05 Aug 2022 3 min read

Hydrogen: preferred pathway or just hot air?

By John Daly , Charlie Miller

In the first of a two-part blog on the hydrogen economy, we look at the economics of production, and consider the potential implications for investors.


The hydrogen market is already bigger than many realise. Worth approximately $130 billion per year1, production has doubled in 20 years, from 50 million tonnes (MT) to nearly 100MT per year2. Demand comes primarily from oil refining, fertiliser production and methanol production.

Energy research and consultancy firm Wood Mackenzie forecasts another doubling by 2040-2050;3 significantly less than the 223MT in the International Energy Agency’s net-zero scenario.

Growth is underpinned by government pledges to build a significant hydrogen capacity and infrastructure, e.g., Netherlands (15GW), Germany (14GW) and UK (5GW). These pledges promise supportive policy environments and incentives for hydrogen projects.

Not all hydrogen is created equal

Among the challenges for hydrogen in the energy transition are scaling of production, lowering cost, building out infrastructure and decarbonisation of supply. Hydrogen can be divided into three categories:

  1. Grey and brown hydrogen accounts for around 96.6% of hydrogen production.4 Grey hydrogen is produced via steam methane reformation (SMR) of natural gas; a carbon-intensive process producing roughly as much carbon dioxide as using natural gas itself and is therefore not a decarbonisation solution. Brown hydrogen (c.28% of production) sources the natural gas feedstock via gasification of coal. Grey hydrogen is produced today at $1-2/kg and 9kg CO2/kg H2.5
  2. Blue hydrogen is essentially grey hydrogen with carbon capture and storage. A longer-term reference price of $2-3/kg6 is reasonable7 (current gas prices have elevated pricing). Only 80-90% of carbon emissions are captured, resulting in 1-2kg CO2/kg H2.8
  3. Green hydrogen is made through electrolysis, is around 80% efficient and is produced today at roughly $3-7/kg9. The carbon intensity can vary from zero if the electricity comes from renewables to 30kg CO2/kg H210 if a global average grid power carbon intensity is used.

Can green hydrogen compete?

To compete on price, green hydrogen needs to scale: the price of electrolysers needs to fall from c.$1400/kW to nearer $250/kW.11 This must be paired with cheap, clean power available for significant parts of the day.  

Although this is a significant challenge, solutions may not be too far away. Research from PWC suggests a price of $1-1.5/kg by 2050 in countries with a competitive advantage in renewables projects is possible.12

Adoption hurdles

Hydrogen must overcome some significant barriers to achieve widespread adoption.

Early mover adoption risk is significant. For investors in hydrogen production capacity, the rapid cost curve of green hydrogen represents an investment risk, as each incremental capacity addition will produce hydrogen at lower cost. Old capacity will be pushed to the margins of the supply curve, making it vulnerable to demand shocks. This is particularly true for blue hydrogen projects in regions where renewables are cheap, since there are limited pathways to reduce blue hydrogen project costs once financed. 

Future demand uncertainty, lack of market structure, and distribution and storage infrastructure also present formidable issues for the industry and governments. We only need to look at the pace of electric vehicle charging infrastructure development as an example.

Hydrogen’s high cost relative to high-carbon fuel alternatives – and policy and regulatory uncertainty, including establishing hydrogen emissions standards for system-wide adoption – means that while grey and blue hydrogen are not long-term solutions, they are necessary stepping stones for hydrogen to establish an economic value chain and end-user adoption. This may ultimately pave the way for green hydrogen.


In part two of this blog, we’ll turn to the economics of hydrogen use in cars, heavy goods vehicles and ‘hard to abate’ sectors, and consider the potential risks and opportunities for investors.


1. Source: https://www.grandviewresearch.com/industry-analysis/hydrogen-generation-market 

2. Source: https://home.kpmg/xx/en/home/insights/2020/11/the-hydrogen-trajectory.html 

3. Source: https://www.woodmac.com/news/opinion/hydrogen-the-us$600-billion-investment-opportunity/ 

4. Source: https://www.woodmac.com/market-insights/topics/hydrogen-guide/ 

5. Source: https://www.lazard.com/media/451779/lazards-levelized-cost-of-hydrogen-analysis-vf.pdf 

6. Source: https://home.kpmg/xx/en/home/insights/2020/11/the-hydrogen-trajectory.html 

7. Source: https://home.kpmg/xx/en/home/insights/2020/11/the-hydrogen-trajectory.html 

8. Source: https://thundersaidenergy.com/downloads/hydrogen-opportunities-an-overview/ 

9. Source: https://home.kpmg/xx/en/home/insights/2020/11/the-hydrogen-trajectory.html 

10. Source: LGIM analysis based on 50kWh per kg H2 and grid intensity of 600kg/MWh; https://ourworldindata.org/grapher/carbon-intensity-electricity and https://thundersaidenergy.com/downloads/hydrogen-opportunities-an-overview/

11. Source: https://thundersaidenergy.com/downloads/category/hydrogen/ 

12. Source: https://www.pwc.com/gx/en/industries/energy-utilities-resources/future-energy/green-hydrogen-cost.html 

John Daly

Senior Solutions Strategy Manager

John is a Senior Solutions Strategy Manager within the Solutions Group and has over 20 years of industry experience working in asset-management companies. He focuses on long-term global investment-grade credit and active liability investment strategies. His role encompasses designing developing and servicing investment strategies for DB pension schemes and other financial clients. John has been with LGIM since 2009 and has previously held institutional distribution roles at PIMCO and Fidelity. John holds a BSc in Business Economics from Cardiff University and is a CFA charterholder.

John Daly

Charlie Miller

Climate Strategist, Climate / Investments

Charlie is responsible for integrating climate analysis into LGIM’s investment process through metrics and research.  Charlie joined LGIM in 2021 having previously worked in Legal &General Retirement as an investment analyst where he delivered projects on ESG integration in the annuity portfolio and gained experience in the TCFD reporting process. He began his career at Mercer specialising in insurance investment. Charlie graduated with an MSc in Earth Sciences from University of Oxford in 2015.

Charlie Miller