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Business model and planning approach for hydrogen energy systems at three application scenarios

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Hong Zhang , Tiejiang Yuan , Jie Tan; Business model and planning approach for hydrogen energy systems at three application scenarios. J. Renewable Sustainable Energy 1 July 2021; 13 (4): 044101. https://doi.org/10.1063/5.0031594

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Green hydrogen is used as fuel or raw material in power systems, transportation, and industry, which is expected to curb carbon emissions at the root. First, a unified energy system consisting of clean power generation systems, hydrogen energy systems (HESs), and transmission systems was proposed, and the characteristics of hydrogen load in different fields are analyzed. Possible business models for HESs in industry and transportation are then presented, cost and benefit functions for stakeholders of HES were created, and a business model with multi-party participation was modeled as a multi-objective optimization model. In a power system, the business model of combining two operating modes for hydrogen storage was proposed at the power generation side as well. Finally, three HESs were designed for a chemical plant with a hydrogen demand of 1000 Nm 3 /h, a hydrogen refueling station with a daily hydrogen load of 600 kg, and a 100% clean power generation system, respectively. The results of the case study show that one or more feasible business models (i.e., all stakeholders are profitable) can be found in both industrial and transportation by the HES planning approach proposed, while the internal rate of return of HES installed on the generation side is less than 5% due to high investment cost at this stage and low utilization rate; nonetheless, the profitable strategies are shown by 3D graphics.

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Business Opportunities in Low-Carbon Hydrogen

While the market for blue and green hydrogen takes shape, some companies are already climbing the experience curve.

By Aaron Denman, Søren Konnerup, Peter Meijer, and Brian Murphy

• June 22, 2021

At a Glance

• The supply of blue and green hydrogen is still small, but energy, natural resources, and industrial companies are beginning to explore how customers will use hydrogen.
• Economic feasibility will vary greatly depending on the availability of low-carbon alternatives, which will affect whether regions export or import blue and green hydrogen.
• Consortia of companies are forming around the opportunity to climb the experience curve and gain early-mover advantages.

This article is part of Bain's 2021 Energy and Natural Resources Report.

As climate change has risen to the top of the agenda for governments, investors, and companies, it’s becoming clear that traditional abatement strategies won’t get us to the goal of net-zero emissions, even with better energy efficiency and the introduction of vast amounts of renewable energy, biofuels, batteries, and carbon capture. Other innovations will be needed, and among the most promising is low-carbon hydrogen, which will help close the gap in industries that could prove hard to abate otherwise, including heavy-duty transportation, steel manufacturing, and production of fertilizer and methanol.

The current market for hydrogen is about 115 million metric tons, but Bain’s research estimates this could increase to 300 million metric tons by 2050, with the low-carbon component growing from virtually nonexistent to most of the supply. (For more on the developing market for hydrogen, see “ Five Imperatives to Thrive in a Hydrogen Future." ) Growth rates in green hydrogen (produced from zero-carbon sources) and blue hydrogen (produced from low-carbon sources) will outpace traditional energy markets, creating attractive opportunities along the value chain.

Hydrogen’s feasibility will vary across regions and industries, and many companies are already experimenting in consortia to expand hydrogen’s reach. Most are grappling with the same questions. What’s the best way to participate in the burgeoning hydrogen market? What are the most attractive opportunities, where should we play in the value chain, and how do we ensure we have the right capabilities to move forward?

Identifying opportunities

Much of the attention has focused on how to supply low-carbon hydrogen at prices competitive with gray hydrogen (made from fossil fuels) or other low-carbon energy sources, but customer demand will ultimately drive the market. Leaders start by developing a clear understanding of their customer’s needs, then figure out where hydrogen could make sense in filling them. This requires determining whether the cost of hydrogen can be competitive, given regional dynamics, regulatory incentives, and other low-carbon alternatives. Even when it cannot, some customers may be willing to pay more to meet their own sustainability goals.

Early projects show several different approaches, including some that are already feasible without subsidies, and others intended to develop new markets (see Figure 1). 

Hydrogen projects show a range of models; some are based on market economics and others depend on subsidies

For most applications, low-carbon hydrogen isn’t yet competitive with other low-carbon technologies, but there are a few exceptions, depending on location and other factors. Forklifts are one example. Because the refueling time is much faster than for a battery, and because a fuel cell’s output doesn’t wane at low-charge levels, forklifts powered with hydrogen fuel cells already present a competitive option with superior performance and flexibility. An electrolyzer running from grid-sourced renewable electricity can produce enough green hydrogen for a fleet of forklifts. Vehicles used in mining are another example where hydrogen could make sense as a tool for decarbonizing, given the similar uptime requirements. (For more analysis on timing for different use cases, see “ When Will Hydrogen Be Cost Competitive? ”)

When Less Carbon Means More Growth

Winning companies play both offense and defense for a full-potential carbon transformation.

Other applications make economic sense only in certain places with unique economics. To identify these opportunities, companies need to determine regional differences in the economics of hydrogen—in other words, they must “de-average” global costs. For example, at a global average, green hydrogen is about two to three times as expensive as gray hydrogen. But much of that cost difference lies between the renewable electricity used to generate green and the price of natural gas to produce gray, whose prices vary widely by region. Places endowed with rich renewable energy conditions (such as plenty of wind and sunshine) can offer far better economics for green hydrogen. In Chile, for example, few hydrogen projects are underway, but ample wind and solar could help it produce low-carbon hydrogen for less than $2 per kilogram by 2025. Understanding where below-average low-carbon hydrogen costs align with above-average alternative costs will lead to the earliest pairings of supply and demand.

In regions with excess renewable energy, hydrogen offers a low-cost way to use electricity that might otherwise be curtailed. 

In regions with excess renewable energy, hydrogen offers a low-cost way to use electricity that might otherwise be curtailed. For example, in the sunny southwestern US, zero-emission truck maker Nikola Motor Company secured a below-market rate for solar-generated electricity ($27 per megawatt hour) to produce more competitive hydrogen, some of which will refuel trucks for Anheuser-Busch’s shipping lane from Arizona to California. This agreement highlights how hydrogen can help companies meet their decarbonization commitments.

Smelting is another example of an application with long-term potential for hydrogen, but where unique economics and government subsidies enable early applications. ArcelorMittal, for example, has announced plans to retrofit two of its plants in Germany to make carbon-neutral (or green) steel. In Sweden, the steel manufacturer H 2 Green Steel provides yet another example. In this case, an abundance of renewable energy and iron ore makes green hydrogen an attractive route to produce low-carbon steel.

The pipeline for announced hydrogen projects grows nearly every day. Many of these involve consortia of companies teaming up to meet demands along the value chain, from development of facilities through production of hydrogen and consumption in the making of ammonia or methanol (see Figure 2). Although low-carbon hydrogen still costs more than gray hydrogen, these industrial companies are gaining experience that their competitors lack. At the North-C-Methanol project in Belgium, for example, hydrogen produced with renewable energy is consumed in methanol production along with captured CO₂, greening the process. Japan’s power sector represents another set of hydrogen customers with environmental, social and corporate governance commitments, high alternative fuel costs, and limited options to decarbonize.

Companies are collaborating in consortia across the value chain

Projects are also underway in regions with lots of wind and solar energy but limited domestic consumption of hydrogen. Neom, an experimental city of the future under development in northwestern Saudi Arabia, is one such location. A $5 billion collaboration between Neom, Air Products & Chemicals, and Saudi Arabia’s ACWA Power will produce green hydrogen with electricity generated by solar in the day and wind at night, to gain experience, develop the market, and scale production as demand rises to meet it. In the near term, this systems approach will produce hydrogen for use locally in Neom, with the long-term goal of scaling to support exports. Australian production follows a similar model and is the global leader in announced green hydrogen projects (see Figure 3).

The seven countries with the greatest green hydrogen capacity vary in their likely long-term roles

Finding your place in the value chain.

The market for low-carbon hydrogen is new and likely to remain in flux for a while. As players consolidate their views and experiment with business models, many are struggling to get started and find their focus. The most effective way to avoid dead-end experiments and to gain a leading position is to develop a clear view of the value chain, potential profit pools, and what it takes to win in these future profit pools.

As in any new market, companies should assess which current capabilities might give them a competitive edge in hydrogen (see Figure 4). A European manufacturer in the renewable energy space considered its strengths in engineering, procurement, and construction (EPC); electrical systems; power controls; and system integration. Geographically, it has a strong presence in several locations with potentially high demand. Executives decided that it could use these capabilities to design power-generating assets and production sites for low-cost hydrogen and help scale production in the electrolysis industry.

Different sectors have varied advantages in building an edge in the hydrogen economy

Closing capability gaps.

