In a world increasingly driven by the promise of a low-carbon future, hydrogen has emerged as the poster child for green energy. But despite all the fanfare, clean hydrogen is facing a bruising reality check. The entrenched dominance of “gray hydrogen”—produced using natural gas without carbon capture—is proving to be a Goliath against which clean hydrogen struggles to compete.
The unyielding hold of legacy sectors
Ammonia, methanol, and oil refining are the legacy sectors that drive the global demand for hydrogen today, consuming a colossal 95 million metric tons (Mt) annually. Yet, despite the growing chorus of climate pledges, most of these sectors are fiercely resistant to change. Why? Because it’s not just about switching feedstock—it’s about economics.
Clean hydrogen, made through electrolysis using renewable energy, is still too costly. For any significant disruption, as per BloombergNEF, clean hydrogen’s price must drop below $3 per kilogram (kg) to even be in the running, but in many markets, it’s nowhere close.
Countries like the United States, Russia, Canada, and Middle Eastern giants—sitting on a treasure trove of low-cost natural gas ($2-$3 per MMBtu)—are comfortably producing gray hydrogen at prices clean alternatives can’t touch. This means that even if green hydrogen prices fell to $1.5/kg, the economics simply don’t add up for most of these fossil-fuel powerhouses.
Europe and India: The last bastions of hope?
If there is any silver lining, it might be found in Europe and India. Both regions are grappling with high gray hydrogen costs and are fortifying their policy arsenals to incentivise clean alternatives. The EU, for example, is pushing decarbonisation through its Renewable Energy Directive III, which could spur over 1.5Mt of clean H2 demand annually by 2030. Meanwhile, India’s hydrogen mission is gaining traction, driven by high costs of imported natural gas and a growing appetite for energy independence.
Yet, despite all the optimism, only a fraction of global demand seems likely to transition to clean hydrogen over the next decade. Methanol production, which is heavily concentrated in China, is projected to be the hardest nut to crack. With over 60% of the global methanol supply rooted in China, and no strong policy mandates in place, any meaningful switch would be akin to turning a battleship mid-ocean.
A shrinking legacy market: Hydrogen’s dwindling fortunes?
The catch? The legacy hydrogen market itself is poised to shrink. BloombergNEF’s latest New Energy Outlook 2024 forecasts a bleak future for these sectors. Under the Net Zero Scenario, demand could plummet by up to a third as sectors like ammonia production—primarily used for fertilisers—see their volumes cut in half. Oil refining, too, is nearing its peak, with demand set to decline as road fuels lose ground to electric vehicles. Methanol might be the lone survivor, buoyed by demand in chemical and plastics production, but its total annual H2 consumption of 15Mt is a mere fraction of the combined 80Mt devoured by the other two.
Can clean hydrogen ever win?
To make matters worse, even where there is demand, clean hydrogen often can’t compete. Consider the US: it offers generous subsidies of up to $3/kg for green hydrogen and $85/ton for carbon capture projects, making retrofitted hydrogen plants theoretically viable. Yet, without such extraordinary incentives, most producers would rather stick with gray hydrogen, since natural gas is available at dirt cheap pricing of $2-$3/MMBtu in these regions.
This grim reality is reflected in the EU’s decarbonisation landscape. Current mandates cover just 8.6Mt of the global 95Mt hydrogen demand. That leaves 90% of the market to the mercy of economics—and right now, the numbers aren’t in favour of green hydrogen.
China and India: The wildcards that could tip the scale
China and India might be the unexpected game-changers in this saga. With their relatively low green hydrogen production costs, the gap between gray and green is narrowing faster than elsewhere.
In China, gray hydrogen costs around $2.1/kg (which comes from the fact that it produces ammonia at a marginal cost of $360 – $500 per ton), while in India, the figure hovers near $2/kg (India imports expensive natural gas to produce ammonia, at a marginal cost of $350 per ton in 2023, equivalent to $2/kg gray hydrogen cost).
If project costs fall further, these two giants could bridge the gap sooner than expected. But there’s a catch: buyers in these price-sensitive markets are notoriously averse to paying any sort of green premium, making large-scale adoption a risky bet.
However, with Europe and India driving new demand through decarbonisation mandates, clean hydrogen could potentially replace gray hydrogen in these sectors—particularly where ammonia imports remain high. Import substitution, after all, is a powerful motivator, especially as global supply chains wobble under geopolitical and market pressures.
Countries like the US and Morocco, which together account for over 60% of ammonia imports, could see a shift towards green hydrogen if local production ramps up. But without clear policy signals and firm carbon pricing, even these hopeful scenarios could stall.
The brutal reality: Margins, mandates, and market dynamics
The bitter truth is that green hydrogen’s path to market dominance is littered with obstacles. Even if it reaches $1.5/kg, the total cost of green ammonia or methanol would still be significantly higher than running costs for existing gray facilities. Carbon pricing might lift the cost of gray hydrogen, and subsidies could reduce clean hydrogen’s burden—but unless these measures are ramped up to over $100/ton or more, they won’t change the market dynamics significantly.
The bottom line: The fight for legacy demand isn’t over
Scaling clean hydrogen in legacy sectors is like fighting with one hand tied behind its back. Most producers will stick with what they know—gray hydrogen—until the economics turn decisively in favour of green alternatives. For now, clean hydrogen is stuck playing catch-up, waiting for its moment in the spotlight. But with aggressive policy pushes in Europe and India, and with technological innovations just around the corner, it might not have to wait forever.
The stakes are high, and the battle is fierce. Will clean hydrogen rise as the champion of a decarbonised world, or will it be confined to the periphery, a promising technology unable to break free of its economic chains? Only time will tell. For now, the race to $2/kg is on—and it’s anyone’s game.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
This content is protected by copyright and may not be reused. If you want to cooperate with us and would like to reuse some of our content, please contact: editors@pv-magazine.com.
By submitting this form you agree to pv magazine using your data for the purposes of publishing your comment.
Your personal data will only be disclosed or otherwise transmitted to third parties for the purposes of spam filtering or if this is necessary for technical maintenance of the website. Any other transfer to third parties will not take place unless this is justified on the basis of applicable data protection regulations or if pv magazine is legally obliged to do so.
You may revoke this consent at any time with effect for the future, in which case your personal data will be deleted immediately. Otherwise, your data will be deleted if pv magazine has processed your request or the purpose of data storage is fulfilled.
Further information on data privacy can be found in our Data Protection Policy.