Schroders Greencoat’s James Samworth (Co-head of Energy Transition) and Kristian Høeg Madsen (Co-head of Hydrogen) explore the rationale for, and ramifications of, renewed optimism in green hydrogen.

The investment thesis for green hydrogen was always compelling. Hydrogen has been used for decades in industrial processes ranging from refining to fertiliser production. Crucially, as a zero-emissions ‘clean’ fuel, which also acts as an effective energy carrier, it holds much promise to support the decarbonisation of industries across the economy, including long-haul transportation, chemicals, and steel production.

However, most of the hydrogen that is used today comes from fossil fuels such as natural gas (predominantly) or coal, and the processes used to extract it also generate carbon emissions as a by-product. As a result, hydrogen production currently accounts for around 2% of global greenhouse gas emissions.

Enter ‘green’ hydrogen, which is instead produced from water using renewable energy-powered electrolysis. No fossil fuels are used to source the hydrogen, no emissions are produced when extracting it – and the resulting fuel is emission-free, too. Some thought this was the fuel of the future that would help to power the global energy transition.

Excitement over the potential for green hydrogen reached a peak in the early 2020s, with the Hydrogen Council, a Belgium-based industry group, predicting in 2021 that there would be $500bn invested in projects by 2030. Instead, high costs, production complexities and slow implementation of government support led to project delays and a loss of enthusiasm for the sector among investors.

Green shoots

Now, though, is a good time to take a fresh look at green hydrogen, as green shoots are once again beginning to emerge.

In its Global Hydrogen Review 2024, the International Energy Agency (IEA) notes that both demand and production of low-emissions hydrogen, which includes ‘blue’ hydrogen that is produced from natural gas through a process that captures and stores carbon emissions, was estimated to be around 1Mt (million tonnes) in 2024. Production is up more than 50% since 2021, with all of that growth attributable to renewables-powered green hydrogen.

Meanwhile, installed electrolyser capacity to produce green hydrogen was expected to reach 5.2GW last year, a 9x increase from 2021 and a threefold increase year on year. Investment in electrolyser installation reached $7bn in 2024, up from just $300m in 2021.

Of course, these figures are still well short of the potential that was once envisaged for the sector – and of the ramp up the IEA has projected is needed by 2030 under the agency’s scenario for the global energy sector to reach net zero emissions by 2050. This included an assumption of 56 Mt of low-emissions hydrogen production by the end of the decade, 49 Mt of which would be green hydrogen.

Expected eventual production of green hydrogen from projects that have been announced stood at 37 Mt in 2024 – and only a fraction of those have actually reached their final investment decision, meaning most currently exist as theory, rather than reality.

Growing potential

Clearly there is a long way to go and investors are currently proceeding with caution, but there is undoubtedly renewed optimism towards the sector – and a combination of government support and policy interventions (carrots and sticks, if you will) could help to accelerate more projects into production.

First, the carrots. Governments around the world are investing billions into new subsidies, tax breaks and direct project support for green hydrogen infrastructure. Announcements in 2024 included:

• European Commission approval for a combined €6.9bn ($6.7bn) in state aid subsidies from France, Germany, Italy, the Netherlands, Poland, Portugal and Slovakia, which is expected to be combined with €5.4bn in private investment to support 33 projects;
• approximately €2bn from the Spanish government for subsidy programmes, part of a wider package of renewable energy support;
• confirmation of £2bn ($2.5bn) of subsidies from the UK government for 11 projects approved in its first hydrogen project allocation round, with applications for the second round in progress;
• the first tranche of a €1.9bn ($2bn) subsidy auction from the European Hydrogen Bank; and
• $12.6bn in funding from the US Department of Energy to deliver hydrogen projects at three of the largest ports in California.  

As for the sticks, governments around the world are introducing new rules that will require – or indirectly drive – companies to acquire more green hydrogen in future. For example, the EU last year adopted the Renewable Energy Directive, which among other things compels industrial users to source at least 42% of their hydrogen from renewable sources by 2030, increasing to 60% in 2035. The directive also includes a binding target for 5.5% of all transport fuels in 2030 to be renewable fuels of non-biological origin (RFNBO), referring to renewable hydrogen and derived alternatives, or advanced biofuels.

Elsewhere, in Australia, new emissions reductions laws are expected to have the most significant impact on the likes of steel producers and transport groups, which is driving fresh demand for local green hydrogen projects.

Renewables catalyst

How will this growth in green hydrogen – both actual and potential – translate into renewable energy demand? These are sectors that are intrinsically linked, given that the availability of renewable energy capacity is, by definition, essential to growing green hydrogen production. In fact, from 2030 EU rules will require green hydrogen production to be matched with the renewable energy used to generate it on an hour-by-hour basis.

Fertile ground for growth

Having come through a challenging period, it is clear there are green shoots emerging and renewed optimism in the green hydrogen sector. While the initial surge of interest in speculative use cases has receded, projects that were kicked off over a number of years have started to come to fruition, while electrolyser installation and production is now ramping up, which brings a range of interesting investment opportunities.

The potential for this clean fuel to be a key driver of the global energy transition is unchanged, but the use cases of hydrogen are now more clearly understood to be those where it carries the most value – and there is increasing policy and financial support coming from governments that should help to overcome hurdles to bringing projects online. Investors are proceeding with caution, however, and knowledge of the risks inherent to the sector, along with a customer-centric approach focusing on projects that are linked directly to demand, is key.

Importantly, the growth that is beginning to emerge in the sector will, by its nature, increase demand for renewable energy generation – and there is evidence that it could in time become a key driver of increasing renewables capacity globally.

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