What it would take to unlock the next phase of hydrogen growth

Given hydrogen's versatility and wide range of potential uses, there is no single set of effective policy instruments, and pathways forward will depend on the specific country contexts. And with the low-emissions hydrogen sector still in its nascency, governments can take different approaches to develop policies that address ongoing barriers.

Options for addressing the cost gap between low-emissions hydrogen and hydrogen produced from fossil fuels include grants and subsidies, which have already been used extensively by advanced economies. Loan guarantees, concessional loans, export credit facilities and public equity investments can also be useful to reduce investment risks. For demand creation, quotas, mandates and carbon contracts for difference are among the most-widely used instruments. Some governments have considered public procurement to trigger demand for hydrogen in steel production, heavy-duty transport and aviation, but the instrument remains relatively unexplored compared with other options. The creation of hydrogen hubs - or areas where several hydrogen applications are combined together into an integrated hydrogen ecosystem - has so far mostly been a source of funding for project development. Hubs also provide an opportunity to address coordination barriers and to aggregate demand from several users, sharing the offtake risks among those involved.

For most of these policies to be effective, it is necessary for hydrogen producers and buyers to be able to differentiate low-emissions hydrogen by tracking greenhouse gas emissions along the value chain. Several regions already have certification schemes in place, and a more standardised approach could be achieved once the forthcoming International Organization for Standardization methodology is published.

There have been delays in implementing the first wave of hydrogen policies since they had to be designed from scratch (and, in many cases, they have been subject to trial-and-error). While these delays are understandable, they have also created uncertainty for project developers and investors. For example, in the European Union, the transposition of the Renewable Energy Directive to national legislation has taken more than four years. In India, support for hubs is being scaled back, and conditions for financial support for ammonia supply have been revised several times.

Very firm regulations may provide clarity as the sector develops. However, in some cases, they can be very restrictive and slow down market development, which is essential during these early stages. Given that the hydrogen market is expected to evolve quickly, policies need to be adaptive, with short review cycles to account for market developments. This approach can leave room for experimentation at first while providing longer-term clarity. Such clarity is fundamental not only for creating investment security, but also for ensuring that low-emissions hydrogen adoption can accelerate beyond initial strong steps and play its part in meeting the energy policy goals of countries.