What is Power-to-X (PtX)? It’s just a fancy marketing term for green hydrogen – using green energy, like wind, solar, nuclear, or hydroelectric, to make hydrogen from water. This process does not release any CO2, just oxygen, and when the hydrogen is burned back with that oxygen it creates only water as a byproduct. Essentially hydrogen is being used as an energy storage medium. This whole process does not create energy, it uses energy. The wind and solar etc. are what create the energy. The “X” refers to all the potential applications of hydrogen, from fuel to fertilizer. Part of the idea is that intermittent energy production can be tied to hydrogen production, so when there is excess energy available it can be used to make hydrogen.

A recent paper explores the question of why, despite all the hype surrounding PtX, there is little industry investment. Right now only 0.1% of the world’s hydrogen production is green. Most of the rest comes from fossil fuel (gray and brown hydrogen) and in many cases is actually worse than just burning the fossil fuel. Before I get into the paper, let’s review what hydrogen is currently used for. Hydrogen is essentially a high energy molecule and it can be used to drive a lot of reactions. It is mostly used in industry – making fertilizer, reducing the sulfur content of gas, producing industrial chemicals, and making biofuel. It can also be used for hydrogen fuel cells cars, which I think is a wasted application as BEVs are a better technology and any green hydrogen we do make has better uses. There are also emerging applications, like using hydrogen to refine iron ore, displacing the use of fossil fuels.

A cheap abundant source of green hydrogen would be a massive boost to multiple industries and would also be a key component to achieving net zero carbon emissions. So where is all the investment? This is the question the paper explores.

The short answer has to do with investment risk. Investors, especially when we are talking about billions of dollars, like predictability. Uncertainty increases their risk and is a huge disincentive to invest large sums of money. The paper concludes that there are two main sources of uncertainty that make PtX investments seem like they are high risk – regulatory uncertainty and lack of infrastructure.

Regulations in many countries are still in flux. This, fortunately, is an entirely solvable problem. Governments can put resources and priority into hammering out comprehensive regulations for the hydrogen and related industries, lock in those regulations for years, and provide the stability that investors want. Essentially the lack of proper regulations is a hurdle for green hydrogen investment, and governments simply need to do their job.

The second issue is lack of infrastructure, with further uncertainty about the completion of planned hydrogen projects –

“For instance, in October, the Danish government announced that a planned hydrogen pipeline to Germany would not be established until 2031 at the earliest, whereas the previous target was scheduled for 2028.”

The fossil fuel industry has the advantage of a mature infrastructure. Imagine if we had to develop all the oil rigs, oil wells, pipelines, trucking infrastructure, and gas stations from scratch. That would be a massive investment on an uncertain timeline. Hydrogen is facing the same issue. Again, this is a solvable issue – invest in hydrogen infrastructure. Make sure projects are sufficiently funded to keep on the originally promised timeline. Governments are supposed to craft regulation and invest in common infrastructure in order to facilitate private industry investing in new technologies. This may be all that is necessary to accelerate the green transition. At least we shouldn’t be holding it back because governments are doing their job.

The authors of the paper also explore another aspect of this issue – incentives for industry to specifically invest in green technology. This is essentially what the IRA did in the US. Here incentives fall into two broad categories, carrots and sticks. One type of carrot is to reduce risk for private investment. Beyond what I already mentioned, government can, for example, guarantee loans to reduce financial risk. They can also provide direct subsidies, such as tax breaks for investments in green technology. For context, the fossil fuel industry received $1.4 trillion in 2022 in direct subsidies worldwide. It is also estimated that the fossil fuel industry was allowed to externalize $5.6 trillion in health and environmental costs (whether or not you consider this a “subsidy”). This is for a mature industry with massive profits sitting on top of a massive infrastructure partly paid for with public dollars. The bottom line is that some targeted subsidies for green energy technology is perfectly reasonable, and in fact is a good investment.

But the authors argue that this might not be enough. They also recommend we add some sticks to the equation. This usually takes the form of some type of carbon tax, which would make fossil fuels less profitable. This seems perfectly reasonable. They also recommend mandated phase out of fossil fuel investments. This is trickier, and I think this type of approach should be a last resort if anything. You won’t have to mandate a phase out if you make green technologies more attractive through subsidies and infrastructure, and fossil fuels less attractive by eliminating subsidies and perhaps taxing carbon.

At the very least governments should be not slowing down the green transition because they are neglecting to do their basic job.