Low-carbon hydrogen can potentially solve one of the key challenges of the energy transition: reducing carbon emissions from industrial sectors such as chemicals, steel, and heavy transport. All of these are industries where emissions are hard to abate, and alternative solutions are either unavailable or difficult to implement.
The momentum behind this solution continues to grow, although there are limited offtake agreements in place. What are offtake agreements, exactly? Offtake agreements are commitments between producers and buyers. The producer agrees to create and supply a predetermined quantity of a product (such as low-carbon hydrogen), and the buyer promises to purchase it at a set price and time. It’s a way to guarantee a market for new products, giving both sides the security and confidence to invest and grow.
Ameliorating financial burdens in ways like this is key to making low-carbon hydrogen a reality. According to a recent International Energy Agency report, “Low-carbon hydrogen production can grow massively by 2030 but cost challenges are hampering deployment.” That’s because identifying tech solutions that address the emissions reduction challenge at the right economic point requires a new approach to innovation, engineering, and execution. In fact, it requires the execution of first-of-their-kind projects to quickly capture learnings that enable future deployment at scale.
Stimulating demand for low-carbon hydrogen
To promote the industry's growth, more than 50 countries have announced their own hydrogen strategies and more than USD 300 billion in total incentives. Most of the new policies designed for implementing these plans are focused on setting production volume and cost targets, along with providing incentives for hydrogen production. The result? An increased interest in the sector.
By the end of 2023, more than 1,000 projects had been announced globally to replace carbon-intensive energy generation with the low-carbon hydrogen alternative. Annual production could reach 38 million metric tons in 2030 if all these projects are realized. However, because of cost challenges, only 4% of this potential production has reached or progressed beyond the final investment decision (FID) stage.
There’s limited demand for additional volumes of low-carbon hydrogen, and fewer than 1% of announced projects have a binding offtake agreement. The entire value chain—including consumption, transport, and storage—requires development. In other words, if we truly want to grow demand, then we must:
- Establish a favorable and stable regulatory framework to create the right market conditions
- Foster innovation across the value chain to address the technical and economic challenges of this emerging industry
- Develop the required infrastructure to connect supply with demand centers.
Tech road map: Innovate, engineer, execute
So, what does the tech readiness road map look like? And what are some strategies for expediting progress along this path?
Innovation
New low-carbon hydrogen tech must drive down production costs, with the goal of providing not just a viable alternative but a competitive, long-term solution. This journey involves transforming potential into reality, aligned with the maturity and growth of the low-carbon hydrogen market. The goal is to improve the economics of low-carbon hydrogen production—an improvement that comes from both innovation and volume. Before we have volume, however, we must not only demonstrate the tech, but also scale it until we reach the ideal techno-economics tipping point.
On the production side, the challenge is the level of tech maturity and cost point of low-carbon hydrogen production. Even the most mature low-carbon hydrogen production technologies have not yet been deployed at scale. For this, the low-carbon hydrogen market—while very large—will take several decades to mature.
This evolution can be seen in three phases. During the first phase, multiple demonstration projects must be built across a variety of use cases. The purpose of these is to fully develop and derisk the production tech, along with achieving the significant cost reductions needed to reach the aforementioned economic tipping points. On the consumption (demand) end, it’s to learn how to integrate low-carbon hydrogen into both current and new applications, all while gaining confidence in a mature and supportive regulatory framework.
Practically, this means processes that use hydrogen today will start by blending small volumes of low-carbon hydrogen with current grey production, and new applications will foster the piloting of innovative solutions that enable using hydrogen to decarbonize their use case.
Once project developers become confident in the market and technology, contracted volumes increase, and the economics are proven, we will move into the second phase of increasing installed production capacity. This will translate into small- to mid-size unit demand and higher low-carbon hydrogen blending percentages in existing large-scale processes such as ammonia or chemical plants. In addition, new applications such as steelmaking will incorporate hydrogen in their facilities to displace natural gas.
The experience gained in this second phase will give producers and consumers the confidence they need to fully switch to low-carbon hydrogen. Then, in the third and final phase, hydrogen use could become the standard across multiple industries and applications, driving very strong demand growth until economies of scale are reached. Carbon pricing in key industrial economies, combined with the cost reductions that accompany scale, is then expected to materially support economics.
Engineering
Understanding the diverse applications of low-carbon hydrogen is crucial, especially for hard-to-abate industries such as steel, because upcoming tech solutions must be tailored and designed for specific use cases. This approach doesn't just cater to existing demand, but rather actively enables and expands it.
To accelerate small- to mid-scale demonstration projects, for example, the best path has proved to be collaboration between the end user, tech deployment team, and project developer for robust front-end engineering and design. It’s an approach that enables the accurate techno-economic assessment of such projects.
Execution
Deploying pilot projects across high impact use cases is a must for shifting from theory to practice. These projects are more than just demonstrations; they’re proof of what can be achieved and catalysts for widespread adoption.
A developed hydrogen economy will happen in phases combining prosumers—entities producing and consuming hydrogen on site—with a network of interconnected hydrogen production and demand centers. This is followed by incremental infrastructure development driven by those demand centers. In the first phase, we see prosumers announcing projects at various scales to reduce the carbon intensity of their current facilities.
Many of the projects being announced are based on hydrogen hubs, a model where participants benefit from the economies of scale of shared infrastructure and consolidated volumes of future demand. Given their size, however, these projects require large investments. Not to mention the limited number of demand offtake agreements represents a challenge in supporting the FID threshold, thereby affecting innovators' ability to prove the viability of their novel tech.
That said, it seems that small- to mid-scale distributed projects can provide a quicker route to proving and derisking tech. When these projects are designed to include the full value chain from production to demand (on the right scale), they offer a platform that attracts the investment levels necessary to reach FID milestones faster.
After the barriers of creating industrial clusters are overcome, different supply and demand centers can be connected within a regional network. In this phase, production sites can be placed close to areas where there is an abundance of low-cost, clean electricity or natural gas, while demand sites can be situated elsewhere.
Overcoming production and demand challenges
The momentum behind low-carbon hydrogen is strong, but faster action is required to create demand and unlock investment that can accelerate both the scaling up of production and reduction of its cost. A few companies are striking deals (i.e., the offtake agreements I mentioned earlier) to acquire low-carbon hydrogen, with about 2 million metric tons annually earmarked to date.
The number of such agreements, however, is still limited. And some tech players are seen moving ahead without them. They’re deploying demonstration projects to prove concepts and understand the techno-economic challenges in depth. Because, as decarbonization pledges and regulations continue to propel the low-carbon hydrogen industry forward, innovative tech-led solutions that meet techno-economic project goals are essential.
The global shift toward a low-carbon to carbon-free economy underscores the urgency of tech and engineering innovation that helps us meet our decarbonization challenges, especially in hard-to-abate sectors. While the demand side makes pledges like SteelZero, which commits to significant decarbonization, transitioning to “green” decarbonized products requires unprecedented collaboration to achieve the economic viability necessary for the industry's growth. This includes partnerships across multiple stakeholders—from tech companies to industry producers to end-users themselves—and a supportive framework of incentives and investments dedicated to accelerating the pace of change.
