Johanna Englundh: Welcome to Morningstar. While the EU has high hopes and goals for green hydrogen to play a crucial role in the energy transition.
Demand in key sectors such as heavy industry, refineries and long-distance transportation is seemingly low. So what does the future hold for green hydrogen, and why is demand from European businesses not growing?
Marta Mancheva and Amar Causevic, stewardship managers at Morningstar Sustainalytics, thank you both for joining me today. So what is your view? Will green hydrogen play as big a role in the energy transition here in Europe as we might think?
Green hydrogen too expensive to produce
Marta Mancheva: This is one of the big questions we’ve been asking ourselves, Johanna, and that’s why we went out into the field and met with European companies in November.
You know, hydrogen was once touted as the new oil and was seen as a kind of silver bullet for Europe’s transition to clean energy. But the reality is that producing green hydrogen from renewable electricity is currently very expensive and not economically viable without massive subsidies on both the supply and demand side. In the long term, I believe that green hydrogen will play a role in decarbonizing sectors that are difficult to electrify, such as steel and cement, but also in industries that already use hydrogen, such as fertilizer production.
But to what extent and when this will happen on a large scale, we really don’t know. I would say that the future of the green hydrogen economy in Europe looks uncertain right now, and we are definitely past the hype phase. 2024 has actually been something of a reality check, not just for green hydrogen, but for Europe’s energy transition as a whole.
Leaders in green hydrogen
JE: Okay. Are there any examples of any kind of leaders in this field? Any European companies that are actually using green hydrogen to a large extent right now?
Amar Causevic: So Johanna, yes, there are three. The first one is actually Iberdrola IBE. And we visited it during our trip. It’s the Puertollano plant where they use solar energy.
Iberdrola is one of the largest renewable energy companies, using solar energy to power green hydrogen and supply a local Fertiberia plant. And they produce low-carbon fertilizers.
But this summer, Yara YAR from Norway opened the largest in Europe. If Iberdrola’s plant is 20 megawatts, this one is 24 megawatts. And they’re using it again, for their own low-carbon fertilizer production.
However, in our neighborhood here, speaking from Stockholm, there is an Everfuel EFUEL HySynergy plant in Frederica, Denmark, which is similar in size to Iberdrola’s 20 MW. And they plan to expand it to 300 in the next year or two. So it’s a big plant.
So those are the three that I would say are the most notable examples in Europe right now.
Three main challenges for green hydrogen in Europe
JE: Okay. And Marta, you mentioned costs. Would you say that’s the biggest challenge or are there some other big challenges as well when it comes to green hydrogen?
MM: So let’s first clarify a few things. There are better and worse uses for green hydrogen as a low-carbon technology, because in many cases there are actually cheaper, safer and more convenient alternatives. And this should always be the starting point when talking about the viability of green hydrogen.
To come back to your question, the main challenges are firstly that the cost of the renewable energy used in the production of green hydrogen can amount to 60% of the total production cost. That’s a lot. So this is what makes green hydrogen very expensive to produce in Europe today.
Second, building the infrastructure to produce, store and transport hydrogen is complex and costly.
Third, I mean, I already mentioned subsidies. Today, green hydrogen producers in Europe rely heavily on government funding to build production facilities.
At the same time, demand is growing very slowly because the companies that are supposed to buy and use green hydrogen simply lack the market incentives to pay a premium.
So in practice, industries are still hesitant to actually adopt green hydrogen as a decarbonization technology.
Green hydrogen a growing market despite setbacks
JE: Okay, so finally, is there anything you would like to say to investors who might be interested in hydrogen companies?
AC: Definitely not to give up. It was a hype a couple of years ago. Now we’re in a bit of murky waters, but it’s still a growing market.
Technology is advancing and every two or three years there are some breakthroughs. And maybe in the future there will be new breakthroughs that will reduce certain costs or risks.
Europe is investing a lot in this. We, especially after the war in Ukraine and other energy crises that we are facing in Europe, Europe is investing a lot and that means that we will have hydrogen in different applications all over Europe, and that will be supported by subsidies.
And I would like to add, in general, what we were told when we visited Iberdrola, they told us that besides the subsidies, besides the access to renewable energy, besides the grid connection, access to stable grid connection, a secured off taker is important.
So when investors are planning to invest in these projects, I think they need to articulate that there needs to be a secured off taker that’s going to be consistent and be ready to receive these hydrogen for some time to come, because it simplifies everything else that makes hydrogen more accessible.
But follow the market, follow what happens and let’s keep our fingers crossed.
JE: Thank you very much for joining me here today, and until next time, my name is Johanna Englundh and I work for Morningstar.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