In the emerging hydrogen project consortia, companies are combining their strengths to complete the value chain. In many cases, oil and gas majors or utilities are taking on the role of project developer, with the output often used within refining, ammonia production, or blending into existing natural gas networks. Securing such offtake partnerships is critical for these early consortia, because a significant merchant market isn’t expected to develop before 2030. In the current project pipeline, some oil and gas companies are taking both the project developer and offtake roles.

Over time, the value chain is likely to consolidate as companies integrate forward or backward. For example, manufacturing and EPC companies in oil and gas or renewable energy could extend their core capabilities into optimizing electrolyzer production, taking out weight, applying a modular approach, and procuring components at lower cost. At the same time, these companies may need to close gaps in stack and electrolysis design, where there are many partnerships with electrolysis pure players.

New partnerships will be essential. Consider a renewable energy original equipment manufacturer (OEM) seeking a larger role in the value chain, which might include electrolysis design and access to end customers. It would make sense to seek out an electrolysis partner to combine capabilities to design and scale production. To cover its gaps in the gas and end-consumer markets, it could partner with strong midstream and downstream partners, such as oil and gas majors. That would help the OEM focus on taking market share and developing repeatable models that will enable it to expand to other geographies.

Moving forward to execute

The hydrogen market is moving quickly. A year ago, most executives were just beginning to consider where hydrogen would play a role in their industry’s value chain. Today, companies have started deploying strategies for using hydrogen, all while maintaining the flexibility to adjust as the market evolves and conditions change.

Winners in this market will be companies that can develop a keen understanding of hydrogen’s potential and economic feasibility, as well as a determination of their place on the value chain. Setting long-term strategic goals will be essential, with progress measured against short-term milestones.

Finally, no new program will gain much traction without strong support from senior management. Some companies will invest in hydrogen as a second engine of growth (see “ Engine 2: How to Grow a Sustainable New Business ”). Only by guaranteeing continued support, and securing the resources to make it happen, can companies ensure that their investments in hydrogen will have a chance to succeed in the developing energy economy.

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Hydrogen net zero investment roadmap: leading the way to net zero

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The UK is leading the charge towards a net zero, nature-positive future

We are now entering a period of unprecedented growth for the UK hydrogen economy. With the largest number of commercial scale electrolytic hydrogen production projects announced at once anywhere in Europe, the UK is a world leading place to invest in hydrogen.

Rt Hon Claire Coutinho MP Secretary of State for Energy Security and Net Zero

In the two and a half years since the publication of the UK Hydrogen Strategy we have made rapid progress and are now firmly in delivery mode, supporting projects to move us closer to our hydrogen ambitions.

In December 2023, we announced the largest number of commercial scale green hydrogen production projects at once anywhere in Europe, awarding support to projects representing 125MW of production capacity through the first Hydrogen Allocation Round ( HAR1 ).

At the same time, we opened the second Hydrogen Allocation Round ( HAR2 ) with a capacity aim of up to 875MW , closing for applications on 19 April 2024. 

We also made a range of exciting announcements and publications on our growing hydrogen economy.

We announced plans for the first allocation rounds of the hydrogen transport and storage business models in 2024, a major step forward in the delivery of critical hydrogen infrastructure.

We also published a consultation on the need for and design of potential hydrogen to power market intervention and sought views on enabling hydrogen to power plants to compete in the Capacity Market.

To support the expansion of strong, home-grown, clean energy supply chains, in November 2023 we announced the £960 million Green Industries Growth Accelerator ( GIGA ) fund for UK sectors including hydrogen and CCUS , to seize growth opportunities through the transition to net zero.

This rapid progress demonstrates our commitment to hydrogen, and proves that the UK is a world leading destination for investment in low carbon hydrogen.

The UK has one of the world’s most attractive business and investment environments

1st in Europe for value of start–up and scale–up ecosystem [Reference 1]

3rd in Europe for FDI attractiveness [Reference 2]

£1 billion funding for Net Zero Innovation Portfolio

1st ranked best global green finance centre [Reference 3]

1st in G20 as a globally connected economy [Reference 4]

6th Largest economy in terms of GDP [Reference 5]

£39.8 billion committed to raise R&D to 2.4% of GDP by 2027 [Reference 6]

Engineering employs 6.9 million people [Reference 7]

• Open, liberal economy
• stable regulatory regime with independent legal system
• globally competitive and transparent tax regime
• generous R&D and patent tax relief
• the UK-EU Trade and Cooperation Agreement allows zero tariff market access with the EU
• flexible labour market
• world class professional services sector supporting businesses with insurance and finance

Why invest in UK hydrogen?

Opportunities in an advanced and growing sector.

A sector with striving ambitions and major opportunities for growth.

Up to 10GW ambition by 2030, up to 6GW from electrolytic hydrogen

£960 million Green Industries Growth Accelerator (GIGA) fund

Up to 35% of UK’s energy consumption could be hydrogen by 2050

27GW of potential hydrogen projects identified in the UK pipeline (through to 2037*)

More than £150 million will be spent from the Net Zero Innovation Portfolio on hydrogen innovation

Up to £18 billion private financial capacity available from UK Infrastructure Bank for sectors including H2

*Source: DESNZ Low Carbon Hydrogen production pipeline. Note that all figures here are based on potential deployment and capacity scale up according to the projects themselves, and does not relate to decisions on individual projects or volume support through specific funding allocation windows.

• First Hydrogen Allocation Round : 125MW of production capacity were offered contracts from the first allocation round ( HAR1 ) in December 2023, with over £400 million of private capital investment being committed by the projects upfront between 2024-2026, and over 700 direct jobs created.
• Second Hydrogen Allocation Round : we also launched the second Hydrogen Allocation Round ( HAR2 ), which will aim to award contracts of up to 875MW . The application window will close on April 19 2024. The EOI data shows a significant increase in interest from HAR1 and confirms our confidence in a healthy pipeline of non- CCUS -enabled projects in the UK.
• Future Hydrogen Allocation Rounds : government has set its ambition to allocate up to 1.5GW across HARs 3&4, launching in 2025 and 2026 respectively.
• Green Industries Growth Accelerator : in November 2023, we announced the £960 million Green Industries Growth Accelerator ( GIGA ) fund to support private sector investment in clean energy supply chains across the UK. Part of a wider £4.5 billion package for manufacturing, GIGA , will enable the UK to seize growth opportunities of the net zero transition by supporting the expansion of strategically important sectors including hydrogen; carbon capture, utilisation and storage; electricity networks; nuclear; and offshore wind.
• Hydrogen Transport and Storage Business Models : we set our intention for the first allocation round to open in 2024 with an initial ambition to support up to 2 geological storage projects at scale and associated regional pipeline infrastructure to be in construction or operation by 2030. 
• Hydrogen to Power ( H2P ) : government is consulting on the need and design for potential market intervention to accelerate the deployment of H2P .
• Projects under development : there are up to 27GW known projects in the pipeline, in all countries and regions of UK including CCUS enabled (blue) and electrolytic hydrogen

Our 2035 delivery plan

Critical activities and milestones on a path to developing the UK hydrogen economy.

Timings are indicative and subject to change.

2022 to 2025: £240 million Net Zero Hydrogen Fund

2023 to mid-2020s: CCUS Track-1 Cluster consents, construction, commissioning

2023 to 2030: CCUS Track-1 Expansion development, launch, negotiations and construction 

2025 to 2030s: GIGA funding available

• Publication of UK Hydrogen Strategy
• Publication of Net Zero Strategy
• Launch of Phase-2 Cluster Sequencing Process
• Low Carbon Hydrogen Standard published
• Launch of NZHF (Strands 1 and 2)
• Sector Development Action Plan published
• Launch of HAR1 (HPBM and NZHF Strand 3)
• Phase 2 of Industrial Energy Transformation Fund
• Second wave of NZHF (Strands 1 and 2)
• GIGA announced
• Outcome of HAR1
• Launch of HAR2
• Policy decision on hydrogen blending
• Launch of Hydrogen to Power consultation
• Hydrogen Production Delivery Roadmap
• Outcome of NZHF Strands 1 and 2 Round 2
• H2 Levy consultation
• Allocation Round 1 for Transport and Storage Business Models

2025 to 2030

• ZERFD programme to inform the commercial roll out of hydrogen fuel cell HGV technologies before the end of the decade
• 2GW of hydrogen production in construction or operation
• Design of Transport and Storage Business Models complete (2025)
• Low Carbon Hydrogen Certification Scheme launch from 2025
• Launch of HAR3 (2025)
• 2 CCUS clusters by mid-2020s
• Hydrogen for domestic heating decision (2026)
• Launch of HAR4 (2026)
• Launch of HAR5 (2027)
• Launch of HAR6 (2028)
• Launch of HAR7 (2029)
• 4 CCUS clusters by 2030

2030 to 2035

• Up to 10GW low carbon hydrogen production capacity

The known pipeline of hydrogen projects shows potential for growth and investment

Cumulative potential total GW low carbon hydrogen production capacity

Source: DESNZ Low Carbon Hydrogen production pipeline. Note that all figures here are based on potential deployment and scale up according to the projects themselves, and does not relate to decisions on individual projects or volume support through specific funding allocation windows.

