Could Lagging Demand Pop the Clean Hydrogen Balloon?

Author: Caroline McKenna and Chris Richardson

Especially with the unknown potential for gold hydrogen, now is the time for utility companies and hydrogen hubs to step up to create a strong yet balanced hydrogen industry. Investment in a diverse demand chain for hydrogen must happen today to avoid the economic danger of a supply/demand imbalance and a price crash. While research remains ongoing, hydrogen’s wholesale price could fall far faster than was previously expected, and so development of hydrogen offtake infrastructure cannot be delayed.

Over the last couple years, hydrogen has moved further and further into the spotlight of the energy transition. Spurred by hydrogen hub funding, tax credits under the IRA, and the DOE’s Hydrogen Shot, hydrogen is likely to experience further growth in both public and private sector investments in production. In addition, newly discovered natural sources of hydrogen hold the potential to drive down production costs and allow hydrogen to grow far beyond the industries in which it is dominant, such as ammonia, steel, and chemical production. The future of clean hydrogen seems promising: production just in the US could increase tenfold by 2030.

But amidst the excitement, such investments in production could exacerbate economic uncertainty by expanding what is already a growing imbalance between supply and demand. Companies and government institutions investing in hydrogen must keep market sustainability—not just climate sustainability—in mind by considering hydrogen’s commercial adoption potential as a clean energy source, as a market imbalance (even if temporary) could cripple infrastructure buildout with a supply glut. 

Existing applications for hydrogen such as oil refining and chemical production (particularly ammonia) may drive early demand for green hydrogen (albeit slowly), but novel applications including green steel and heavy-duty transport are in very early stages and new infrastructure like pipelines and storage may be required for transporting clean hydrogen to new demand centers. There is thus a risk of hydrogen’s long-term economics becoming less predictable even as its popularity increases.

A primary risk to hydrogen’s viability is the lack of investment into diversifying the demand chain, leading to a potential near-term oversupply without sufficient offtake. Today’s investments have disproportionately targeted ensuring supply with less regard for demand, and considering the projected growth in supply with limited diversity of high-volume use cases for hydrogen today, we may need to start “pulling” a growing volume of hydrogen into new use cases to ensure a sustainable market as the world moves towards decarbonization.

Gray, Green, and Gold

As evidence of growing confidence in hydrogen as a low-carbon fuel, more and more countries have begun to announce their support. In 2022, the US DOE pledged to spend $7B on at least half a dozen hydrogen hubs, and the EU has called for 20 million tons of new green hydrogen per year by 2030. Private investment has kept up: throughout the first 11 months of 2022, private equity firms spent $3.1B on hydrogen-related companies (primarily supply) while venture firms invested $2.6B. Even as low-emission hydrogen still makes up less than 1% of global hydrogen production, growing momentum is based around hydrogen’s zero-emission potential.

The clean hydrogen market is likely to experience rapid growth despite the fact that historically hydrogen’s cost has discouraged potential investment. Hydrogen has a reputation of being an expensive energy source to produce, and greening it certainly doesn’t help: electrolyzers typically require around 50 kWh of electricity to produce 1 kg of hydrogen. Even a PPA for as cheap as 6 cents per kWh places the input cost to produce hydrogen at $3/kg for the electricity alone.

clean hydrogen

Figure 1: Affordable hydrogen is possible in the long run, but today’s industry-level WTPs tend to require cheaper production, storage and transportation technologies.


Increases in natural gas costs over the past couple years have narrowed the cost differential between natural gas and hydrogen, which has supported switching cost economics. Moreover, the 45V tax credit, introduced by the Inflation Reduction Act, offers up to $3 per kg in tax credits, which could make some green hydrogen practically free. This, along with increased production, will help to make the cost of hydrogen less prohibitive; but, alongside falling production costs, economic instability remains a threat: hydrogen supply is already outpacing demand. 

This threat is compounded by the potential, albeit very early potential, for abundant natural or “gold” hydrogen. The first signs of gold hydrogen date back to 1888 in Ukraine when Dmitri Mendeleev observed hydrogen seeping from a coal mine, and hundreds of hydrogen seeps have since been discovered. Evidence suggests that Earth’s supply of natural hydrogen could be vast, and while the amount that can be captured economically remains unknown, some scientists estimate that even if green hydrogen production increases into the hundreds of Mt per year, geologic hydrogen production could comprise at least half of it by 2100.

Because the geographies that could contain gold hydrogen are vastly different from those for oil and gas, there have yet to be any opportunistic discoveries in, for example, the Permian Basin.  To be sure, these efforts are early and unproven and could amount to little. Nonetheless, sources tell ADL that stealthy gold hydrogen drilling efforts funded by well-respected VCs are underway in Nebraska among other locations.

