How will the production and customer markets develop, and what influence will this have on the future price of “green hydrogen”?
The development of the production and customer markets for green hydrogen is strongly influenced by both regulatory pressure and supply-side dynamics , and ultimately has an impact on future price developments.
- Existing demand for various application areas (e.g. hydrogen in the chemical and refining industry, ammonia in fertilizer production, methanol in the chemical industry)
- Additional demand resulting from the decarbonization of other hard-to-abate sectors. These include, for example, steel production (hydrogen-based direct induction instead of blast furnaces), the shipping industry (e.g. replacing heavy fuel oil with green methanol) or aviation (Sustainable Aviation Fuel).
In order to redirect this demand to CO2-free solutions, the pricing of the corresponding CO2 emissions must be carried out within the framework of regulation. Their implementation has been significantly accelerated, in particular by the European Commission.
a) Regulatory framework conditions determine demand
The regulatory environment for decarbonisation has been tightened in recent years by the introduction, redesign and implementation of RED I, II and III, FuelEU Maritime, ReFuelEU and the European Emissions Trading System (EU ETS).
For example, the ReFuelEU Aviation Regulation (2023) is a key regulation that aims to increase the use of renewable fuels in European aviation. The directive not only mandates Sustainable Aviation Fuel (SAF) quotas, but also introduces partial quotas for electricity-based, synthetic eSAF and promotes the growth of green hydrogen as a feedstock.
This pressure from legislation, combined with international and national initiatives such as the European Hydrogen Bank and the Fit for 55 package (as well as several national funding schemes), has created a regulatory-backed market basis for green hydrogen and related fuels. These oblige airlines, the shipping industry and industrial companies to comply with the regulations and lead to fines if violated. Violations of eSAF quotas cannot be remedied by fines either, so the pressure to use eSAF remains unchanged regardless of any fines.
While the regulation verbally primarily focuses on decarbonization efforts, it should be noted that green hydrogen and hydrogen derivatives also offer the advantage of reducing the European Union’s dependence on oil- and gas-producing countries by building its own fuel production capacities. This aspect is increasingly relevant against the background of the currently existing geostrategic conflicts.
b) Supply-side dynamics
On the supply side, the prospects of significantly falling production costs for green hydrogen in the short to medium term depend largely on the learning curves, which are currently not steep enough. While regions such as the Nordic countries benefit from favourable energy production conditions, including the lowest levelised cost of electricity in Europe, the main drivers for future cost reductions, i.e. increasing energy efficiency or reducing investment costs, are associated with significant challenges.
CAPEX accounts for only 20-30% of total production costs, so reducing them overall would have a limited impact. On the other hand, significant increases in efficiency require the further development of new or revised technologies. These are associated with considerable (technological) risks, long development times and pilot phases. Unless sufficient projects are implemented in the short term to support these technological advancements, it is unlikely that significant cost reductions will be achieved in the medium term through technological breakthroughs/substantial efficiency gains or CAPEX reductions. Investments in new technologies are also very challenging for equity and debt investors.
First-mover advantage
The current insufficient supply of production equipment to meet regulatory demand requirements gives the pioneers an advantage. While demand for hydrogen is projected to skyrocket in some sectors, actual production capacity is lagging behind. This creates a scenario in which early market participants can capture market share in the short to medium term and benefit from top prices. The ability to deliver green hydrogen at competitive prices will vary greatly depending on the region and production process. Projects in regions with low-cost renewable electricity generation will benefit from both lower production costs and geographical price differences. However, the decisive factor for the ramp-up of the hydrogen industry will be the maintenance or, if necessary, even tightening of the regulatory framework (e.g. no “buy-out”, clear verification of compliance with EU criteria in the production process) and/or corresponding incentives for customers despite the current tense economic situation in Europe.