Hydrogen production

• A growing pipeline of over 250 projects across a range of low carbon hydrogen production pathways provides confidence in the future development of the UK hydrogen economy.
• The first electrolytic allocation round offered contracts totalling 125MW of capacity across 11 projects, with the first projects operational in 2025, kickstarting the UK low carbon hydrogen production sector.
• The second Hydrogen Allocation Round ( HAR2 ) launched in December 2023, and will aim to award up to 875MW of capacity in early 2025, to deliver up to 1GW of electrolytic hydrogen production capacity in construction or operation by 2025.
• Announced 2 CCUS -enabled hydrogen projects announced as part of the Track-1 Cluster Sequencing process, plans to establish 2 further CCUS clusters in Track-2, as well as enable further expansion of the Track-1 clusters.

Hydrogen will play a crucial role in future of the UK’s energy system

Our ambition for up to 10GW of low carbon hydrogen production capacity by 2030 will help to create a thriving hydrogen economy in the UK, supporting the deep decarbonisation of key UK sectors, particularly in ‘hard to electrify’ industries, and can provide greener, flexible energy across power, heat, transport, and potentially heat in buildings.

Our drive for renewables makes hydrogen especially valuable for energy security and independence by providing flexibility and energy storage: excess renewable electricity can be used to produce hydrogen, which can be stored over time and used to generate electricity when there is less sun or wind to power the grid. 

Analysis for the UK Hydrogen Strategy shows that low carbon hydrogen could play a key role in UK energy system potentially becoming comparable in scale to existing electricity use by 2050.

Hydrogen demand could be 20-35% of UK final energy consumption by 2050

percentage = hydrogen as proportion of total energy consumption in 2050

Source: Central range – illustrative net zero consistent scenarios in CB6 Impact Assessment. Full range – based on whole range from UK Hydrogen Strategy Analytical Annex. Final energy consumption from ECUK (2019).

• Industry – 25-55 TWh by 2035
• Power – 5-30 TWh by 2035
• Heat in buildings – 0-60 TWh by 2035
• Transport – 20-30 TWh by 2035

Illustrative demand based on analysis for the Hydrogen Transport and Storage Networks pathway (2023)

Recent UK hydrogen ( H2 ) developments

The Hydrogen Strategy Delivery Update (December 2023) sets out the approach to developing a thriving low carbon hydrogen sector in the UK to meet our increased ambition for up to 10GW of low carbon hydrogen production capacity by 2030.

The Hydrogen Production Delivery Roadmap (December 2023) sets out how we expect the hydrogen production landscape to evolve towards 2035, and the key opportunities and challenges that we may face.

The Hydrogen Transport and Storage ( T&S ) Networks Pathway (December 2023) sets out the next steps in our vision for the strategic development of UK hydrogen T&S infrastructure.

The Government response to a consultation on hydrogen blending (December 2023) sets out a strategic policy decision to support blending of up to 20% hydrogen by volume into the GB gas distribution networks, if enabled.

The Hydrogen to power need and design for market intervention consultation (December 2023) seeks views on our position that market intervention could be required to support hydrogen to power to deploy, including design options.

The CCUS Vision (December 2023) sets out government’s vision for the UK CCUS sector in the 2030s.

Supportive policy and regulatory environment

The UK has developed a supportive policy and regulatory environment.

Hydrogen Blending

In December 2023 we announced a positive strategic decision to support the blending up to 20% hydrogen by volume into the GB gas distribution networks in certain circumstances and scenarios that align with blending’s strategic role.

Hydrogen Infrastructure

In December 2023, we set out our ambition to support up to two storage projects at scale and associated regional pipelines in construction or operation by 2030. This is a major step forward in the delivery of the transport and storage we will need, building on the legislative powers created in the Energy Act in October 2023.

Following the recommendation of the National Infrastructure Commission, we have announced support in principle for a hydrogen core network. Government agreed that a core hydrogen network could bring benefits to security of energy supply and help build a competitive hydrogen market, subject to further work on the optimal scale, location and pace of network development.

In December 2023, we published a consultation seeking views on our minded-to position that market intervention could be required to mitigate our identified barriers to hydrogen to power ( H2P ) deployment. Our analysis indicates that a market intervention based on elements of the CCUS Dispatchable Power Agreement ( DPA ) but adapted for H2P could be the most suitable for mitigating the identified deployment barriers.  H2P faces potentially higher investment costs from being a first of a kind technology, and H2P developers may not be able to effectively manage delays or outages in the hydrogen value chain in a nascent hydrogen economy. We intend to publish a response to the consultation in Q2 2024.

To maximise the deployment potential for a wide range of potential H2P projects, we also sought views on enabling participation of H2P in the Capacity Market ( CM ) as soon as practical.

In March 2023, we consulted on proposals for updated Decarbonisation Readiness requirements to require new build and substantially refurbishing combustion power plants to be built in such a way that they can decarbonise through either 100% hydrogen-firing or by retrofitting CCUS within the plant’s lifetime. We intend to publish a response soon. 

CCUS Enabled Hydrogen

The Cluster Sequencing process maps a logical sequence for CCUS deployment in the UK. CCUS -enabled clusters will be the starting point for a new carbon capture industry.

We have now published the Track-1 Project Negotiation List which includes 8 projects which we have selected through the Cluster Sequencing Process to progress to negotiations to form the first 2 CCUS clusters, based in HyNet and the East Coast Cluster.

We have begun launching a process to enable the expansion of Track-1 clusters: we launched Track-1 expansion in HyNet in December 2023 and will launch Track-1 expansion in the East Coast Cluster this year.

We have launched Track-2 of the CCUS cluster sequencing process to establish 2 further CCUS clusters.

In December 2023 we published the Low Carbon Hydrogen Standard V3.

We are developing a Low Carbon Hydrogen Certification Scheme (by 2025) to provide a reliable method for producers to demonstrate the sustainability credentials of low carbon hydrogen, promoting confidence in the early hydrogen market and facilitating future trade.

As committed to in the Hydrogen Strategy, we established the Hydrogen Regulators Forum in January 2022 to determine current and future non-economic regulatory responsibilities across the hydrogen value chain.

The Forum has facilitated knowledge sharing on multiple legislative and regulatory changes to help develop the hydrogen economy.

There is also an ambition for the new National Energy System Operator ( NESO ) to take on strategic planning activities for hydrogen transport and storage infrastructure from 2026, subject to further scoping work.

In the absence of an overarching consenting framework for offshore hydrogen pipelines and storage, in September 2023, DESNZ introduced secondary legislation to extend existing offshore oil and gas pipeline and storage regulatory frameworks to cover offshore hydrogen pipelines and storage. Our legislation changes ensure that this infrastructure is brought within pre-existing environmental assessment and decommissioning frameworks. Therefore, the relevant oil and gas responsibilities for OPRED and the NSTA now extend to hydrogen pipelines and storage infrastructure. This legislation came into effect on 27 September 2023.

Visibility of policy direction

DESNZ provides regular updates on hydrogen production policy development, including the production pipeline, in Hydrogen Strategy updates to the market.

The Hydrogen Production Delivery Roadmap sets out how we expect the hydrogen landscape to evolve out to 2035.

Business models

CAPEX and OPEX supporting mechanisms such as the NZHF , HPBM , future Transport and Storage Business Models (expected 2025).

Skills and supply chain

We are giving employers a stronger voice in the system through Local Skills Improvement Plans, which set out employers’ views on the key skills priorities for an area. The £165 million Local Skills Improvement Fund ( LSIF ) enables collaborations of FE providers across an area to respond to the skills needs set out in the LSIPs .

In England, DfE is investing an additional £3.8 billion in skills throughout this parliament. This includes funding for programmes to support green skills, including apprenticeships, T levels and Skills Bootcamps. 

Free Courses for Jobs gives adults the chance to access free level 3 (A level equivalent) qualifications. Many eligible courses are in subjects linked with green careers.

To tackle emerging and future workforce demands, the government, working with the Green Jobs Delivery Group, is focused on the creation of a Green Jobs Plan for publication in the first half of 2024. This plan will provide the actions needed to ensure we have the sufficiently skilled workforce to deliver on the government’s targets. 

As part of the Tees Valley Hydrogen Transport Hub, the Tees Valley Combined Authority will utilise £300,000 of government funding to run competitions for Tees Valley colleges and training institutions to purchase hydrogen training equipment to upskill the local workforce.

Supply chain

We announced the £960 million Green Industries Growth Accelerator ( GIGA ) in November 2023 to support the expansion of strong, home-grown, clean energy supply chains across the UK, for carbon capture utilisation and storage and hydrogen as well as electricity networks, nuclear and offshore wind. This is part of a wider £4.5 billion package of funding for manufacturing to support private investment in 8 strategic sectors across the UK. Funding will be available from 2025 to 2026.