The details of why gold hydrogen exists or where it may occur in high concentrations are not fully understood, but one leading theory involves iron-rich ancient cores of continents known as cratons. Within these cratons, a reaction known as serpentinization may occur, releasing hydrogen. Hydrogen may also be released during radiolysis, which is when radioactive elements in the Earth’s crust decay and emit radiation that can split water molecules.

clean hydrogen

Figure 2: How natural hydrogen may be generated.


If gold hydrogen can realistically be captured, this would make hydrogen cheap, abundant, clean, and renewable, vastly expanding the applications in which it is economically—and not just environmentally—beneficial. However, gold hydrogen poses the long-term threat of compounding what is already poised to be a near-term supply glut of hydrogen; many project developers today are already securing electrolyzers and real estate yet struggling to find committed offtakers. 

Clean Hydrogen’s Future Depends on Diverse Demand

Investment in clean hydrogen supply is important to kick start the market, but the current state of investments in hydrogen demand infrastructure appears to be out of balance. Hydrogen demand continues to be heavily concentrated in the refining and chemical sectors even while energy goals require more diversity. Some types of projects are already undergoing pilots – e.g. Class 8 truck conversions, green steel, natural gas pipeline blending, etc. – but those are years away from soaking up supply at scale, whereas the supply glut could occur as early as 2024. For the environmental benefits of hydrogen to be fully realized, a wider variety of sectors—particularly hard-to-abate sectors such as heavy trucking—must adopt hydrogen-based technologies at a much faster pace.

The IEA’s Net Zero Emissions by 2050 Scenario forecasts that global hydrogen demand should reach 180 Mt by 2030 with almost half coming from new applications (such as power generation and heavy industry), but global hydrogen demand in 2021 reached only 94 Mt with a mere 0.04% coming from new applications. Clearly, scaling the market to meet ambitious clean energy targets requires drastic growth in hydrogen demand, urgency which current investment levels do not reflect.

Beyond the possibility of falling behind on energy goals, if there is inadequate demand to meet eventual supply and particularly if the supply is as vast as is suggested by the potential for gold hydrogen, the price of hydrogen will fall (if only temporarily), and investments in more supply will grind to a halt as companies supplying hydrogen will fail to secure financing for new projects. In particular, because there is no liquid market for hydrogen (like there is for natural gas), OEMs and other project developers will become particularly threatened (or even go bankrupt). 

Thus, ensuring the long-term viability of hydrogen does not merely involve tapping all available clean sources – e.g. gold hydrogen – to bring down costs and make hydrogen’s offtake economics pencil in more applications; it also involves creating a robust and diverse demand chain to utilize what could be plentiful supply so that hydrogen’s price remains healthy enough for OEMs and project developers to continue to invest in new sources of supply.

Especially with the unknown potential for gold hydrogen, now is the time for utility companies and hydrogen hubs to step up to create a strong yet balanced hydrogen industry. Investment in a diverse demand chain for hydrogen must happen today to avoid the economic danger of a supply/demand imbalance and a price crash. While research remains ongoing, hydrogen’s wholesale price could fall far faster than was previously expected, and so development of hydrogen offtake infrastructure cannot be delayed.

clean hydrogen

Figure 3: Hesitancy to commit to long-term offtake is a primary factor limiting near-term expansion of clean hydrogen.


Beyond the 45V tax credit, market mechanisms must be developed to incentivize long-term investments in hydrogen production. For example, private sector entities, especially potentially significant hydrogen users such as gas utilities, refineries, and ammonia producers, could commit to using certain amounts of hydrogen. This could also be particularly relevant in industries where hydrogen can both help decarbonize and provide large savings, such as shipping and aviation.

Ideally, we will also see more supportive commercial mechanisms to reduce the downside risks of adoption across the full demand chain – e.g. insurance policies for backstopping offtake agreements or preparing end-use equipment for running on hydrogen blends, or zero-interest loans and/or loan guarantees for switching to hydrogen-based equipment (e.g. engines). If you have any other ideas for how to facilitate switching to hydrogen at SMBs or utilities, please reach out to us below!

Businesses that expect to incorporate hydrogen in their futures must be willing to engage with hydrogen suppliers and start piloting innovative technologies that support hydrogen in varied applications. For hydrogen to reach its full potential and significantly contribute to the energy transition, its versatility must be supported by similarly diverse demand that extends into sectors in which its presence is limited to nonexistent.

ADL is looking to partner with corporates and innovators alike to create new business models and ventures with the potential to diversify the clean hydrogen demand chain, address vexing technical challenges preventing use of clean hydrogen in energy-intensive sectors, and develop strategies for utilities and others to plan for a clean hydrogen future. Many of the concepts ADL has developed for the MachH2 hydrogen hub are relevant to any big hydrogen supply project to diversify the demand chain and support local businesses. Reach out to us to share ideas and explore collaborations!