seen incredible momentum behind low-emission hydrogen projects in recent years, which could have an important role to play in energy-intensive sectors such as chemicals, refining and steel,” said IEA Executive Director Fatih Birol. “But a challenging economic environment will now test the resolve of hydrogen developers and policymakers to follow through on planned projects. Greater progress is needed on technology, regulation and demand creation to ensure low-emission hydrogen can realise its full potential.”

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Author: Stuart Penson