Sustainability Atlas
Clean Energy·12 min read··...

Explainer: Hydrogen & e-fuels — the concepts, the economics, and the decision checklist

A practical primer: key concepts, the decision checklist, and the core economics. Focus on LCOH drivers, offtake contracts, and infrastructure bottlenecks.

In 2024, global hydrogen investment surged to $4.3 billion—an 80% increase from the previous year—while the e-fuels market reached $9.1 billion and is projected to grow at a 33% compound annual growth rate through 2032, according to the IEA Global Hydrogen Review and Fortune Business Insights. With 1,572 clean hydrogen projects announced worldwide and electrolyser manufacturing capacity expected to reach 186 GW per year by 2030, hydrogen and synthetic fuels have transitioned from laboratory curiosities to cornerstone technologies in the global decarbonization strategy.

Why It Matters

The urgency surrounding hydrogen and e-fuels stems from a fundamental challenge: approximately 30% of global carbon emissions originate from sectors that cannot be easily electrified. Heavy industry (steel, cement, chemicals), long-haul aviation, maritime shipping, and high-temperature industrial processes require energy carriers with high energy density and compatibility with existing infrastructure. Hydrogen and its derivatives—e-fuels synthesized from green hydrogen and captured carbon dioxide—offer the only scalable pathway to decarbonize these hard-to-abate sectors.

The European Union has positioned itself at the forefront of this transition, committing EUR 18.9 billion through Important Projects of Common European Interest (IPCEI) for hydrogen development and approving EUR 1.9 billion for the Hydrogen Bank's first auction rounds. Germany alone has secured a EUR 24 billion loan to construct 9,040 kilometers of hydrogen pipeline network—the backbone of what will become Europe's hydrogen superhighway. Meanwhile, the U.S. Inflation Reduction Act offers production tax credits of up to $3.00 per kilogram over ten years, fundamentally reshaping the economics of clean hydrogen production in North America.

For sustainability leaders, the strategic implications are profound. Organizations that delay hydrogen integration risk being locked out of decarbonizing value chains, facing regulatory penalties under tightening emissions standards, and missing procurement opportunities as major buyers increasingly mandate low-carbon inputs. The window for first-mover advantage is narrowing as 2025 marks a critical inflection point with multiple giga-scale projects reaching final investment decision (FID).

Key Concepts

The Hydrogen Color Spectrum

Understanding hydrogen requires navigating its production taxonomy:

Green hydrogen is produced via electrolysis powered exclusively by renewable electricity. Water molecules are split into hydrogen and oxygen, yielding zero direct emissions. Current production costs range from $3–8 per kilogram depending on electricity prices and electrolyser efficiency, with a target of $1.00/kg by 2030.

Blue hydrogen derives from natural gas through steam methane reforming (SMR) with carbon capture and storage (CCS). It offers lower near-term costs ($1.50–3.00/kg) but faces scrutiny over methane leakage rates and capture efficiency, which must exceed 90% to deliver meaningful climate benefits.

Grey hydrogen remains the incumbent—produced from fossil fuels without carbon capture, it accounts for 95% of current global production (approximately 100 million tonnes annually) and generates significant emissions.

Pink/purple hydrogen utilizes nuclear power for electrolysis, offering baseload-compatible production with zero direct emissions.

Levelized Cost of Hydrogen (LCOH)

LCOH represents the all-in cost per kilogram of hydrogen produced over a project's lifetime, incorporating capital expenditure (electrolyser, balance of plant), operating costs (electricity, water, maintenance), and financing costs. The critical LCOH drivers include:

Cost ComponentContribution to LCOHKey Levers
Electricity50–70%PPA rates, capacity factors
Electrolyser CAPEX15–30%Scale, learning curves, utilization
Balance of Plant5–15%Integration complexity
O&M and Water5–10%Automation, location

Electrolyser capacity factors above 60% dramatically improve unit economics by spreading fixed costs across greater output. Proximity to abundant renewable generation—offshore wind corridors, solar-rich regions—directly correlates with competitive LCOH.

E-Fuels: Synthetic Carbon-Neutral Hydrocarbons

E-fuels (electrofuels or power-to-liquids) combine green hydrogen with captured CO₂ through Fischer-Tropsch synthesis or methanol pathways to produce drop-in replacements for conventional fuels. Key variants include:

  • E-kerosene (synthetic jet fuel): Critical for aviation decarbonization given limited battery energy density for long-haul flights
  • E-methanol: Maritime shipping fuel and chemical feedstock
  • E-gasoline: Compatible with existing internal combustion infrastructure
  • E-ammonia: Hydrogen carrier for long-distance transport and direct fuel for modified marine engines

Current e-fuel production costs range from €1,200–4,200 per tonne, significantly above fossil equivalents. However, regulatory mandates—particularly the EU's ReFuelEU Aviation requiring 2% sustainable aviation fuel (SAF) by 2025, rising to 70% by 2050—are creating guaranteed offtake markets.

