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Challenges of integrating the hydrogen market in Germany

Updated: Oct 25

Despite the high decarbonisation potential of hydrogen, expansion of hydrogen technologies is inhibited by several factors that have a negative impact on the economic viability of projects.


First, hydrogen technologies tend to be far more costly in terms of upfront investment costs when compared to existing native technologies. This is due to the early-stage production processes and limited production quantity. However, just as the cost of wind and solar technologies have come down as those technologies have developed, so too is the price of hydrogen technologies expected to fall rapidly over the coming years. The decline in price will result from technical development, learning rates, and economies of scale. Yet, this does not change the fact that there is still a significant hurdle to overcome today, as the development of hydrogen projects is currently only possible through state funding, subsidisation, or implementation by energy majors.


Furthermore, storing and transporting hydrogen is energy and cost intensive due to the properties of the element. According to Andersson et al. 2019, it has a remarkably high gravimetric energy density of 33,33 kWh/kg (referring to the lower heating value) and therefore contains almost three times as much energy per weight compared to petrol or diesel (Andersson et al., 2019). However, hydrogen is the lightest element and for that reason it has an extremely low volumetric energy density, meaning that stored under standard conditions it has 3,000 to 4,000 times less energy than petrol and diesel per litre (Andersson et al., 2019). To overcome this issue, hydrogen is either stored and transported under very high pressure (usually 200 – 700 bar) or liquified, which is achieved through cooling it down to roughly -253 °C (Andersson et al., 2019). Both methods are fairly energy intensive. Compressing the hydrogen can use up to 10 – 15% of the contained energy, and liquification uses even more energy (20 – 30% of the total energetic content) (Andersson et al., 2019). Other ways of storing hydrogen, such as chemical and physical carriers like liquified organic hydrogen carriers (LOHC) and metal hydride storages, only run with process heat, which is needed to charge or discharge the carrier medium. While these can be more efficient in certain sets of use cases, so far, they have been rarely used in the transport and storing sector.


Finally, in developing markets it is either the case that supply follows demand or vice versa. However, innovative technologies often suffer from a ‘chicken and egg’ problem, which also occurs with regards to hydrogen technologies. The best example for this is the expansion of hydrogen refuelling stations and the growth of fuel cell vehicle sales: if more refuelling stations were available, then more hydrogen vehicles would be used. However, if more fuel cell vehicles were on the road, then more refuelling stations would be under construction to supply the demand. This same issue affects many steps in the hydrogen supply chain. Therefore, it is important to kickstart either supply or demand, so that the two sides of the market have a positive effect on each other. Germany is dealing with this issue through the ‘H2 Mobility Initiative’, which is committed to establishing a large network of hydrogen fuelling stations throughout Germany. Currently 100 of these stations are active, and the initiative is planning to construct 300 more in the coming years with funding by the German State (H2Mobility, 2022).

Figure: Challenges of the hydrogen market integration in Germany, Source: Andersson et al., 2019


All these factors have combined to prevent a dynamic, free market for hydrogen from forming, and thus hydrogen development remains centrally planned. Hydrogen projects are driven by bilateral contracts, in which suppliers and consumers commit to a certain amount of hydrogen generation or offtake respectively, and exchange promises to perform. This kind of contract gives both sides enormous security and the business case can be calculated very precisely for both participants. However, if supply and demand are not planned together, then hydrogen can only be bought from major players in the gas and energy business, who as a result are close to forming an oligopoly and charging extremely high costs. In turn, smaller market players have been discouraged from taking part, as they must either incur prohibitive costs or put significant effort into adopting hydrogen technologies.


On its way to its goal of climate neutrality by 2045, Germany needs to amend its regulations to promote the application of hydrogen technologies to a key element of its decarbonisation effort. One Step would be the forming of an open market where both suppliers and consumers, irrespective of their production or purchase quantities, can participate to enable the full potential of hydrogen technologies and accelerate market growth. This would have positive effects on trading–including transparency, investment signals, and scarcity pricing.


Sources:

Andersson, Joakim; Grönkvist, Stefan. 2016. Large-scale storage of hydrogen. International Journal of Hydrogen Energy, 44(23), 11901-11919. https://doi.org/10.1016/j.ijhydene.2019.03.063.

Hydrogen Council. 2020. Path to hydrogen competitiveness, https://hydrogencouncil.com/wp-content/uploads/2020/01/Path-to-Hydrogen-Competitiveness_Full-Study-1.pdf.

H2Mobility. 2022. Keep on rolling – Weiterfahren mit Wasserstoff, https://h2-mobility.de/h2-infrastruktur/.

International Energy Agency. 2019. The Future of Hydrogen, https://www.iea.org/reports/the-future-of-hydrogen.