The advanced manufacturing plan sets out the actions we are taking to be the best place in the world to start and grow a manufacturing business.

The North Sea Transition Deal (March 2021) will support workers, businesses, and the supply chain through a transition to a net zero future by harnessing the industry’s existing capabilities, infrastructure and private investment potential to exploit new and emerging technologies, including hydrogen production and CCUS . 

The North Sea Transition Deal has developed an integrated People and Skills Plan to ensure the highly skilled oil and gas workforce can be deployed to adjacent energy sectors including developing our hydrogen industry. Skills body OPITO are currently working with stakeholders to align qualifications and develop a digital skills passport which will support workers to transfer their skills and move more easily between offshore oil and gas and other sectors, starting with offshore wind.

We are working with industry to develop a supply chain strategy for hydrogen.

Demand and use

The £500 million Industrial Energy Transformation Fund supports the deployment of fuel switching technologies, with Phase 3 launched in January 2024. Various innovation programmes for hydrogen end-use funded through the £1 billion Net Zero Innovation Portfolio.

We are sponsoring the British Standards Institute to develop a publicly available specification for hydrogen firing and conversion of large gas-fired equipment, supporting faster and cheaper fuel switching to hydrogen.

We are exploring opportunities to export hydrogen, including from the UK to continental Europe, where we see increasing hydrogen demand alongside established energy trading and interconnection with the UK.

We have agreed a partnership between the UK and Germany to help secure safe, affordable and clean energy for consumers in both nations for the long term and bolster energy security.

Spring 2023 guidance enhanced the flexibility of the Renewable Transport Fuel Obligation ( RTFO ) for electrolytic hydrogen allowing suppliers to blend additional and non-additional renewable energy in order to reach the GHG threshold and qualify for support. Suppliers of hydrogen to aviation can now potentially claim Renewable Transport Fuel Certificates ( RTFCs ).

£13 million for the Tees Valley Hydrogen Transport Hub will fund both hydrogen fuel cell vehicles and new refuelling infrastructure to co-locate supply and demand in the region, building an evidence base and experience to support its future use and investment decisions.

New zero emission HGV demonstrators will deploy up to 60 new hydrogen fuel cell HGVs on UK roads and up to 7 publicly accessible hydrogen refuelling stations.

The £206 million UK Shipping Office for Reducing Emissions (UK SHORE) programme, launched in March 2022, is focused on accelerating the development of technologies necessary to decarbonise our maritime sector, including hydrogen and hydrogen-derived fuels. UK SHORE is delivering R&D funding through a wide range of interventions until March 2025, including the Clean Maritime Demonstration Competition and the Zero Emission Vessels and Infrastructure scheme.

In July 2022, government confirmed that a sustainable aviation fuel ( SAF ) mandate will be introduced in 2025. Last March, a specific reward for hydrogen used directly as a fuel for aviation, was proposed, as well as where hydrogen is used as a feedstock in SAF production. The final design will be confirmed in Spring 2024.

The proposed hydrogen heating village trial in Redcar cannot go ahead as designed, as the main source of hydrogen supply will not be available. The government still plans to take a decision in 2026 on whether, and if so how, hydrogen will contribute to heating decarbonisation. This will be supported by SGN’s H100 neighbourhood trial in Fife, a wide range of trials across Europe, and our broader research, development and testing programme. The Hydrogen Skills and Standards for Heat programme is developing standards for hydrogen gas installations as well as training frameworks for installers. These will support future trials and conversion of the existing gas system for hydrogen heating.

Innovation and incentives

Public funders like the Department for Energy Security and Net Zero, the Department  for Business and Trade, and UK Research and Innovation continue to fund hydrogen innovation including through the flagship £1 billion Net Zero Innovation Portfolio ( NZIP ), which has allocated over £170 million to hydrogen innovation projects.

Contracts have been awarded from the £60 million NZIP Low Carbon Hydrogen Supply 2 to ongoing projects to demonstrate novel technologies and move them closer to commercial deployment, with testing due to start in some projects in early 2024.

The 2023 Biomass Strategy outlined the role biomass could play in the hydrogen sector, supported by the NZIP £31 million Hydrogen BECCS Innovation programme.

UKRI ’s Engineering and Physical Sciences Research Council ( EPSRC ) invested £20 million in June 2023 in 2 hydrogen research hubs that deliver options to integrate low carbon hydrogen into the domestic, industrial and transport energy systems.

Up to £18 billion private financial capacity available from UK Infrastructure Bank ( UKIB ) for sectors including hydrogen, which has been identified as an investment opportunity. The bank recently published a hydrogen sector update which sets out how the bank will tackle financing problems in the sector over the next 12-24 months.

Freeports are special areas within the UK offering a comprehensive package of measures, such as tax reliefs, customs, business rates retention, planning, regeneration, innovation and trade and investment support. Since 2021, the government has announced 12 Freeports, which are projected to create over 200,000 future jobs, many of which will be in the high-innovation, low carbon technologies of the future. To date, Freeports have already attracted a remarkable £2.9 billion of investment, creating over 6,000 jobs.

 The government has established Investment Zones which aim to boost economic activity by offering tax and customs incentives to businesses, encouraging investment, innovation and growth in key industries. The zones provide a supportive planning environment to facilitate collaboration between local leaders and regulators. There are currently 12 Investment Zones, including areas like the West Midlands, Greater Manchester and Teeside.

Stimulating hydrogen production investment

Up to £9 billion deployment investment needed by 2030 to deliver up to 10GW of hydrogen production capacity.

Potential investment opportunities

• Debt and equity finance opportunities through life cycle for ‘first of a kind’ electrolytic and CCUS -enabled hydrogen production projects awarded NZHF and HPBM support. 
• From 2024 - 2025 investment is needed in R&D , feasibility, FEED and construction. Opportunities for equity as well as debt investors such as existing manufacturers, oil and gas majors, private equity firms, sovereign wealth funds, commercial banks and sector incumbents. 
• services such as engineering, construction management and commissioning
• manufacturing materials such as reformers, compressors, piping, instrumentation and controls equipment, civil and structural materials, electrolyser packages, water treatment and cooling packages and electrical equipment and materials

Examples of planned projects

Electrolytic .

Carlton Power : developing 3 successful HAR1  projects (Barrow Green, Trafford Green, and Langage Green), totalling 45MW of electrolytic hydrogen production. Read more - Carlton Power: Green hydrogen .

H2 Energy and Trafigura West Wales Hydrogen : located in the South Wales Industrial Cluster, project successful in HAR1 and progressing plans to scale up electrolytic hydrogen production. Read more - H2 Energy: West Wales Hydrogen project .

EDF and Hynamics Tees Green : project successful in  HAR1 and looking to scale up to a potential 500MW of electrolytic hydrogen to supply industry and decarbonise local port operations. Read more - EDF: New green hydrogen project by EDF Renewables UK and Hynamics comes to Teesside  

CCUS -enabled hydrogen

Essar Energy Transition (EETH) HPP1 : up to 350MW of low carbon CCUS -enabled hydrogen production within the CCUS Hynet cluster. Read more - VertexHydrogen: Building a low carbon future . 

bp H2Teesside : up to 708MW of low carbon CCUS -enabled hydrogen production within the CCUS East Coast Cluster. Read more - H2Teesside .

Any hydrogen projects cited as examples in this Roadmap are indicative only. Any reference to such projects has no bearing on their likelihood of selection under current or future subsidy schemes.

Stimulating transport and storage investment

Up to £2 billion investment needed by 2030 in infrastructure to enable growth of the UK hydrogen economy.

• By 2025 Business models for Transport and Storage are being designed to unlock / de-risk investment. First hydrogen projects are expected to be developed close to end-users with specified off-takers, though as demand grows hydrogen infrastructure will be vital to connecting and balancing supply and demand
• from 2024 - 2025 investment required in feasibility studies , pre- FEED and FEED from equity investors such as manufacturers, energy companies and storage specialists. Plus opportunities for debt investors such as commercial banks and sector incumbents
• pressure vessels, control valves and instrumentation, leveraging existing UK capabilities servicing petrochemicals and oil and gas industries
• short / medium / long range storage provision to balance across seasons and provide resilience to broader market
• inter-cluster transmission pipelines to connect industrial centres and provide resilience as well as facilitate inland market
• tube trailers as a form of both small-scale storage and non-pipeline distribution to support initial hydrogen economy

Examples of projects

Hydrogen transport projects.

East Coast Hydrogen : project led by NGN, Cadent, and NGG to build off Project Union to provide a hydrogen delivery network connecting producers to end-users in northeast England. Read more - East Coast Hydrogen: feasibility report .

