Hydrogen Demand Is Set to Boom, but Growth Faces Big Hurdles

Hydrogen demand is set to rise sharply over the next two decades, but major bottlenecks such as long permitting times, higher equipment costs and lack of access to capital could slow growth in supply.

“The big issue today is that a lot of announcements are coming on stream which have a lot of potential, but only 6% to 10% are actually committed [in terms of financing],” said Pierre-Etienne Franc, CEO of Hy24, a hydrogen-focused investment fund. 

A new report from consulting firm McKinsey forecasts a fivefold rise in hydrogen demand to 600 million metric tons a year by 2050, if climate change is limited to 1.5 degree Celsius. On current trajectories, however, that supply could be between 175 million to 291 million metric tons a year if steps aren’t taken to speed up permitting and lower both equipment and investment costs, the report warned. 

Increasing the supply of hydrogen is crucial to global carbon goals as a way to decarbonize hard-to-abate sectors, such as maritime transport and heavy industry. Using green hydrogen as fuel for steelmaking can cut emissions by up to 95%, according to H2 Green Steel, a Swedish low-carbon steel startup.

McKinsey identified three main bottlenecks: Higher costs, slow permitting and a lack of access to capital. 

“Inflation, raw materials, the cost of energy all have an impact on capex and on equipment supplies,” Franc said. Higher interest rates have made securing funding for big infrastructure projects more expensive, with fewer willing to put up the cash, according to Franc. “If you do not have direct supply financing at low interest rates, it is very difficult to speed up the shift,” he added.

Jason Cheng, CEO of climate-focused hedge fund Kerogen Capital, underscored that the days of cheap money are over, which may make wind, solar and hydrogen tougher sells. “Single-digit returns from core infrastructure were always going to be challenged in a higher-rate environment, and investors are now seeking higher-return opportunities outside commoditized areas such as onshore wind and solar,” he said.

While costs and interest rates have been rising, so, too, have government incentives for hydrogen. The World Platinum Investment Council estimates that up to $300 billion of subsidies have been made available for hydrogen-related projects, up from $50 billion two years ago. Last week, $7 billion of subsidies dedicated to hydrogen projects in the U.S. were announced by the Energy Department. 

But the industry says more policy support is needed. “Regulators haven’t created a level playing field for hydrogen,” said Margery Ryan, market research manager of PGMs at British chemicals firm Johnson Matthey. 

More government backing is needed to foster demand, including the shift to green steel, green ammonia, hydrogen-powered trucks and the build-out of the fueling infrastructure. “If we get more regulatory support, we could see demand taking off,” she said. 

Faster permitting times are needed to bring more hydrogen projects online, as well as the renewable energy to power their electrolyzers, industry experts say. A recent report from the International Energy Agency said current project lead times are too long and can act as a barrier to clean hydrogen uptake. The agency urged governments to “work to make licensing and permitting processes as efficient as possible.”

McKinsey echoed that sentiment, highlighting that investment for the supporting infrastructure such as pipelines is needed.

“Ideal conditions for clean hydrogen production aren’t necessarily co-located with large demand centers,” said Bram Smeets, a partner at McKinsey. For example, the U.S. Midwest wind corridor from the Dakotas to Texas is an ideal region to produce hydrogen, but chemicals plants, ideal buyers of hydrogen, are scattered far away, along the East, West and Gulf Coasts.

More regulatory support would help to build or retrofit the pipeline network to transport hydrogen, according to Ole Rolser, also a partner at McKinsey. Policy support for developing infrastructure—like the U.S. Inflation Reduction Act—reliable base demand and other early investment “will be important to overcome the bottlenecks for a larger hydrogen uptake and decarbonization contribution,” he added.

Once you’ve got over the initial cost of infrastructure, the cost comes down, said Ryan. “The potential is absolutely there, but it’s about getting over that hump,” she added.

Write to Yusuf Khan at yusuf.khan@wsj.com