Competitiveness of hydrogen as a key technology: Strategies and measures for the German economy

Competitiveness of hydrogen as a key technology: Strategies and measures for the German economy

The transformation to a climate-neutral economy presents Germany with enormous challenges. Green hydrogen is considered a key technology and a crucial element of the energy transition. However, current analyses show that the costs of hydrogen are still significantly higher than those of fossil fuels. Nevertheless, there are promising developments: By 2030, green hydrogen could already be competitive in certain application areas if the right political framework is established. This requires extensive investments in production facilities, infrastructure, and technological innovations, while simultaneously ensuring European value creation.

The current situation of the hydrogen economy

Hydrogen is described by experts as a key energy carrier of the future and the “missing piece of the energy transition puzzle.” It combines energy security, climate neutrality, and competitiveness in a single concept. The German Federal Government recognized this importance and published the National Hydrogen Strategy (NWS) in June 2020. This strategy forms the foundation for building a hydrogen economy in Germany, in which green hydrogen is produced, transported, and ultimately used. The goal is ambitious: By 2030, green hydrogen production facilities with a total capacity of 10 gigawatts , as well as the associated renewable energy generation capacities, are to be built.

Germany is planning a comprehensive hydrogen infrastructure network. By 2027/28, an initial network of more than 1,800 kilometers of converted and newly constructed hydrogen pipelines is to be completed, with approximately 4,500 kilometers to be added across Europe. Long-term plans envision the network expanding to 9,040 kilometers by 2032, connecting key hydrogen hubs in all German states: ports, production sites, and industrial centers. The first 525 kilometers of the network are scheduled to be operational by 2025, making the ramp-up of the hydrogen economy more tangible.

Despite these ambitious plans, the hydrogen economy in Germany is still in its infancy. The current market ramp-up is progressing more slowly than hoped. Producers, transport infrastructure, and demand are insufficiently aligned, which is hindering the development of the hydrogen economy. Furthermore, the costs for green hydrogen are currently significantly higher than for conventional energy carriers.

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Cost factors and price gap in hydrogen

The current cost situation represents one of the biggest hurdles to the market ramp-up of green hydrogen. Studies predict that in 2030, the production costs for green hydrogen will still 2.3 times higher than those of conventional, fossil fuels. This price gap is a key problem for potential customers and investors.

Several factors contribute to the high costs. On the production side, the main factors are the capital costs for electrolyzers and the electricity costs for the electrolysis process. However, the cost of electrolyzers could decrease significantly: from $660-$1,050/kW in 2020 to $230-$380/kW in 2030, according to a McKinsey report commissioned by the Hydrogen Council. Transportation and infrastructure costs, as well as regulatory costs and levies, further increase the price.

The transport aspect should not be underestimated: Transport from North Africa to West Germany is estimated at around USD 0.5/kg. For longer distances by sea, transport costs can rise to USD 2-3/kg due to the necessary conversion to liquid hydrogen or the addition of carrier liquids such as LOHC or ammonia.

Nevertheless, there are positive prospects for long-term price developments. After 2035, end-customer prices for hydrogen could fall and approach those of natural gas. Key drivers for this include the declining costs of hydrogen production and rising CO2 prices within the framework of emissions trading. By 2045, the cost of hydrogen could then fall to around 11 to 15 ct/kWh. By comparison, even if natural gas is no longer permitted for use in 2045 according to the draft Building Energy Act, hypothetical end-customer prices would rise to 10 to 12 ct/kWh, particularly due to increasing CO2 prices.

Political measures to promote competitiveness

To increase the competitiveness of green hydrogen, the German Federal Government has introduced various policy instruments. The National Hydrogen Strategy provides the overarching framework and comprises a total of 37 measures to support the market ramp-up of hydrogen technologies and to establish the corresponding value chains. These include, among other things, the creation of legal frameworks that promote the transition to renewable energies and green hydrogen, as well as driving the expansion of infrastructure.