What's Working and What Isn't

What's Working

Strategic offtake agreements are de-risking project finance. Long-term power purchase agreements (PPAs) and hydrogen offtake contracts of 10–15 years have unlocked financing for giga-scale projects. The Hydrogen Council reports that projects with secured offtake achieve FID at 2–3x the rate of merchant projects.

Government incentives are bending the cost curve. The U.S. 45V production tax credit, EU Hydrogen Bank subsidies, and Australia's AUD 2 billion hydrogen production contracts program have narrowed the green-grey price premium to 40–60% in favorable jurisdictions—approaching parity for some industrial applications.

China's electrolyser manufacturing dominance is driving global cost reductions. With 60% of global electrolyser manufacturing capacity and 70% of 2024 committed deployments, Chinese scale economics are reducing electrolyser costs 15–20% annually, benefiting global markets.

Port-based hydrogen hubs are proving the cluster model. Rotterdam (Netherlands), Houston (USA), and Gladstone (Australia) demonstrate that co-locating production, storage, and industrial demand reduces infrastructure costs and enables shared utilities.

What Isn't Working

FID conversion rates remain stubbornly low. Despite 1,572 announced projects representing $680 billion in potential investment, only 6.5 GW of electrolyser capacity reached FID in 2024. Permitting delays, grid connection backlogs, and offtake uncertainty are the primary barriers.

Infrastructure buildout lags production ambitions. Green hydrogen production capacity is reaching commissioning, but dedicated pipelines, storage caverns, and refueling networks remain years behind schedule. The "infrastructure gap" creates stranded production and spot market volatility.

Project cancellations signal capital discipline concerns. Liquid Wind's FlagshipONE e-methanol project in Sweden was cancelled in August 2024 due to cost escalations, highlighting the fragility of early-stage project economics. Several high-profile European projects have paused pending clearer subsidy mechanisms.

Additionality and temporal correlation rules create compliance complexity. The EU's Delegated Act requiring renewable electricity to be "additional" and temporally matched with hydrogen production within the same hour (from 2030) increases project complexity and reduces electrolyser utilization rates.

Key Players

Established Leaders

Air Liquide (France): Global industrial gas leader operating 30+ hydrogen production facilities with committed investments exceeding €8 billion in low-carbon hydrogen through 2035. Leading partner in multiple European IPCEI projects.

Linde (Ireland/USA): World's largest industrial gas company with extensive hydrogen production, liquefaction, and distribution infrastructure. Supplying hydrogen to 200+ refueling stations globally and developing giga-scale green hydrogen projects.

Shell (Netherlands/UK): Operating the NortH2 project in the Netherlands (targeting 4 GW electrolyser capacity by 2030) and Holland Hydrogen I (200 MW, operational 2025). Major investor in hydrogen refueling infrastructure across Europe.

Siemens Energy (Germany): Leading electrolyser manufacturer with PEM and solid oxide technologies. Partnership with Air Liquide to manufacture electrolysers at scale in France and Germany.

Emerging Startups

Infinium (USA): Launched the world's first commercial-scale green hydrogen e-fuel plant in Texas in March 2024, producing ultra-low carbon e-fuels for aviation and heavy transport applications.

HIF Global (Chile): Operating the Haru Oni demonstration facility producing 130,000 liters of e-gasoline annually. Planning giga-scale expansion to 550 million liters by 2027 with Porsche as anchor customer.

Electric Hydrogen (USA): Developing 100 MW-scale modular electrolyser systems with breakthrough cost targets. Raised $380 million in Series C funding (2024) backed by Breakthrough Energy Ventures.

H2 Green Steel (Sweden): Building Europe's first green steel plant integrating 700 MW electrolysis, targeting 5 million tonnes of near-zero emission steel production by 2030.

Key Investors & Funders

Breakthrough Energy Ventures: Bill Gates-backed climate VC with significant hydrogen portfolio including Electric Hydrogen, Form Energy, and H2Pro.

Hy24 (Clean Hydrogen Infrastructure Fund): World's largest hydrogen infrastructure fund with €2+ billion under management, investing in production, storage, and distribution assets.

European Investment Bank (EIB): Providing preferential financing for hydrogen projects under the EU Green Deal, with €4+ billion allocated to hydrogen infrastructure.

U.S. Department of Energy (Regional Clean Hydrogen Hubs): $7 billion program funding seven regional hydrogen hubs across the United States to accelerate production and end-use deployment.