Cadent, HyNet : project to construct and operate an onshore pipeline transporting hydrogen from CCUS -enabled production in northwest  England to end users. Read more - HyNet: North West Hydrogen Pipeline .

National Gas Transmission, Project Union : proposed hydrogen national transmission system, or hydrogen ‘backbone;, repurposing around 25% of current gas transmission pipelines. Read more - ProjectUnion: Launch report

Hydrogen storage projects

Inovyn, Storengy : proposed new and repurposing of salt caverns in Cheshire, currently used for natural gas storage, to store 1.3TWh of hydrogen. Read more - Ineos Inovyn: Keuper Gas Storage Project .

SSE Thermal/Equinor : proposed 0.32TWh salt cavern to store low-carbon hydrogen produced and used in the Humber region, potentially from 2028. Read more - Equinor: SSE Thermal and Equinor developing plans for world-leading hydrogen storage facility in Yorkshire .

Centrica Rough : following re-opening in 2022, Centrica aims to redevelop Rough storage facility (depleted gas field) into a 10TWh hydrogen store. The hydrogen storage capacity is set to be developed in ~3TWh phases. Read more - Centrica: The reopening of Rough gas storage .

Successful projects

Projects offered support through windows 1 and 2 of the NZHF and HAR1 , and the CCUS enabled hydrogen projects in the latest stage of the Track-1 cluster sequencing process.

NZHF window 1

CCUS Sequencing

NZHF Window 2

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The UK’s export credit agency, has enhanced its support to attract investment into supply chains and building export capability.

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Appendix A: Notes and definitions

Investment needs are defined as the total sum of capital contributions required to deliver the necessary projects to achieve the current deployment pathway assumed in the Net Zero Growth Plan.

The investment needs data is calculated to 2030 to align with the Nationally Determined Contribution ( NDC ) agreement to revisit and strengthen Net Zero 2030 targets.

Methodology used to estimate the investment need

Hydrogen production investment is based on the capital costs required to meet our ambition for up to 10 GW of hydrogen production capacity by 2030.

Transport & Storage investment is an estimate of the capital costs needed to build the large-scale hydrogen transport and storage infrastructure projects identified as priority infrastructure projects in the growth plan in September 2022. [Reference 7]

Data caveats

The profile of deployment, and therefore investment, in the 2020s is highly uncertain and dependent on the capacities allocated through funding rounds for the Hydrogen Production Business Model and the mix of hydrogen supply technologies deployed. The figures only cover the cost of projects deploying up to 2030, so in reality we would expect additional investment for projects commissioning after 2030. 

CAPEX costs are estimated based on published costs from the Hydrogen Production Costs Report 2021 and assume CAPEX costs are spread over 3 years before the plant comes online. CAPEX costs are highly uncertain, and costs for actual projects may differ from the generic assumptions used.

Like production, the T&S investment figures are highly uncertain, and we anticipate higher investment after 2030. Investment needs will be dependent on the types of production and demand deployed and their location.

The T&S investment figures, as well as the production investment figures, do not include investment in small scale T&S infrastructure. This is because there is insufficient evidence currently to split out CAPEX costs from total levelized costs for small-scale T&S infrastructure. 

Appendix B: Summary of government funding schemes

Networks and storage

Use of hydrogen

Supply chains

1. Dealroom ↩

2. EY Attractiveness Survey November 2023 ↩

3. Z/Yen Global Green Finance Index 2023 ( GGFI 12) ↩

4. DHL Global Connectedness Index 2022 ↩

5. Official statistics converted at market exchange rates as a source ↩

6. UK Innovation Strategy 2022 ↩

7. Trends in the engineering workforce in the UK (2022) . ↩

8. Technology readiness levels ( TRLs ) ↩

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Global Energy Perspective 2023: Hydrogen outlook

About the authors.

This article is a collaborative effort by Chiara Gulli, Bernd Heid , Jesse Noffsinger , Maurits Waardenburg, and Markus Wilthaner , representing views from McKinsey Energy Solutions.

The Global Energy Perspective 2023 models the outlook for demand and supply of energy commodities across a 1.5°C pathway, aligned with the Paris Agreement, and four bottom-up energy transition scenarios. These energy transition scenarios examine outcomes ranging from warming of 1.6°C to 2.9°C by 2100 (scenario descriptions outlined below in sidebar “About the Global Energy Perspective 2023”). These wide-ranging scenarios sketch a range of outcomes based on varying underlying assumptions—for example, about the pace of technological progress and the level of policy enforcement. The scenarios are shaped by more than 400 drivers across sectors, technologies, policies, costs, and fuels, and serve as a fact base to inform decision makers on the challenges to be overcome to enable the energy transition. In this article, we explore how hydrogen could contribute to decarbonizing the energy system, uncertainties around hydrogen’s future role, and what it would take to set up a global hydrogen economy by 2050.

Clean hydrogen demand is projected to increase to between 125 and 585 Mtpa by 2050

Hydrogen demand today is largely supplied by fossil fuel-based steam methane reforming and driven by fertilizer production and refining. These industries are expected to lead the uptake of blue and green hydrogen until 2030 in the slower scenarios, as they switch their hydrogen-based operations to clean hydrogen. In parallel, “new” emerging applications—for instance in steel, in the production of synthetic fuels, and in heavy road transport—may begin to emerge in the faster scenarios.

Nearly all hydrogen consumed today is grey hydrogen (approximately 90 million tons 1 Metric tons: 1 metric ton = 2,205 pounds. per annum [Mtpa]). However, demand for grey hydrogen is projected to decline as demand for clean hydrogen rises and costs of the green molecules eventually become more competitive. 2 Clean hydrogen includes both green hydrogen (hydrogen produced by the electrolysis of water using renewable energy as a power source) and blue hydrogen (hydrogen produced through steam reforming of natural gas or methane with carbon capture, utilization, and storage [CCUS]), and contrasts with grey hydrogen (hydrogen produced through the same process as blue hydrogen but without CCUS). By 2050, clean hydrogen demand could account for up to 73 to 100 percent (125 to 585 Mtpa) of total hydrogen demand, with only between less than 1 and 50 Mtpa of demand being met by grey hydrogen, depending on the scenario.

After 2025, nearly all new hydrogen production coming online is expected to be clean hydrogen. This coincides with the start of the expected phaseout of grey hydrogen, driven by the growing cost competitiveness of clean hydrogen and commitments to decarbonize. Until 2030, clean hydrogen uptake is projected to be driven by existing applications switching from grey to blue and green hydrogen, but between 2030 and 2040 the uptake of hydrogen in new applications without existing demand is expected to drive the increase in clean hydrogen demand.

After 2040, private and public sector commitments are projected to drive the uptake of clean hydrogen and hydrogen-based fuels in emerging applications in the Further Acceleration and Achieved Commitments scenarios. Potential mechanisms that would be required to support demand growth of hydrogen and hydrogen derivatives in these applications include the implementation of, or increase in, CO 2 pricing, quotas on sustainable fuels in aviation, or CO 2 -reduction targets in maritime transportation. On the other hand, in the Current Trajectory and Fading Momentum scenarios, hydrogen uptake is projected to be driven by a continuation of the current cost decline and the underlying growth in some of the fertilizer and chemicals markets that use hydrogen today, with limited new policy support.

Some geographies, such as the European Union and United Kingdom, are expected to fully phase out grey hydrogen by 2050 in all scenarios except Fading Momentum. Grey hydrogen will likely play a larger role in the Fading Momentum scenario than in the faster energy transition scenarios, due to slower uptake of clean hydrogen in new sectors. In these sectors, uptake of clean hydrogen is projected to be limited until 2050.

Industry is projected to drive the majority of clean hydrogen uptake until 2030, followed by a wider uptake in new applications by 2050

Applications with existing demand will likely account for the majority of clean hydrogen demand throughout the 2020s, potentially driving the increase in clean hydrogen’s share of total hydrogen demand from less than 1 percent today to around 30 percent by 2030 in the Further Acceleration scenario.

By 2040, clean hydrogen could play a larger role in new applications—especially in mobility, which is expected to be the largest “newcomer” for clean hydrogen demand by 2040 in the Further Acceleration scenario. Applications could range from fuel cell electric vehicles in long-haul, heavy-duty trucking to synthetic kerosene in aviation. The second largest newcomer is expected to be hydrogen used in (mainly industrial) heating, displacing natural gas. Combined, clean hydrogen uptake in existing applications and emerging applications could drive clean hydrogen’s share of total demand to 75 percent by 2040.

By 2050, in the Further Acceleration scenario, mobility applications are projected to remain the largest drivers for clean hydrogen uptake, with road transport accounting for around 80 Mtpa and aviation around 50 Mtpa, with the remaining 15 Mtpa coming from maritime. Existing industrial applications and heating are projected to drive further clean hydrogen uptake, potentially resulting in clean hydrogen accounting for 95 percent of total hydrogen demand in 2050.