A crucial factor for the competitiveness of green hydrogen is the pricing of CO2 emissions. At a CO2 price of €100/t CO2, significantly more applications for green hydrogen become competitive, including road and rail transport, as well as its use as a feedstock in refineries and steel production. Even at CO2 prices between USD 35 and USD 50/t CO2, blue hydrogen (produced from natural gas with carbon capture and storage) reaches price parity with gray hydrogen (produced from natural gas without carbon capture and storage).

Germany and the EU will provide billions of euros in funding over the next few years to ramp up green hydrogen production and transform industry to climate-neutral production. The economic stimulus package of June 3, 2020, provides an additional 9 billion euros. This funding will flow into various programs, such as the National Innovation Program for Hydrogen and Fuel Cell Technology, with up to 1.4 billion euros allocated between 2016 and 2026, and the "Ideas Competition: Hydrogen Republic Germany."

Furthermore, the Federal Ministry for Economic Affairs and Climate Action (BMWK) has reached an agreement with the European Commission on the regulatory framework for promoting hydrogen power plants. Three concepts for tendering new plants have been formulated: “Sprinter”, Hybrid, and H₂-Ready. The aim is to tender 8.8 GW of new power plants that will be operated with hydrogen from the outset, as well as up to 15 GW of hydrogen power plants by 2035 that can be temporarily operated with natural gas until they are connected to the hydrogen grid.

Technological innovations and cost reduction potential

Reducing the production costs of green hydrogen depends significantly on technological innovations. In a white paper, Ramboll identifies various starting points for cost reductions in plant design, including scaling, modularization, and the development of standardized solutions. These cost reductions should be implemented at the stack, system, and plant levels.

The market ramp-up itself is a key factor in cost reduction. Increasing production volumes enable economies of scale, leading to lower unit costs. Investors and developers of Power-to-X and green hydrogen technologies previously assumed that the costs of hydrogen production and supply would decrease simply through the expansion of electrolysis capacity and the simultaneous increase in demand. However, these optimistic forecasts for capital expenditure (CAPEX) reductions have not yet materialized. A major reason for this is that the market ramp-up is progressing more slowly than anticipated.

Another approach to reducing costs is improving the efficiency of electrolysis. Research and development plays a central role here. The German Federal Government is therefore specifically funding basic research into green hydrogen, with a focus on materials research, systems studies, and potential key technologies of the next and following generations.

Infrastructure expansion and logistics concepts

The development of a high-performance hydrogen infrastructure is a fundamental prerequisite for the competitiveness of this energy carrier. The planned core hydrogen network is expected to grow to 9,040 kilometers by 2032, with approximately 40 percent of the pipelines being newly constructed and existing natural gas pipelines being converted for the remaining 60 percent. The total costs, amounting to around 19 billion euros, are to be borne by the private sector – with government support through caps on network charges.

A particular challenge lies in the “last mile”—that is, how smaller consumers who are not directly connected to the core network can gain pipeline access to green hydrogen. Currently, many isolated hydrogen solutions are emerging, relying on their own hydrogen production capacities, supplemented by the purchase and delivery of hydrogen by tanker truck. These are viable approaches for the initial phase of the hydrogen economy, but in the medium to long term, these isolated solutions must also be connected to the planned core network.

Besides pipeline transport, there are other logistics concepts for hydrogen. For long-distance transport by ship, conversion to liquid hydrogen (LH2) or combination with carrier liquids (LOHC or ammonia) is necessary. However, these processes involve additional costs. If the end use can be directly as LH2 or ammonia, transport costs decrease significantly.

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Market mechanisms and incentives for buyers

To stimulate demand for green hydrogen, various market mechanisms and incentives for potential customers are needed. A key problem at present is that industry is hesitant to invest in hydrogen technologies due to a lack of economic incentives. A viable business case can facilitate investment and create demand.

One promising approach is Carbon Contracts for Difference (CCfD), in which the government compensates for the difference between the current CO2 price and the actual CO2 avoidance costs of a climate-friendly project. These instruments offer companies planning security for long-term investments in climate-friendly technologies.

Other important incentive mechanisms include quotas for green hydrogen in certain sectors, tax breaks for hydrogen users, and long-term offtake agreements. The McKinsey report identifies 22 end-use applications for which hydrogen can be the most competitive solution. These include, in particular, applications in industry and the transportation sector.

