Hydrogen's tipping point

The hydrogen sector in Europe is at a critical crossroads, with stakeholders navigating varying levels of readiness. Transportation stakeholders, for example, benefit from a relatively structured regulatory environment, enabling them to push forward. By contrast, other key players, such as offtakers, operate within uncertain conditions that hinder the development of the sector as a whole. This uneven playing field highlights an urgent need for alignment across the supply chain, particularly as Europe pushes toward its ambitious decarbonisation goals.

Regulatory clarity: uneven ground for stakeholders

Regulations play an essential role in shaping the low-emission molecule and hydrogen market. While the European Union has made significant progress in establishing directives, such as those governing ‘green’ hydrogen and Renewable Fuels of Non-Biological Origin (RFNBO), many Member States lag in transposing these directives into national legislation. This delay creates an uneven environment for stakeholders.

Transportation stakeholders benefit from clearer regulatory structures, such as those guiding the repurposing of natural gas pipelines for hydrogen transport and storage. This regulatory certainty allows them to make informed decisions and implement long-term plans. However, developers and offtakers face greater uncertainty. For developers, ambiguity in standards, particularly around the classification of ‘low-carbon’ hydrogen, complicates project planning and investment decisions. For offtakers, the lack of a consistent framework for hydrogen use across sectors, such as maritime and heavy industry, reduces confidence in committing to long-term agreements.

The EU’s ‘Fit for 55’ package offers a roadmap for cutting greenhouse gas emissions by 55% by 2030. However, achieving these targets requires more than ambitious legislation. It demands coordinated efforts among stakeholders across the value chain, from policymakers and financiers to developers and offtakers. Without a clear regulatory environment for all stakeholders, these efforts remain fragmented, slowing the pace of development.

Financing: a misalignment of needs and risks

Financing remains one of the most significant bottlenecks in Europe’s low-emission molecule and hydrogen market. The financial sector is well-established and ready to invest in low-emission molecule projects, but its traditional risk management tools are often incompatible with the unique challenges of these projects. Developers struggle to demonstrate bankability due to high upfront costs, extended project timelines, and a lack of long-term offtake agreements that would secure revenue streams.

This misalignment leaves even the most promising projects at a standstill. Public financial institutions like the European Hydrogen Bank and initiatives like H2Global are working to mitigate these early-stage risks by providing auctions and guarantees that attract private investment. While these mechanisms are helpful, they are not sufficient to meet the sector’s growing needs.

Risk-sharing remains a key issue. The short- to medium-term planning preferences of offtakers clash with the long-term financial commitments required by developers and financiers. This mismatch creates a vicious cycle: offtakers are hesitant to commit without established infrastructure and stable pricing, while developers cannot secure financing or proceed with projects without those commitments. Breaking this cycle requires innovative solutions, including government-backed guarantees, new financing tools, and stronger collaboration between stakeholders.

Developers: leading the charge despite hurdles

Among all stakeholder groups, developers have made the most progress in preparing for a low-emission molecule and hydrogen-driven future. They are actively working on large-scale production and import projects to meet Europe’s ambitious targets. However, their efforts are frequently stymied by two major obstacles: difficulties in obtaining financing and the absence of long-term agreements with offtakers.

Securing a final investment decision (FID) for capital-intensive hydrogen projects requires careful planning in both engineering and financing. Developers must navigate tight deadlines, evolving regulatory requirements, and high levels of financial risk. These challenges are further compounded by the absence of long-term commitments from offtakers, who often prefer flexible, short-term arrangements that allow them to adapt to energy price volatility.

Despite these challenges, developers remain optimistic about the future. High-level political support, substantial engineering solutions, and the potential to repurpose existing natural gas infrastructure provide a foundation for growth. However, to accelerate progress, developers need stronger commitments from other stakeholders, particularly financial institutions and offtakers.

Infrastructure bottlenecks: meeting the demand for growth

The transportation and storage of hydrogen present another set of challenges. Europe’s existing infrastructure is insufficient to support the intercontinental transportation of low-emission molecules and hydrogen and its domestic distribution within the continent. Key investments are needed to expand ports, pipelines, and storage facilities.

Repurposing existing natural gas infrastructure offers a practical solution for some of these challenges. For instance, converting natural gas pipelines into hydrogen pipelines could reduce costs and accelerate deployment. Cavern storage also holds significant potential for stabilising supply, particularly as hydrogen production scales up.

The main hurdle in infrastructure development is timing. The rapid growth of hydrogen demand requires infrastructure to expand at a similar pace. This necessitates close coordination among transmission system operators, government agencies, developers, and offtakers. Without proactive investment and planning, infrastructure bottlenecks could stall the market’s development.

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