However, uncertainties around demand growth remain. For example, power could drive an additional demand upside of between 60 and 70 Mtpa by 2050, on top of the projected demand in the Further Acceleration scenario. This could happen if hydrogen-fueled turbines or stationary fuel cells prove more competitive or have more public support than alternative technologies for the last-mile decarbonization of the energy system, such as long-duration energy storage technologies and carbon capture, utilization, and storage (CCUS).

In the Fading Momentum scenario, the already existing end use of hydrogen in fertilizer production is expected to drive consumption far beyond 2030 corresponding with the lower total growth.

The only sector that is not projected to see an increase in total hydrogen demand in 2050 compared to today is refining, with demand expected to peak in the late 2020s or early 2030s, depending on the scenario, driven by lower oil demand across scenarios.

Uptake in new applications depends on operating environment, infrastructure development, and relative competitiveness

Going forward, the decarbonization agendas of governments and companies are expected to drive hydrogen uptake in new applications, as well as the decarbonization of existing grey hydrogen applications. However, in most regions, there is significant uncertainty around projected hydrogen uptake in these new applications across scenarios.

The uncertainty surrounding hydrogen demand in emerging applications stems from a combination of factors, including lack of clarity in government support, the development of enabling infrastructure, and evolving competitive dynamics with other decarbonization technologies. For example, hydrogen’s role in decarbonizing aviation could depend on government support, as well as market dynamics and competition. First, sustainable aviation fuel (SAF) quotas are needed across geographies to drive a switch from fossil fuel-based kerosene to clean alternatives. Second, hydrogen-based synthetic fuels would have to prove competitive with the main SAF alternatives, for instance biokerosene, either based on costs or constraints in the availability of feedstock necessary to produce biokerosene.

Similarly, there is uncertainty about the switch from grey to clean hydrogen. Active mandates, such as CO 2 prices and subsidies, will likely be needed to facilitate the decarbonization of existing hydrogen demand, as the switch will likely not be attractive based on economics alone.

Infrastructure scale-up and technology advancements could be critical

In key sectors, the timely deployment of infrastructure across the whole supply chain is projected to be needed to meet clean hydrogen demand.

Several key enablers—mostly physical infrastructure—would have to be rolled out by 2050 to facilitate the future hydrogen economy. In the Achieved Commitments scenario, over 163,000 refueling stations for trucks would be needed globally, alongside a network of more than 40,000 kilometers of hydrogen pipelines in Europe alone.

Technological advancements may also be needed to ensure the uptake of hydrogen in sectors where hydrogen technology is not yet mature, such as the further development of fuel cells for heavy-duty vehicles and marine vessels.

Coordination between government and the private sector may be needed to ensure the required infrastructure is in place to meet hydrogen demand at the pace necessary to meet decarbonization commitments and with an attractive business case.

The extent of the growth and advancement necessary to establish a hydrogen economy is not without precedent—historical adoption of natural gas in the European Union since the 1960s and 70s shows that it is possible to rapidly change an established energy system if the necessary competitiveness and support are in place.

Asia is projected to remain the region with the largest hydrogen demand to 2050

Despite uncertainties in regional and sectoral demand, Asia is projected to remain the biggest hydrogen consumer across scenarios, largely driven by the demand from chemicals that already exist today, and, to a lesser extent, the transport, iron, and steel sectors in China and India. In Japan and South Korea, a significant share of hydrogen demand is expected to come from electricity generation as ammonia and hydrogen are blended in existing coal and gas plants, respectively. As Asia will likely not produce enough hydrogen to meet its growing demand, the region might rely on imports from Oceania or the Middle East, for instance.

In Europe and the United States, the chemicals sector is projected to remain a significant driver of hydrogen demand, but new applications in sectors including steel and production of synthetic fuels for aviation, maritime, and heavy road transport are also expected to contribute significantly to demand growth.

Green hydrogen production is projected to be spread across regions, while blue hydrogen production is geography-specific

By 2050, green hydrogen is expected to dominate the global supply mix, with a share of between 50 and 65 percent across scenarios, as cost reductions in renewables and electrolyzers make this production route more cost competitive. Blue hydrogen is projected to account for the next largest share of supply, at between 20 and 35 percent.

The ratio of blue to green hydrogen production is expected to differ significantly by region, driven mainly by cost factor developments. Blue hydrogen production is projected to be concentrated in regions with cost-competitive natural gas and CCUS, such as the Middle East and North America. By 2050, blue hydrogen production could require as much as around 500 billion cubic meters of natural gas (between 10 and 15 percent of global natural gas demand in the Further Acceleration scenario), and capacity to capture and store 750 to 1,000 megatons of CO 2 .

Green hydrogen production is projected to have a higher share in regions with abundant and cost-competitive renewable resources, such as Australia and Iberia. The production of green hydrogen could potentially be constrained by a lack of renewable power. Globally, approximately a quarter of renewable electricity generation (around 14,000 terawatt-hours) could be required to produce the green hydrogen needed by 2050 in the Further Acceleration scenario. Further potential bottlenecks to be tackled to achieve strong green hydrogen uptake include large-scale investments and deployment of at-scale manufacturing of electrolyzers, with cost competitiveness being strongly dependent on the latter.

Clean hydrogen cost competitiveness is projected to vary between regions

Clean hydrogen production costs are expected to drop significantly by 2030–50, with large differences across regions under the scenarios explored. Cost differentials among regions could drive an increased mismatch between supply and demand centers and thus lead to the development of major hydrogen and hydrogen-derivatives export hubs.

Regions with cost-competitive natural gas resources and CCUS, such as the Middle East, Norway, and the United States, are expected to have the highest cost competitiveness and could potentially account for 30 percent of exports at production costs of below $1.5/kg by 2050.

Regions with access to low-cost renewable power, such as Australia or North Africa, could make up an additional 60 percent of exports at production costs of between $1.5/kg and $2/kg.

The growing hydrogen trade could enable uptake in countries that have strong decarbonization ambitions but lack the necessary energy resources for clean hydrogen production, such as parts of Europe, as well as Japan and South Korea.

A global hydrogen trade could emerge to connect demand centers with resource-rich export hubs

Major hydrogen trade flows are expected to evolve to connect export hubs with favorable renewable power or natural gas resources to two main demand regions: Asia and Europe.

Europe could meet most of its demand from within the region, importing from countries with low gas prices or abundant hydro and solar power, such as Iberia and the Nordics. The remainder could be sourced from the Middle East, North Africa, and North America. Asia could source hydrogen from countries and regions like Australia, Latin America, the Middle East, and North America.

Regions with favorable routes to market—either by producing and shipping as derivatives or building a strategic network of hydrogen pipelines toward off-takers, potentially re-using existing natural gas infrastructure—may also emerge as production hubs.

While major trade flows in Europe will likely depend heavily on pipelines, shipping could prove critical to enable overseas trade. Hydrogen shipping could be expedited by converting hydrogen to synfuels (such as ammonia or methanol) at export hubs. Liquid hydrogen shipment could be one way to enable the global hydrogen trade after 2030, potentially increasing to approximately 20 Mtpa traded in 2050 in the faster scenarios.

Although this projected ramp-up of the global hydrogen trade is ambitious, it does have historical precedent—similar growth was observed in the first 25 years of LNG development.

About the Global Energy Perspective 2023

Hydrogen is a versatile energy carrier that has the potential to play a significant role in decarbonizing the energy system. Hydrogen-based technologies and fuels can provide low-carbon alternatives across sectors. However, as of now, there is still a wide range of possible hydrogen pathways up to 2050 both in terms of hydrogen demand and supply, leading to uncertainty for organizations looking to enter the hydrogen market or to scale their operations.

Government and private sector support is projected to heavily affect hydrogen uptake. At the same time, future technological developments of alternatives (for instance, high-temperature electric furnaces, long-duration energy storage, and availability of biobased feedstock) could also create competition in some of the new applications for hydrogen and hydrogen-based fuels. Hydrogen companies may benefit from closely monitoring signposts on policies, the development of hydrogen-enabling infrastructure, and the cost-competitiveness of hydrogen-based technologies compared to other low-carbon alternatives as they chart their way forward.

To request access to the data and analytics related to our Hydrogen outlook, or to speak to our team, please contact us .

Chiara Gulli is a solution manager in McKinsey’s Amsterdam office; Bernd Heid is a senior partner in the New York office, where Maurits Waardenburg is a partner;  Jesse Noffsinger is a partner in the Seattle office; and Maurits Waardenburg is a partner in the Brussels office.

The authors wish to thank Cristina Blajin, Alison Hightman, Albertine Potter van Loon, and Ole Rolser for their contributions to this article.

