Is There Hope on the Horizon for Hydrogen?

During the renewable energy bubble of 2020/21, hydrogen equities emerged as the market darlings, with sky high expectations for any company involved in or planning to produce or utilize green hydrogen. Today, those lofty expectations have been substantially tempered, and the stock market bubble has deflated with share prices reverting to pre-COVID levels.

Despite this market correction, political ambitions regarding green hydrogen remain largely unchanged. For instance, the EU continues to target production of 10m tons and import of additional 10m tons of green hydrogen annually by 2030. Similarly, the Biden administration, while less enthusiastic about facilitating imports, aims for 10m tons of production by 2030, 20m tons by 2040 and an ambitious 50m tons by 2050. Although many believe these targets are unrealistic, the incentives lined up by both the EU and the US in 2021/22 are now about to be made available.

We covered the US incentives in our monthly report from June 2023 - Will green hydrogen deliver on its promise of decarbonization? In this report, we will focus on Europe which delivered its first award from the EU Hydrogen Bank in late April. Despite the name, the Hydrogen Bank is not a physical institution but rather a financial instrument aiming to unlock private investments in hydrogen value chains by addressing the initial investment challenges.

In total, nearly EUR 720m was awarded to seven renewable energy projects, five in Iberia and two in the Nordics. The auction was 15 times oversubscribed (EUR ˜12bn) and attracted 132 proposals from 17 different countries. This indicates the high interest but also the fierce competition for funding. This is reflected in the winning bids of between EUR 0.37 and EUR 0.48 per kg of green hydrogen, which to put it in perspective is less than one tenth of the cost of production per kg. It was also well below EUs bid ceiling of EUR 4.5/kg. Without delving deeply into the specifics of the seven winning bids, it is safe to assume that the funding allocated is just one small component of the necessary subsidies needed to bring these projects to fruition.

The seven projects will have until the end of 2029 to commence production to receive the funding. Collectively they will supply a total volume of 1.58m tons of hydrogen over the span of ten years, which translates to only 1.6% of EUs ambitious 2030 goal for domestic production. Fortunately, there will be another EU Hydrogen Bank auction later this year which will be almost four times larger than the first. However, the terms are much less attractive, with a lower ceiling price, only 3 years to get operational and a 10% fine if not completed on time versus 4% in the first auction.

Still, assuming that most projects are rebid, we estimate in an optimistic scenario that the next auction could potentially generate an additional 3-4 million tons of hydrogen production over the course of 10 years. This would bring the EU approximately 3-4 percentage points closer to its 2030 target for domestic production. So, a bit closer, but still very far away.

Although there will probably be more auctions and the EU has a myriad of different subsidies schemes, given the considerable time required to construct large-scale hydrogen plants, we believe it is highly unlikely that the target of 10 million tons per year by 2030 will be met. This challenge is compounded by the fact that no such large-scale plant has been constructed yet, further underscoring the difficulty of meeting these ambitious production goals.

Unfortunately, the size of the target is not the most significant challenge. A critical concern is the scarcity of companies prepared to commit to long-term off-take agreements. Without these agreements, attracting investment for project development is almost impossible. So, what is deterring potential offtakers? Primarily, the cost competitiveness of green hydrogen remains highly uncertain. With the prevailing gas price in Europe, grey hydrogen can be produced for about EUR 2 per kg. Assuming optimistically that green hydrogen can be produced at large scale at EUR 5 per kg in 2030, subsidies or carbon taxes would have to bridge the difference. Second, infrastructure for storing and distributing green hydrogen does not exist and will have to be developed in parallel.

Third, the regulatory framework with regards to carbon pricing, certification standards and renewable energy incentives are still under development. Finally, the demand for green hydrogen as an energy carrier is still relatively limited and considering the improvements in battery technologies, green hydrogen’s competitive position is continuously weakening.

The uncertainties are massive and to put some numbers on the problem, if the EU should subsidise the EUR 3 per kg gap between green and grey hydrogen for both the 10m tons of domestic production and the 10m tons of imported hydrogen, it would incur an annual costs of EUR 60bn from 2030. While this expense would be distributed among member states, it is no small change compared to the total EU budget which stood at less than EUR 190bn in 2023.

However, there is potential for this cost to decrease considerably if renewable energy, which accounts for 65-80% of the total cost of green hydrogen, becomes more readily available at a lower cost. This was the expectation during the emergence of the hydrogen bubble in 2020, but it is now rather accepted that there may be a shortage of affordable clean energy in the coming years.

In addition, when optimistic hydrogen targets were set three to four years ago, little attention was paid to grid capacity and grid access. As highlighted in our March 2024 report – “Roadblocks on the AI highway”, grid capacity has emerged as one of the primary obstacles to the energy transition. Notably, connecting a 200MW green hydrogen plant to the grid ties up similar capacity and resources as a 200MW data centre. However, while the data centre owner can pay a premium for access due to its significant value creation, the hydrogen plant would require substantial subsidies.

The overarching objective of the energy transition is to decarbonise and replace fossil fuels with clean alternatives in the most economically viable manner. As emphasised in our June monthly report last year, unless there is an abundance of clean electricity, the inefficiency of using hydrogen as an energy carrier outweighs its benefits compared to direct electricity utilisation. Consequently, we maintain a sceptical stance on hydrogen’s role in the energy transition.

Joel Etzler


Joel Etzler


    • Portföljförvaltare och grundare av fonden Coeli Renewable Opportunities.
    • Mer än 15 års erfarenhet av investeringar från både publika och private equity-sidan.​
    • Förvaltat fonden Coeli Energy Transition sedan 2019. ​
    • Spenderade sex år på Horizon Asset i London, en marknadsneutral hedgefond.​
    • Började arbeta tillsammans med Vidar Kalvoy 2012.
    • Fem år inom Private Equity på Morgan Stanley.
    • Startade sin investeringskarriär inom tekniksektorn på Sweden Robur i Stockholm 2006.
    • Utbildad Civilingenjör från Kungliga Tekniska Högskolan.

    Vidar Kalvoy


    Vidar Kalvoy


      • Portföljförvaltare och grundare av Coeli Renewable Opportunities-fonden. ​
      • Förvaltat aktier inom energisektorn sedan 2006 och har mer än 20 års erfarenhet från portföljförvaltning och aktieanalys. ​
      • Förvaltat fonden Coeli Energy Transition sedan 2019. ​
      • Ansvarig för energiinvesteringarna på Horizon Asset i London under 9 år, en marknadsneutral hedgefond. ​
      • Erfarenhet från energiinvesteringar på MKM Longboat i London och aktieanalys inom teknologisektorn i Frankfurt och Oslo. ​
      • MBA från IESE i Barcelona och Civilekonom från Norges Handelshögskola.
      • Innan han började arbeta inom finans var han löjtnant i norska marinen.

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