Hydrogen’s hurdles limit prospects | Insights | Bloomberg Professional Services

This analysis is by Bloomberg Intelligence Associate Analyst Chia Cheng Chen and Bloomberg Intelligence Senior Industry Analyst Henik Fung. It appeared first on the Bloomberg Terminal.

SpaceX’s shift to methane from liquid hydrogen (H2) to power its Starship augurs poorly for H2 as a road fuel, despite the rocket’s explosion shortly after launch on Thursday. Methane’s better performance allows for smaller fuel tanks, while H2 production — from water electrolysis — is neither climate- nor budget-friendly. Hydrogen demand could grow 1.9% a year through 2030 vs. 16.7% for solar.

Hydrogen’s growth spurt could be a lengthy wait

SpaceX’s shift to methane to power its Starship relaunch — rather than hydrogen, which NASA has used since Apollo — casts a pall on the latter’s prospects as a road fuel. Global hydrogen’s demand growth could struggle to get beyond 2% a year through 2030 despite its hype, as its consumption would largely come from traditional applications such as crude refining, and ammonia and methanol production. High costs due to the power-intensiveness of water electrolysis, lack of infrastructure, and scant government support are forestalling hydrogen’s wider adoption.

Low growth makes hydrogen’s market share expansion challenging vs. solar’s 16.7% annual demand increase, and wind’s 10.5%. Solar and wind energy could keep delivering stronger demand growth, making companies such as Longi and Goldwind major beneficiaries.

 Rising rates dim hydrogen’s appeal

Higher interest rates pose yet another hurdle for hydrogen. Tighter policy hampers project funding, as increasingly uncertain returns on projects diminishes investors’ urgency to own long-duration assets. The past decade’s solar and wind development boom occurred during a period of low rates and generous government subsidies, both of which have become less likely. While higher rates raise the returns hurdle for all clean energy projects, the emerging hydrogen sector’s capital-intensiveness leaves it vulnerable due to substantial research costs.

The Global X Hydrogen ETF has tumbled 42.3% as of April 17 since the US central bank began raising rates, underperforming solar, wind, nuclear, and crude oil.

Falling gas prices tarnish green hydrogen’s appeal

Cheaper gas is once again putting “green” hydrogen –formed by splitting water into hydrogen and oxygen via electrolysis — at a gaping cost disadvantage vs. the “grey” variety derived from natural gas. The cost chasm becomes more apparent when natural gas prices are falling amid a global economic downturn, with Asia’s LNG prices down 52% vs. a year ago to $12.49 per million British thermal units. At this gas price, grey hydrogen’s production cost would average $2 a kilogram, less than a third that of “green” hydrogen. “Green” and “grey” hydrogen won’t reach price parity until 2030 the earliest, by our calculations.