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Hydrogen Business Models: details of the Low Carbon Hydrogen Agreement begin taking shape

In August 2021, as part of the UK Hydrogen strategy , the Department for Business, Energy & Industrial Strategy (“ BEIS ”) launched its first consultation on a business model establishing the financial support framework for low-carbon hydrogen (the “ Business Model Consultation ”). This consultation was published alongside a related consultation to define “low-carbon hydrogen” (“ Hydrogen ”) i.e. the Hydrogen which will be eligible for support under the business model (the “ Hydrogen Standard Consultation ”).

On 8 April 2022, BEIS published a raft of Hydrogen-related updates, including:

• its response to the Business Model Consultation (the “Business Model Response”);
• indicative heads of terms for the Hydrogen business model (the “LCHA Heads of Terms”); and
• its response to the Hydrogen Standard Consultation (the “Hydrogen Standard Response”) and associated draft guidance on greenhouse gas emissions and sustainability criteria (the “Draft Guidance”).

We summarise the key takeaways of the Business Model Response, LCHA Heads of Terms, Hydrogen Standard Response and Draft Guidance here. For our commentary on the Net Zero Hydrogen Fund (“ NZHF ”) Consultation Response and Funding Allocation Consultation, please see here .

Price support on offer

For the most part, BEIS intends to proceed with the minded-to positions set out in the Business Model Consultation i.e. to support new Hydrogen production capacity (of 5MW and above) through a combination of price support and volume support, being:

• (price support) payment of a variable premium (calculated as the difference between a “strike price” (to enable producers to cover costs) and a “reference price” (the higher of the actual price received by the producer and the natural gas price)) - see figure below; and
• (volume support) price support to be granted on a sliding scale whereby producers receive higher levels of price support during times of low offtake.

BEIS continues to favour a single business model to apply across different project types and sizes, building in flexibility e.g. around indexation and strike price and possibly running separate allocation processes for different project categories. What’s clear is that due to the way the support has been structured, blending of hydrogen onto the national gas network will not be compatible with the proposed payment structure.

Who can get support?

One change of tack is the proposed treatment of Hydrogen as a feedstock, which was previously not going to be supported. In light of stakeholder responses, BEIS, subject to compliance with subsidy control and public law principles, intends to allow Hydrogen producers to receive a subsidy for sales to feedstock users while continuing to develop additional measures to avoid possible distortions.

Additionally, BEIS is still considering how to accommodate “own consumption” projects, where there may be little or no commercial incentive for the producer to increase their achieved sales price, and sales to intermediaries, particularly where they intend to take ownership of the Hydrogen produced.

Due the nascent nature of the Hydrogen economy in comparison with the electricity market, BEIS considers that a different approach is needed to achieve the objectives of the Hydrogen business model in the absence of a Hydrogen price benchmark, however details of the anticipated direction of travel have not yet been provided.

Sources of funding

Likely to prove controversial is the confirmation that all Hydrogen produced should be levy funded by 2025. It is not clear if funding will come from an additional levy pot or within the existing subsidy budget.

In addition, BEIS does not see a compelling case for introducing a separate scheme for smaller scale projects (below 5MW) for business model support, but such projects will have the option to apply to ‘strand 2’ of the NZHF if they meet all other eligibility criteria (see our commentary on funding allocation here ).

Within the scope of funding, at least for the initial projects, BEIS is considering the extent to which transport and storage (“ T&S ”) networks supporting carbon capture, usage and storage (“ CCUS ”) enabled Hydrogen production should be supported via the business models, i.e the Low Carbon Hydrogen Agreement (“ LCHA ”). The concern is that insufficient T&S infrastructure represents a risk for hydrogen producers that will stymie their ability to develop projects. The government plans to publish their findings on T&S infrastructure requirements alongside either a call for evidence or a further consultation later this year.

What are the terms of the contract: LCHA Heads of Terms

The Hydrogen business model is heavily based on the principles of the low-carbon CfD. Accordingly, the heads of terms of the proposed LCHA echo the terms of the AR4 CfD, with little detail of how they may need to be adapted for hydrogen projects. However, there are some early key differences - most notably in the mechanism for determining support level and payment mechanism. Key terms and how they compare to the AR4 CfD are:

Payments will be made on a £ per MWh (higher heating value (HHV)) basis. As with the generic CfDs, payments will be two-ways, with the Producer paying the Hydrogen Counterparty the difference between the Reference Price and the Strike Price if the Reference Price exceeds the Strike Price.

The publications provide further detail on BEIS’ thinking on business model support for Hydrogen that will be required to achieve the government’s recently updated goal of achieving 10GW of Hydrogen capacity by 2030 (see here for our commentary on the energy security strategy), as well as supporting deployment of Hydrogen at the levels that would support the UK’s aim to achieve net-zero by 2050.

While the LCHA Heads of Terms are helpful and have been welcomed by the industry, important elements around payment provisions and where the funding will come from remain to be developed. Given the wider pressures of rising energy prices and the impacts of this on businesses and electricity consumers overall, the scope of the levy and who it will apply to will be a point of careful consideration for government. What’s more given the failure of so many suppliers in the British market (more than half have exited the market in the last 2 years), the pressures on remaining electricity suppliers will need to be factored in when casting the “levy” net.

In addition, some in the industry may be disappointed that blending has not been included in the business model or that the government has not provided a separate support scheme for smaller projects. The decision for the levy funding is expected to need new primary legislation, which will impact the timeline for rendering government’s Hydrogen ambitions a reality. BEIS have confirmed that government intends to legislate subject to the availability of Parliamentary time. Further details of this are expected to be in the Queen’s Speech on 10 May 2022.

Other aspects, including how price support for own consumption projects and sales to intermediaries will operate, the absence of a Hydrogen price benchmark, indexation methods, and contract length, will also need to be answered so as to allow projects needing this clarity to proceed.

Investors looking at hydrogen projects in the UK as part of the European and global landscape will also need to understand how the UK’s Hydrogen Standard compares to those proposed in the EU and elsewhere, especially where such investors are supporting projects looking to export hydrogen around the world. It would be a disadvantage if the hydrogen standards in different countries led to the development of a fragmented hydrogen economy instead of all supporting the global achievement of the Paris Agreement goals.

BEIS aims to finalise the business model in 2022, enabling the first contracts to be allocated from 2023.

Overall, the government has set clear delivery aims through to 2035 in its 2035 hydrogen delivery plan (see figure below), which anticipates 2GW of hydrogen production in construction and operations. Clearly much of the hydrogen delivery also depends on the other strands that are promoting the development of CCUS clusters remaining on track.

Key contact

Dalia Majumder-Russell

Related content, cms annual review of english construction law developments: an international perspective, uk tax disputes digest (summer 2024), ukraine launches large-scale privatisation.

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President Biden’s Investing in America Agenda Drives $50 Billion in Public-Private Sector Investment to Jumpstart America’s Clean Hydrogen Economy; Seven Clean Hydrogen Hubs Will Create Tens of Thousands of High-Quality Jobs, Strengthen the Nation’s Energy Security, and Combat the Climate Crisis

WASHINGTON, D.C. — As part of President Biden’s Investing in America agenda , a key pillar of Bidenomics, the U.S. Department of Energy (DOE) today announced $7 billion to launch seven Regional Clean Hydrogen Hubs (H2Hubs) across the nation and accelerate the commercial-scale deployment of low-cost, clean hydrogen—a valuable energy product that can be produced with zero or near-zero carbon emissions and is crucial to meeting the President’s climate and energy security goals. This historic milestone is part of the third installment of the Investing in America tour, during which President Biden and Secretary Granholm will travel to Philadelphia, Pennsylvania to announce this unprecedented investment in American manufacturing and jobs. 

Funded by President Biden’s Bipartisan Infrastructure Law, the seven H2Hubs will kickstart a national network of clean hydrogen producers, consumers, and connective infrastructure while supporting the production, storage, delivery, and end-use of clean hydrogen. The H2Hubs are expected to collectively produce three million metric tons of hydrogen annually, reaching nearly a third of the 2030 U.S. production target and lowering emissions from hard-to-decarbonize industrial sectors that represent 30 percent of total U.S. carbon emissions. Together, they will also reduce 25 million metric tons of carbon dioxide (CO2) emissions from end-uses each year—an amount roughly equivalent to combined annual emissions of 5.5 million gasoline-powered cars—and create and retain tens of thousands of good-paying jobs across the country while supporting healthier communities. 

Today’s announcement is one of the largest investments in clean manufacturing and jobs in history. This transformative Federal investment will be matched by recipients to leverage a total of nearly $50 billion to strengthen local economies, create and maintain high-quality jobs—especially those that support worker organizing and collective bargaining—and slash harmful emissions that jeopardize public health and pollute local ecosystems. In addition to positioning America to be a global leader in emerging clean energy industries, the H2Hubs will implement comprehensive local benefits and workforce proposals to support the President’s vision of an equitable and inclusive clean energy future. 

