The Future of Green Hydrogen Value Chains: Geopolitical and Market Implications in the Industrial Sector

Note: The authors of this report published a related article, "Green Hydrogen Value Chains in the Industrial Sector—Geopolitical and Market Implications," in Energy Research and Social Science in October 2022.

Executive Summary

The global transition to a low-carbon economy will significantly impact existing energy value chains and transform the production to consumption lifecycle, dramatically altering interactions among stakeholders. Thanks to its versatility, green hydrogen is gaining economic and political momentum and could play a critical role in a carbon-free future. Furthermore, its adoption will be critical for decarbonizing industrial processes at scale, especially hard-to-abate ones such as steel and cement production. Overall, hydrogen demand is expected to grow by 700% by 2050 (BP, 2019). Currently, the two central challenges to green hydrogen adoption and use at scale are limited infrastructure availability and cost. While recent spikes in fossil fuel prices due to the war in Ukraine have made green hydrogen cost-competitive with blue and grey hydrogen (Radowitz, 2022), from a long-term perspective, the International Renewable Energy Agency (IRENA) predicts a decline in green hydrogen costs by up to 85% by 2050 (IRENA, 2020), making it the dominant hydrogen form (IRENA, 2022).

A New Framework to Assess Countries’ Roles in Industrial Green Hydrogen Value Chains

This report studies the role countries could play in future green hydrogen industrial markets, focusing on three key applications: ammonia, methanol, and steel production. Today, these sectors are among the largest consumers of hydrogen, accounting for about 41% of global demand, and are expected to increase their shares due to global decarbonization efforts (IRENA, 2022). Analyzing a country’s potential positioning in these markets is key to helping policymakers define strategic industrial policies. To elucidate the impact of the transition to a low-carbon economy on energy value chains, we propose an analytical framework to cluster countries into five groups based on the variables of resource endowment, existing industrial production, and economic relatedness:

Frontrunners. These countries could lead in green hydrogen production and industrial applications at scale globally. Potential frontrunners should focus on industrial policies that foster green hydrogen up-scaling to gain global leadership.

Upgraders. Countries with adequate resources for green hydrogen production and highly related economic activities could potentially upgrade their value chain positioning and attract green hydrogen-based industries. Potential upgraders could benefit from strategic partnerships with frontrunners to foster technological and know-how transfer. Policies should focus on attracting foreign capital, for example, by lowering market risk, developing public-private partnerships, and forming joint ventures.

Green hydrogen exporters. Resource-rich countries with limited upgrading potential should prioritize green hydrogen exports and would benefit from partnerships with green hydrogen importers to deploy enabling infrastructure and reduce market risk. Furthermore, coordination of international standards for green hydrogen production and use would facilitate trade on a global scale.

Green hydrogen importers. Resource-constrained countries with industrial hydrogen-based production will need to develop strategic partnerships to ensure secure and stable green hydrogen supplies. Additionally, stimulating innovation and knowledge creation through targeted policies will be critical to sustaining competitiveness and avoiding industrial relocations to frontrunners or upgraders.

Bystanders. Countries with significant constraints along all three critical variables should assess whether some of these constraints, such as limited infrastructure or freshwater availability, could be overcome to integrate into future green hydrogen value chains. Otherwise, they will continue to be the final importers of industrial products.

Countries in these groups face unique challenges and opportunities, which we exemplify through case studies focusing on the United States, Germany, and Thailand.

The Geopolitical Map of Green Hydrogen in the Industrial Sector

The low-carbon transition in existing energy value chains will also give rise to new market and geopolitical dynamics and dependencies. Our analysis elucidates key geopolitical trends that could shape international relations in the upcoming decades, with countries competing for industrial leadership, markets, and opportunities for job creation.

Only a few countries, including China and the United States, may emerge as clear frontrunners. These countries have vast resource endowments and considerable market shares in today’s hydrogen industrial applications that would enable them to integrate the green hydrogen value chain segments of production and industrial applications. Locating industrial facilities close to low-cost green hydrogen production would create value by increasing a country’s control over supply chains and minimizing hydrogen transportation costs. These countries could thus reap the most extensive benefits and become geopolitical and market winners. However, these dynamics could spur a green race for industrial leadership, creating tensions in international relations. Furthermore, competing dynamics for green hydrogen-based industries could foster market tensions between green hydrogen importers and upgraders. Resource-rich countries, such as Thailand and Mexico, have the potential for green industrialization and would likely compete with import-dependent industrial powers for market share and jobs, leading to new geopolitical tensions.

Second, new dependencies might emerge. Most countries that currently have highly developed ammonia, methanol, or steel industries, such as Saudi Arabia, Japan, and Germany, are resource constrained and would depend on green hydrogen imports to meet demand. Hence, from a geopolitical perspective, dependencies and supply disruption risks will likely persist in a low-carbon energy world, but will be different from those of today. These new geopolitical dependencies will involve new alliances and will also be a function of future market structures. Like natural gas markets, hydrogen markets will emerge as regional ones, but only global and more structured markets will allow for risk reduction.

Finally, tensions between higher-income countries in the Global North and lower-income countries, often located in the Global South, might intensify. Our analysis shows how the potential for the three industrial hydrogen applications—ammonia, methanol, and steel—is unevenly distributed across the globe. Although there are opportunities for economic gains in all world regions, most frontrunners are middle- to high-income countries. Many lower-income countries, especially in Africa, will be limited to green hydrogen exports since they cannot compete in value-added segments of the value chains. Hence the promise of ‘sustainable development’ and green industrialization, often associated with the energy transition, might not be replicable everywhere. This might intensify the need for technology transfer and financial support to enable sustainable development and green industrialization for all.