After two years when inflation drove up project costs, a range of factors including stabilizing prices suggest the gas could soon start to play a greater part in the energy transition.

• For the past two years, steep cost increases have held back clean hydrogen projects.
• But conditions are improving due to the decline in inflation as well as technology advances and lower renewable power costs.
• This suggests that nascent industry’s fortunes, and hydrogen-related ETFs that track it, could soon improve.

With carbon emissions still rising, the transition to a cleaner energy future is by no means a foregone conclusion. In the eyes of many governments planning to ease out fossil fuel by 2050, it cannot happen without clean hydrogen. Yet clean hydrogen projects have stalled in recent years as they faced headwinds in the form of higher costs.

Quite simply, the clean hydrogen economy has failed to take off at the pace hoped, against a backdrop of spiraling costs. When European, US and UK inflation spiked in 2021 and 2022, the cost of capital and equipment for hydrogen production projects rose significantly. In many cases, these capital-intensive projects became uneconomic.

Even so, there are good reasons to suspect that these headwinds may be weakening. For a start, inflation has fallen sharply — in the UK it has collapsed from a peak of 11.1% in 2022 to 2.2% in July 2024, and there have been similar falls in Europe and the US. At the same time, the hydrogen industry is scaling up as the government policies backing it are increasingly embedded.

Should this lead to a revival of hydrogen projects, there is every chance that stocks of hydrogen-focused companies might start to recover after a torrid two years. For context, some hydrogen stocks and investment vehicles have lost more than half their value in this time. This includes some of the five hydrogen ETFs that offer ways to invest in the hydrogen sector.

An essential role

Clean hydrogen’s unique position is explained by Hydrogen for Net-Zero, a paper co-authored by the Hydrogen Council and McKinsey & Co.  “Clean hydrogen offers the only long-term, scalable and cost-effective option for deep decarbonization in sectors such as steel, maritime, aviation and ammonia,” the paper notes. Beyond that, it also has a vital role in a decarbonized energy system, as it can “store energy, provide resilience and transport high volumes of energy over long distances via pipelines and ships”.

For clean hydrogen to make a material difference in the race to net zero, production must be scaled up hugely in just a few decades. Against this backdrop, the project pipeline is growing, with over 1,400 projects—from electrolyzers to infrastructure—announced across all regions at the end of 2023 (up from about 1,040 a year earlier), according to the Hydrogen Council.

The number of projects actually underway is also increasing but falls far short of what has been announced. For instance, investment in electrolyzers is set to increase by 140% in 2024 to USD 5 billion, calculates the International Energy Agency (IEA) World Energy Investment 2024 report.

Easing headwinds

But slowly declining inflation in the US, EU and UK gives good reason to think the industry may be approaching an inflection point. Lower inflation has already led to lower policy interest rates in the EU, UK and Canada at the time of writing, with the US Federal Reserve signaling that rate cuts are imminent.

Going forward, advances in electrolyzer technology, manufacturing economies of scale, design improvements and reductions in renewable power costs should make hydrogen more competitive. According to Hydrogen Insights 2023, the cost of clean hydrogen is forecast to fall in the years to 2030 to between 2.5 and 4.0 USD per kilogram.

As costs fall and the policy environment improves, it is reasonable to assume that private sector demand should also increase. For instance, an Offtake Declaration published in 2023 illustrates latent demand from German companies.[1] As more companies sign long-term off-take contracts, this should justify large-scale investments in production.

It's hard to overstate the importance of clean hydrogen for the energy transition. After the headwinds of the past few years, the backdrop for the industry is improving, which may lead to better performance for the ETFs tracking its fortunes. Without wishing to overstate the positives, there are good reasons to suspect that clean hydrogen has finally reached its inflection point.

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