“Unlocking the full potential of hydrogen—a versatile fuel that can be made from almost any energy resource in virtually every part of the country—is crucial to achieving President Biden’s goal of American industry powered by American clean energy, ensuring less volatility and more affordable energy options for American families and businesses,” said U.S. Secretary of Energy Jennifer M. Granholm . “With this historic investment, the Biden-Harris Administration is laying the foundation for a new, American-led industry that will propel the global clean energy transition while creating high quality jobs and delivering healthier communities in every pocket of the nation.”   

Clean hydrogen is a flexible energy carrier that can be produced from a diverse mix of domestic clean energy resources, including renewables, nuclear, and fossil resources with safe and responsible carbon capture. Its unique characteristics will allow the H2Hubs to substantially reduce harmful emissions from some of the most energy-intensive sectors of the economy, such as chemical and industrial processes and heavy-duty transportation, while creating new economic opportunities across the country. It could also be used as a form of long-duration energy storage to support the expansion of renewable power. By enabling the development of diverse, domestic clean energy pathways across multiple sectors of the economy, clean hydrogen will strengthen American energy independence and accelerate the American manufacturing boom that has already created more than 815,000 jobs since President Biden took office. 

Selected projects for negotiation include: 

• Appalachian Hydrogen Hub (Appalachian Regional Clean Hydrogen Hub (ARCH2); West Virginia, Ohio, Pennsylvania) — The Appalachian Hydrogen Hub will leverage the region’s ample access to low-cost natural gas to produce low-cost clean hydrogen and permanently store the associated carbon emissions. The strategic location of this H2Hub and the development of hydrogen pipelines, multiple hydrogen fueling stations, and permanent CO2 storage also have the potential to drive down the cost of hydrogen distribution and storage. The Appalachian Hydrogen Hub is anticipated to bring quality job opportunities to workers in coal communities and create more than 21,000 direct jobs—including more than 18,000 in construction and more than 3,000 permanent jobs, helping ensure the Appalachian community benefits from the development and operation of the Hub. (Amount: up to $925 million) 
• California Hydrogen Hub (Alliance for Renewable Clean Hydrogen Energy Systems (ARCHES); California) — The California Hydrogen Hub will leverage the Golden State’s leadership in clean energy technology to produce hydrogen exclusively from renewable energy and biomass. It will provide a blueprint for decarbonizing public transportation, heavy duty trucking, and port operations—key emissions drivers in the state and sources of air pollution that are among the hardest to decarbonize. This H2Hub has committed to requiring Project Labor Agreements for all projects connected to the hub, which will expand opportunities for disadvantaged communities and create an expected 220,000 direct jobs—130,000 in construction jobs and 90,000 permanent jobs. (Amount: up to $1.2 billion)  
• Gulf Coast Hydrogen Hub (HyVelocity H2Hub; Texas) — The Gulf Coast Hydrogen Hub will be centered in the Houston region, the traditional energy capital of the United States. It will help kickstart the clean hydrogen economy with its plans for large-scale hydrogen production using both natural gas with carbon capture and renewables-powered electrolysis, leveraging the Gulf Coast region’s abundant renewable energy and natural gas supply to drive down the cost of hydrogen—a crucial step to achieving market liftoff. This H2Hub is expected to create approximately 45,000 direct jobs—35,000 in construction jobs and 10,000 permanent jobs. (Amount: up to $1.2 billion)  
• Heartland Hydrogen Hub (Minnesota, North Dakota, South Dakota) — The Heartland Hydrogen Hub will leverage the region’s abundant energy resources to help decarbonize the agricultural sector’s production of fertilizer, decrease the regional cost of clean hydrogen, and advance the use of clean hydrogen in electric generation and for cold climate space heating. It also plans to offer unique opportunities of equity ownership to tribal communities through an equity partnership and to local farmers and farmer co-ops through a private sector partnership that will allow local farmers to receive more competitive pricing for clean fertilizer. The Heartland Hydrogen Hub anticipates creating upwards of 3,880 direct jobs–3,067 in construction jobs and 703 permanent jobs. (Amount: up to $925 million) 
• Mid-Atlantic Hydrogen Hub (Mid-Atlantic Clean Hydrogen Hub (MACH2); Pennsylvania, Delaware, New Jersey) — The Mid-Atlantic Hydrogen Hub will help unlock hydrogen-driven decarbonization in the Mid-Atlantic while repurposing historic oil infrastructure and using existing rights-of-way. It plans to develop renewable hydrogen production facilities from renewable and nuclear electricity using both established and innovative electrolyzer technologies, where it can help reduce costs and drive further technology adoption. As part of its labor and workforce commitments to the community, the Mid-Atlantic Hydrogen Hub plans to negotiate Project Labor Agreements for all projects and provide close to $14 million for regional Workforce Development Boards that will serve as partners for community college training and pre-apprenticeships. This H2Hub anticipates creating 20,800 direct jobs—14,400 in construction jobs and 6,400 permanent jobs. (Amount: up to $750 million)
• Midwest Hydrogen Hub (Midwest Alliance for Clean Hydrogen (MachH2); Illinois, Indiana, Michigan) — Located in a key U.S. industrial and transportation corridor, the Midwest Hydrogen Hub will enable decarbonization through strategic hydrogen uses including steel and glass production, power generation, refining, heavy-duty transportation, and sustainable aviation fuel. This H2Hub plans to produce hydrogen by leveraging diverse and abundant energy sources, including renewable energy, natural gas, and low-cost nuclear energy. The Midwest Hydrogen Hub anticipates creating 13,600 direct jobs—12,100 in construction jobs and 1,500 permanent jobs. (Amount: up to $1 billion)
• Pacific Northwest Hydrogen Hub (PNW H2; Washington, Oregon, Montana) — The Pacific Northwest Hydrogen Hub plans to leverage the region’s abundant renewable resources to produce clean hydrogen exclusively via electrolysis. Its anticipated widescale use of electrolyzers will play a key role in driving down electrolyzer costs, making the technology more accessible to other producers, and reducing the cost of hydrogen production. The Pacific Northwest Hydrogen Hub has committed to negotiating Project Labor Agreements for all projects over $1 million and investing in joint labor-management/state-registered apprenticeship programs. This H2Hub is expected to create more than 10,000 direct jobs—8,050 in construction jobs and 350 permanent jobs. (Amount: up to $1 billion) 

Learn more about the seven H2Hubs selected for award negotiations here .

DOE’s historic $7 billion of Federal investment in clean hydrogen will be met with the H2Hubs selectees’ cost share of more than $40 billion. Together with tax incentives in the President’s historic Inflation Reduction Act and ongoing research and development efforts across the Federal government, today’s announcement will help drive private sector investment in clean hydrogen, setting the nation on a course to hit critical long-term decarbonization objectives. 

Delivering Economic and Environmental Benefits to Communities Across America As part of the President’s commitments to invest in America’s workforce, support high-quality American jobs, advance environmental and energy justice, and strengthen tribal energy sovereignty, each H2Hub was required to develop and ultimately implement a comprehensive Community Benefits Plan (CBP)—which will be informed by early and meaningful community and labor engagements in each region.  

The Biden-Harris Administration is dedicated to ensuring the benefits of the clean energy transition flow directly to impacted communities—a stark contrast from the legacy of underinvestment and environmental degradation resulting from the development of past energy infrastructure projects. President Biden’s Justice40 Initiative aims to ensure that 40 percent of the overall benefits of certain Federal investments—including from the H2Hubs—positively impact disadvantaged communities that are marginalized by underinvestment and overburdened by pollution.    

The Administration continues to work in partnership with frontline communities and industries to build a clean energy economy that is equitable and responsive to many of the concerns raised by Environmental Justice communities. As part of those efforts, DOE will co-host virtual community-level briefings for each H2Hub to provide local communities with a forum to learn about and provide input on the selected projects. 

Providing Market Certainty and Unlocking Private Sector Investment To ensure the long-term success of the clean hydrogen economy and support the H2Hubs’ development, DOE issued a Request for Proposals in September 2023 to solicit a U.S. entity to execute a demand-side initiative. This demand-side initiative seeks to ensure that both producers and end users in the H2Hubs have the market certainty they need during the early years of clean hydrogen production to unlock critical private investment. 

DOE’s Office of Clean Energy Demonstrations (OCED) manages the H2Hubs program and will provide project management oversight for the projects selected to produce clean hydrogen; demonstrate end uses; generate training opportunities and good-paying, high-quality jobs; reduce emissions and pollution; and ensure tangible benefits flow to local Hub communities.   

Selection for award negotiations is not a commitment by DOE to issue an award or provide funding. Before funding is issued, DOE and the applicants will undergo a negotiation process, and DOE may cancel negotiations and rescind the selection for any reason during that time.    

Learn more about how OCED , the U.S. National Clean Hydrogen Strategy and Roadmap , and the Hydrogen Interagency Task Force are supporting the Biden-Harris Administration’s all-of-government approach to address the climate crisis and deliver a clean and equitable energy future for every American.