The hydrogen revolution accelerates

Hydrogen has both flexibility and a high specific energy per unit mass – two attributes that make it uniquely capable at removing emissions from the harder-to-decarbonize parts of the global economy.

According to Goldman Sachs Research: 

• Hydrogen can be used as an energy fuel, energy vector and feedstock.
• Hydrogen can be used to store energy over the long term, propel heavy vehicles, and heat furnaces for the manufacture of steel among other heavy industrial uses.
• Hydrogen can get us closer to net zero.

“Green” hydrogen, which is produced by using renewable energy sources to electrolyze water and split it into hydrogen and oxygen, is one of the most promising alternatives to “gray” hydrogen, which relies on natural gas supplies – and produces carbon dioxide that then needs to be released or stored. According to a new report from Goldman Sachs Research, government incentives are powering major strides in green hydrogen investments, particularly in the United States.

The size of clean hydrogen projects is measured by the gigawatts (GW) used to power the electrolysis used in production. By this measure, the market is still in its infancy:  At the end of 2020, only about 0.3 GW of capacity was installed.

However, based on projects that have been announced, GS Research estimates as much as 137 GW will be installed by the end of 2030, about 1.7 times more than last year’s estimate of 80 GW. Given the long lead times in creating clean hydrogen production facilities, GS expects even more projects will be announced in the next few years. “Many of the projects for the second half of this decade still have not yet been announced, and are therefore not captured here, implying further upside,” writes Goldman Sachs equity research analyst Michele Della Vigna.

The clean hydrogen industry is scaling up not just in the number of projects planned, but also in the average size of them. The research team estimates that the average project will increase more than 600 times from the current dimensions.

The effects of U.S. policy changes

The U.S. has historically lagged the rest of the world in clean hydrogen development, but the incentives in the Inflation Reduction Act have spurred a development boom in the U.S., with planned installed capacity jumping to 12 GW from 2 GW by 2030. The increase will help the U.S. narrow the gap with the rest of the world, but likely not close it since projects in Europe, Australia and other parts of Asia are also accelerating. The report estimates that Europe will drive the growth of installed capacity, adding 50 GW of cumulative capacity by 2030, followed by Australia with 34 GW, Africa with 25 GW, and Latin America with 17 GW.

“We expect this [U.S. growth] trend to continue further with the introduction of IRA being a game-changer for the production of hydrogen and bringing significant benefits for companies with current or planned hydrogen projects in the U.S.,” Della Vigna writes. According to the report, the law offers several key incentives:

• Production tax credits. These 10-year credits apply to developers who produce clean hydrogen beginning this year or begin construction of new facilities before January 1, 2033.
• Investment tax credits for energy storage. The IRA expands the scope of existing credits for energy storage to include hydrogen.
• Clean vehicle credits. The credits extend to vehicles that use hydrogen fuel cells as well as electric batteries, and offer significant credits for commercial vehicles, for which hydrogen is particularly well suited.
• Alternative fuel credits. The IRA provides property tax credits for expanding alternative fueling stations, which will encourage more hydrogen transportation infrastructure.

By the team’s estimation, a $3 tax credit for every two kilograms of hydrogen produced would lower the cost of clean hydrogen to that of hydrogen currently produced with fossil fuels. “This effectively fully bridges the cost gap between grey hydrogen and green hydrogen from renewable power,” according to the report.