The world of green hydrogen isn’t short on ambitious goals.
One Department of Energy initiative, for instance, aims to bring down the market price of green hydrogen from $5 per kilogram to $1 by 2031, an 80% reduction. And the International Energy Agency’s roadmap to net-zero emissions includes a goal of 550 gigawatts of hydrogen electrolysis capacity by 2030.
This vision for electrolyzers — devices that produce hydrogen by splitting water with electricity, essentially the necessary input for hydrogen creation — represents growth of several orders of magnitude more than the 700 megawatts currently installed.
Currently, though, most hydrogen is produced using natural gas via a process that also generates carbon emissions. In the U.S., only 1% of the 10 million metric tons of the country’s annual hydrogen supply is produced using electrolysis.
Scaling up electrolysis capacity, however, has the potential to produce a truly green fuel. Because hydrogen produces only water as a byproduct, if the electrolysis is powered with renewables, its entire lifecycle can have a negligible climate impact. That potential is especially meaningful for difficult-to-decarbonize industries like steel-making and shipping, and ones that currently consume lots of hydrogen like the chemical industry.
But convincing potential customers to switch to green hydrogen is a big hurdle. It doesn’t help that the number of electrolyzers produced each year remains low, with many technologies still under development and jostling for market dominance. While government incentives have begun to spring up, the global market still lacks the certainty needed to break its current holding pattern.
Green hydrogen is essentially experiencing a chicken-and-egg dilemma: hydrogen producers are unwilling to invest in large projects due to concerns about lack of customer demand, and potential customers are unwilling to commit to big contracts due to concerns about lack of supply.
The stalwarts: alkaline and PEM electrolyzers
Today’s electrolyzer market is dominated by alkaline and proton exchange membrane (PEM) electrolyzers. The former is the reliable workhorse of electrolysis, having been used in industrial processes for over a century. Meanwhile, the latter is the younger entrant, full of potential. (There are several other promising technologies, such as solid oxide electrolysis, but they are further from commercialization.)
Raffi Garabedian, CEO and co-founder of PEM electrolyzer manufacturing company Electric Hydrogen, characterized alkaline electrolysis as low tech but labor intensive. The electrolyzers use a liquid electrolyte to pass hydroxide ions between electrodes. Each individual cell stack, consisting of the electrodes and the electrolyte, is inexpensive to manufacture, which makes scaling up manufacturing capacity relatively easy. But the equipment and work involved quickly add up and eat into hydrogen producers’ profit margin, especially for large plants that have megawatts or gigawatts of capacity.
“When you look at an alkaline electrolyzer, it’s about the size of a small school bus, and that might be a two or three watt electrolyzer,” said Garabedian, adding that in addition to the large size, technical “complexity drives cost.”
These costs make it difficult for producers to compete with the price of hydrogen generated using fossil fuels, which is about a dollar per kilogram of hydrogen. And, given alkaline electrolysis’ maturity as a technology, competition is unlikely to get less stiff.
PEM electrolyzers, though, could eventually be operated much more cheaply. They take up less space than alkaline electrolyzers and use a solid electrolyte membrane that facilitates the passage of protons while separating the oxygen and hydrogen gasses produced.
However, these cell stacks can be expensive to manufacture because of their complexity and delicacy. And PEM electrolyzers also use rare and expensive platinum and iridium catalysts whose prices can fluctuate, like they did last summer due to a power crisis in South Africa, where most of the metals are produced. Researchers are currently trying to find cheaper alternatives to replace those metals as catalysts.
However, PEM electrolysis is the technology of choice for companies like Ohmium and Garabedian’s Electric Hydrogen in part because of its ability to handle fluctuations in the power supply. For green hydrogen producers reliant on renewables to power their operations, that’s invaluable. Alkaline electrolyzers, in contrast, require steady sources of power, which can lead to inefficient power use when pulling electricity from clean energy sources.
“Being able to follow closely the renewable profile is important,” said Luca Mastropasqua, assistant professor of engineering at the University of Wisconsin-Madison and director of the hydrogen and electrochemical lab there. “Otherwise you will lose a lot of the renewable electricity that you wouldn’t be able to capture from electrolysis.”