Examples

  1. NEOM Green Hydrogen (Saudi Arabia): Joint venture between ACWA Power, Air Products, and NEOM developing the world's largest green hydrogen production facility. With 2.2 GW of electrolysis powered by 4 GW of solar and wind, the project will produce 600 tonnes of green hydrogen daily (equivalent to 1.2 million tonnes of green ammonia annually) for export beginning 2026. Air Products has committed $8.5 billion to the integrated project and global distribution network.

  2. Port of Rotterdam Hydrogen Hub (Netherlands): Europe's largest port is transforming into a continental hydrogen gateway. The Porthos CCS project enables blue hydrogen production while Shell's Holland Hydrogen I (200 MW) delivers green hydrogen. New dedicated hydrogen pipelines connect to Germany's emerging network, and the port targets handling 20 million tonnes of hydrogen by 2050—representing 15% of projected EU demand.

  3. Nordic Electrofuel (Norway): Targeting 4.4 million liters of e-fuel production annually by 2025 for aviation customers. The project captures CO₂ from industrial point sources and combines it with green hydrogen produced using Norwegian hydropower. Norwegian Airlines has signed an offtake agreement, demonstrating the viability of SAF procurement partnerships.

Action Checklist

  • Assess decarbonization pathway requirements: Identify which operations require hydrogen or e-fuels versus direct electrification. Prioritize high-temperature processes (>400°C), heavy transport, and chemical feedstock applications.

  • Map regional hydrogen infrastructure: Evaluate proximity to announced hydrogen pipelines, storage facilities, and production hubs. Locations within 100km of major hydrogen corridors offer significant logistics advantages.

  • Engage with potential offtake partners: Contact industrial gas suppliers and green hydrogen developers to understand offtake contract structures, pricing mechanisms, and volume commitments required for preferential terms.

  • Quantify LCOH sensitivity for your use case: Model hydrogen cost scenarios across electricity price ranges ($30–80/MWh) and utilization factors (40–80%) to understand breakeven thresholds for your specific application.

  • Track regulatory developments: Monitor EU Delegated Acts, national hydrogen strategies, and subsidy programs. Compliance timelines and incentive structures vary significantly by jurisdiction and may shift project economics.

  • Pilot before scaling: Consider containerized electrolyser solutions or blended hydrogen supply (green + blue) to build operational experience before committing to large-scale dedicated infrastructure.

FAQ

Q: When will green hydrogen reach cost parity with grey hydrogen? A: Current projections suggest green hydrogen will reach cost parity with grey hydrogen ($1.00–1.50/kg) in favorable locations by 2030–2035, driven by declining renewable electricity costs, electrolyser learning curves, and carbon pricing. However, parity timing varies significantly by region: Australia and Chile may achieve parity by 2028, while European producers may require continued subsidy support through the early 2030s due to higher electricity costs.

Q: Should organizations pursue green hydrogen or blue hydrogen strategies? A: The choice depends on timeline, scale, and risk tolerance. Blue hydrogen offers lower near-term costs and leverages existing natural gas infrastructure, making it suitable for rapid deployment and large volumes. However, it carries transition risk if CCS technologies underperform or methane regulations tighten. Green hydrogen requires higher upfront investment but provides long-term regulatory certainty and avoids fossil fuel exposure. Many organizations pursue hybrid strategies—blue hydrogen for immediate needs transitioning to green as costs decline.

Q: How do e-fuel mandates affect procurement planning? A: EU ReFuelEU Aviation mandates create guaranteed demand: 2% SAF by 2025, 6% by 2030 (with 1.2% e-kerosene sub-mandate), and 70% by 2050. Airlines and fuel suppliers are actively seeking long-term offtake agreements to secure compliant supply. Organizations with aviation-intensive supply chains should engage airlines and fuel suppliers on SAF procurement, as early commitments may secure preferential pricing before mandate-driven demand spikes.

Q: What infrastructure investments are required for industrial hydrogen adoption? A: Typical infrastructure requirements include: on-site storage (compressed gas or liquid), piping modifications for hydrogen compatibility, burner or process equipment upgrades for hydrogen fuel, and safety systems (ventilation, detection, emergency protocols). Costs vary from €500,000 for small industrial burner conversions to €50+ million for integrated steel or chemical plant retrofits. Many equipment suppliers now offer hydrogen-ready specifications at minimal premium for new installations.

Q: How reliable are current electrolyser technologies at scale? A: Alkaline electrolysers (mature technology) demonstrate 95%+ availability with 80,000+ hour operational track records. PEM electrolysers offer faster response times and higher efficiency but have shorter operating histories at scale—early large projects report 90–95% availability. Solid oxide electrolysers (SOECs) achieve highest efficiency (>80%) but remain in early commercialization with limited scale references. Technology selection should match application requirements: PEM for variable renewable integration, alkaline for baseload operation, SOEC for high-temperature industrial integration.

Sources

Topics

hydrogenfuelsHVDCpermittingriskunit economicscompliance

Related Articles