International cooperation and import strategies

Germany will not be able to meet its hydrogen needs solely through domestic production. Therefore, import strategies and international cooperation are crucial. Federal Research Minister Bettina Stark-Watzinger emphasized that Germany cannot meet its hydrogen demand on its own and that an import strategy is therefore an important next step.

According to a McKinsey study, imported hydrogen could be competitive by 2030. Green hydrogen from Saudi Arabia is expected to be available in Rotterdam for $3.10/kg, and even for $1.90/kg via pipeline from Algeria. These import routes could make a significant contribution to meeting Germany's hydrogen demand.

However, when designing import strategies, care must be taken to avoid creating a critical dependency on individual supplier countries. If the EU and Germany source essential components or entire electrolysis plants from individual non-EU countries, such a dependency risks being created, potentially leading to the loss of value chains within the EU.

Securing European value creation

As the green hydrogen market ramps up, hydrogen is becoming a fundamental energy carrier for a secure renewable energy economy. This could lead to the development of a huge market for hydrogen technologies, creating up to 5.4 million new jobs in the European Union. It is therefore crucial to create the conditions now that enable European manufacturers to secure a leading market position in global competition.

One challenge is that competitors outside the EU can currently offer hydrogen technologies up to 50 percent cheaper than European manufacturers. This is often due to lower labor and energy costs, or to massive government subsidies combined with local market incentives. To safeguard European value creation, the German Hydrogen Association (DWV) is therefore calling for resilience criteria in public funding instruments of the European Union.

Federal Minister for Economic Affairs Robert Habeck emphasized that investments in hydrogen are “an investment in our future – in climate protection, in skilled jobs, and in energy security.” The National Hydrogen Strategy sets the course for close cooperation with European and international partners.

Specific recommendations for action for the economy

To accelerate the market ramp-up of green hydrogen and increase its competitiveness, concrete measures are needed from both industry and policymakers. The German Hydrogen Association (DWV) has developed a total of 85 measures in its “HyGuide 2030” designed to stimulate the production, application, and market-driven demand for green hydrogen products in the industrial, chemical, mobility, energy, and heating sectors.

A key recommendation is to accelerate the planning and approval processes for hydrogen projects. Existing obstacles to the ramp-up of the hydrogen market economy must be removed. Another important point is the combination of domestic production and strategic imports to ensure a sufficient supply of green hydrogen.

For the transition phase, a technology-neutral approach should be pursued, which also allows the use of blue hydrogen (from natural gas with CO2 capture) as a transitional solution until green hydrogen is available in sufficient quantities and at competitive prices. The use of blue hydrogen will be indispensable until green hydrogen is competitive.

Another important measure is the coordination of all stakeholders along the hydrogen value chain. Producers, network operators, consumers, and policymakers must work closely together and pull in the same direction to accelerate the ramp-up of the hydrogen economy.

Perspectives for the competitiveness of hydrogen

Hydrogen has the potential to become a key energy carrier in a climate-neutral economy. Currently, however, the market ramp-up is still in its early stages, and the costs of green hydrogen are significantly higher than those of fossil fuel alternatives. Nevertheless, there are promising developments that point to increasing competitiveness in the coming years.

According to a McKinsey study, hydrogen produced from EU offshore wind energy, as well as imported hydrogen, could be competitive by 2030. After 2035, end-customer prices for hydrogen could fall and approach those of natural gas. However, this positive development depends on the policy framework being consistently aligned with the market ramp-up of hydrogen and on the necessary investments being made in production, infrastructure, and applications.

Developing a hydrogen economy in Germany and Europe offers enormous opportunities for sustainable economic growth and job creation. At the same time, we face major challenges, particularly in international competition. It is essential to secure European value creation while simultaneously benefiting from the advantages of a global hydrogen economy.

Green hydrogen will be available in sufficient quantities as early as 2030 if the German government seizes all opportunities to immediately ramp up the hydrogen market economy. Through a clear strategic approach with concrete and verifiable targets, the German government must focus on renewable energies and the hydrogen produced from them. This will create planning certainty for all stakeholders.

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