To build without demand?
Garabedian said the state of electrolyzer manufacturing really boils down to one thing: demand.
“When people are ready to buy hydrogen, that triggers everything else upstream of it to happen,” he said. “The constraint is always, ‘Who’s going to buy the gas? What’s it being used for?’”
When Electric Hydrogen was founded in 2021, the U.S.-based company originally planned to target European and Middle Eastern markets where there were more incentives for green hydrogen. But in August 2022, the U.S.’s Inflation Reduction Act shook up the entire industry.
The IRA includes a clean hydrogen production tax credit that subsidizes the cost of production for companies that generate green hydrogen. Electrolyzer companies began making plans for manufacturing facilities in the U.S. For instance, the Norwegian electrolyzer manufacturing company Nel announced plans in May for a new four gigawatt alkaline and PEM electrolyzer manufacturing plant in Michigan.
Nel communications director Lars Nermoen said the incentives in the U.S. are attractive because they are clear and predictable; in the comparably murky EU, companies have to go through a government vetting process to determine whether they qualify for subsidies. Nel’s two biggest orders are from the U.S.: Nebraska-based green fertilizer startup J. Westling & Co and Woodside Energy, which plans to produce hydrogen for heavy-transport vehicles in Oklahoma.
But Garabedian said the “hype to reality ratio” remains very high.
While announcements and even plans abound, he said, “very few of those projects have matured to a point where there’s a financial investment decision being made.”
That’s in part because the U.S. Treasury Department has yet to release its guidance on how to calculate the production tax credit for different hydrogen production methods, which will essentially define what qualifies as green hydrogen. A loose interpretation could incentivize electrolysis that’s powered by fossil fuels, while a stricter one could require green hydrogen producers to power electrolysis solely with renewables.
The definition matters, Garabedian said, because it changes the types of electrolyzers customers are likely to buy. With a stricter definition, for example, PEM electrolyzers would make more sense because they are able to adjust their hydrogen production based on the amount of solar and wind power available.
When people are ready to buy hydrogen, that triggers everything else upstream
In the meantime, electrolyzer manufacturers are taking a wait-and-see approach. Garabedian said companies are making capacity reservation agreements with customers to lock in future prices for orders. That allows electrolyzer manufacturers to plan for future capacity, but doesn’t guarantee a future sale.
The IRA stipulated that the Treasury Department provide its guidance by mid-August, but it has yet to do so.
The anatomy of green hydrogen cost reduction
Then there’s the question of building a market for green hydrogen — a necessary prerequisite of a market for electrolyzers.
Garabedian said countries should also address the need for demand-side policies to nudge customers to switch to green hydrogen from hydrogen generated using natural gas. Some industries may be susceptible to end-consumer pressure to be more green, like the steel industry.
“But if you look across like these big industrial applications in the U.S., there’s really no demand-side incentive to switch,” Garabedian said. “So there are people who are making the switch because they care for one reason or another about the emissions aspect of their product. That’s a self-imposed decision to pay more for something.”
Whether green hydrogen can truly compete with fossil fuel-produced hydrogen ultimately will come down both to comparative costs, and to market certainty.
And on cost, green hydrogen is way behind. Even with substantial help from IRA-supplied tax credits, green hydrogen might cost the average ammonia producer $2 per kilogram; that’s still twice as much as the fossil-fueled hydrogen that goes for $1 per kilogram.
Of course, electrolyzer costs are a major line item, but there are certainly others. These variables include the cost of clean energy, the ability to transport that energy to electrolysis plants, the supply chains for other electrolysis equipment like transformers, and the availability of water.
“It’s not just the electrolyzers, it’s not just the offtakers — it’s the full value chain,” Megan Reusser, hydrogen technology manager at Burns & McDonnell, said at a September RE+ panel.
Bringing down these component costs will take major investment, both from the government and from the industry itself. But for now, it seems both are waiting for the green hydrogen market to mature before gambling on more investment.
A recent IEA report urged governments to quickly implement the support programs for green hydrogen “first movers,” because waiting too long to do so could hold the industry back.
The delay, the report said, “is hindering investment decisions for planned projects whose economic feasibility depends on public support.”
