Hydrogen: This time, it’s hope, not hype

I know, I know, it’s been said before, and more than once: hydrogen is getting real. And ironically, I think that a large part of the reason is that its advocates are (mostly) modest about its prospects. That hasn’t always been the case. About once a decade since the early 1990s, hydrogen has been sold as just around the corner. The optimism was contagious, because it felt so good. Hydrogen could help decarbonize essentially every sector of the economy, with no harmful byproducts. Goodbye, climate change, hello cleaner air. In July 1999, the Economist asserted, “After many false starts, hydrogen power is at last in sight of commercial viability.” Not quite. 

Now, the commentary is more measured. But make no mistake: there is real progress here. In June, the G-20 made hydrogen one of the main features of its recent summit in Japan. “The new hydrogen economy is not just a dream – it’s quickly becoming a reality,” Toyota chairman Takeshi Uchiyamada said shortly before the conference. A week before that, the International Energy Agency, which is usually a restrained voice on new technology, issued a notably optimistic report on the subject. And I love that the first hydrogen taxi fleet is called Hype, as if mocking the breathless coverage of the past.

The most important thing to know about hydrogen is what it isn’t: it is not a source of energy. It is  a carrier of it (or “vector”). Hydrogen is the most common element on earth, but it still needs to be produced because it exists in combination with other elements. To isolate hydrogen from water, for example, the oxygen needs to be removed; ditto for other sources, such as coal, natural gas, or biomass. The most common method in commercial use now is to separate hydrogen from the carbon in methane (CH4).

Hydrogen can be produced in several ways; the World Energy Council groups them in three categories—grey, blue, and green. Grey hydrogen uses fossil fuels, through energy-intensive processes such as coal gasification or steam reforming. Blue is a close, cleaner cousin; it is created when CO2 is sequestered via carbon capture and storage (CCS). And green hydrogen is produced through low-emissions technologies, such as electrolysis (using electricity to split water into hydrogen and oxygen) powered by renewables. Once the hydrogen is created, it is stored and then released, either through combustion or the use of a fuel cell that converts hydrogen into electricity. In all cases, the only waste product is water vapor.

The space program has used hydrogen fuel cells for decades; they powered the electric systems on the moonflights (see image).

Photo credit: NASA

Hydrogen is also used in oil refining and fertilizer production. But its potential goes far beyond those small-scale uses. In fact, its potential is essentially limitless—it can be used to power vehicles, heat buildings, fuel industry, and store energy.

When people refer to the “hydrogen economy,” it is this kind of expansive future they have in mind. And the consequences could be huge: the Hydrogen Council—an admittedly bullish trade group—estimates that if everything goes right, hydrogen could account for almost a quarter of the CO2 abatement needed to meet global climate change goals in 2050.

That estimate may be edging toward the dramatic. What can be said, though, is that hydrogen is making real progress. Here are four reasons why.

Costs are dropping: Virtue and potential are not nearly enough: economics matter. As we have seen from the recent experience of solar and wind, when prices fall, sales rise. The problem with hydrogen is that it has just been too expensive. That is changing. According to the US Department of Energy, fuel cell costs have fallen 60 percent since 2006, and the cost of re-fueling stations and fuel-cell stacks by half in the last decade. As early as 2025, says the Hydrogen Council, a fuel-cell electric vehicle could be only 10 percent more expensive than a conventional passenger car on a total cost of ownership basis. And McKinsey researchers think there is a lot more to come; they estimated that there is room for costs to fall another 60 percent by 2030.

Fuel cells are already commercially competitive, or close, in specific uses, such as powering forklifts and cellphone towers. By 2030, my McKinsey colleagues think hydrogen could be competitive in a variety of transport applications, including trucks, regional buses, and SUVs and just about there for specific industrial uses, including steel and cement.

Also, electrolysis is becoming viable because renewables are getting so cheap. Power is a major cost in electrolysis; as renewables get less and less expensive, electrolysis becomes more and more of a real commercial option. 

Governments are getting very interested: China, Japan, and South Korea, in particular, are putting tons of time, energy, and money into hydrogen-related technologies. China’s official development plan has set a target of more than 1,000 hydrogen re-fueling stations by 2030, and a million fuel-cell cars. As it has shown in regard to renewables, when China sets its mind to something, change can happen real fast. Japan and South Korea are both energy-poor countries; they see hydrogen as a way to limit their vulnerability to volatile global commodity markets. Both are taking systematic steps to support production and streamline policy. Japanese Prime Minister Shinzo Abe declared a national goal of cutting the “production cost of hydrogen by at least 90 percent by the year 2050, to make it cheaper than national gas.”

While these three countries seem to be making the running, they are hardly alone. In the United States, a private-sector consortium is building a massive—one mile deep and three wide—site to store hydrogen as a way to manage renewables in western states. Europe is also active. A report earlier this year from the European Union argued that without large-scale hydrogen deployment, the EU will “miss its decarbonization objective.” I would expect Europe to take the lead on the use of hydrogen in the electricity system. In particular, it works beautifully in tandem with the growing use of renewables like wind and solar. These sources of power are clean but also intermittent; hydrogen could provide dispatchable back-up capacity. The report suggests that by 2050 hydrogen could account for almost a quarter of total energy demand.

So is the private sector: There are more than 200 different fuel-cell-powered vehicles on the road, and almost all major car companies—including BMW, Daimler, Ford, GM, Honda, Hyundai, Nissan, and Toyota—are working on more. Major industrial companies like Airbus, Alstom, Kawasaki, Shell, and Siemens are also investing. Hyundai alone is investing $7 billion in fuel-cell technology, with the aim of boosting production to 700,000 hydrogen vehicles a year in the next decade. That’s a lot of brainpower.

It works: In broad terms, there are five major roles for hydrogen: in the energy system, in particular by backing up and enabling renewables; transportation; decarbonizing heavy industry; decarbonizing building heat and power; and providing clean feedstock. Real-life projects have proved that hydrogen is feasible in each of these roles. Granted, a number of these efforts are experiments, but at least they are successful ones. In the United States, there are already some 6,500 fuel-cell vehicles on the road and fuel cell stationary power is at work in 40 states, backing up power systems for uses such as data centers. Germany has two hydrogen trains operating, and at least five other countries are working on it. Britain is experimenting with converting gas heating systems. And on … and on.

The hydrogen economy is not nigh. Many things need to happen, in terms of policy, finance, and infrastructure, before it becomes even a medium-sized deal. But all the tailwinds are blowing in the same direction: toward better, cheaper, more useful hydrogen technology. The energy system of the future is going to be more diverse and complicated than the one we have been accustomed to. I think hydrogen can and will have a place in that future. 

All views are mine and not those of McKinsey & Company.