Six Questions to Understand Systems Transformation: A Case Study on Green Hydrogen

Identifying how solutions can help us limit warming to 1.5°C requires that we take both a top-down and bottom-up systems approach to understanding market transformation. By piloting this challenge with green hydrogen we were able to identify six important questions that researchers, analysts, companies, policymakers, and investors can and should ask. In this case study we answer these questions for green hydrogen, but these questions can and should be asked and answered for any decarbonization solution to inform strategy for 1.5°C alignment.

The Six Questions

We will grow this resource in the future by providing coaching on how to do this type of analysis, continuing to refine the question and approach, adding analysis tools and methods for answering these questions, and adding additional examples that can be used to help stakeholders develop their 1.5°C alignment strategy.

Introduction to Green Hydrogen

Green hydrogen is one of a handful of sensitive intervention points in the global energy system that could make or break the pathway to 1.5°C. Like the battery revolution that has preceded it, rapid scaling of production and steeply declining costs for green hydrogen could have far-reaching consequences, speeding the decarbonization of key industrial sectors, opening new pathways for innovation in other parts of the energy system, and ultimately shifting geopolitical power away from fossil fuel dependence.

In just eight years, from 2011 to 2019, the cost of lithium-ion batteries declined by 85%, triggering major shifts that are now unfolding or, in some cases, just beginning in the electricity grid, passenger vehicles, trucking, and short-haul aviation. Similarly, the rise of green hydrogen has the potential to drive fundamental changes in the economics of low-carbon pathways in steel, shipping, aviation, and fertilizer. From a systems perspective, green hydrogen is a critical leverage point for transforming the energy system to achieve a low-cost, low-carbon, secure energy future.

This green hydrogen case study demonstrates how key actors can accelerate this transition now. Our approach to transformation analysis is based on six questions that we answer through a systems approach, synthesized from existing literature and input from relevant experts in the field. Each question is accompanied by a link that describes opportunities to apply a systems transformation approach and methodology.

Question 1: What Is the Energy Transformation Potential of Green Hydrogen?

  1. Technology learning curves. The cost of supplying green hydrogen production is riding in part on well-established technology learning curves for solar and wind power, with demonstrated learning rates of 28% and 10% respectively. That means for each cumulative doubling of solar and wind power installations, the price falls by about 28% and 10% respectively. In addition, the cost of hydrogen electrolyzers is now on a steep learning curve, with learning rates estimated at 13%–18%. Together these forces suggest that rapidly scaling green hydrogen production could quickly drive down the cost, potentially to $0.50–$1.50/kg by 2040.
  2. Critical tipping points. Today’s best costs for state-of-the-art green hydrogen production (at scale) in regions of the world with abundant low-cost renewable electricity supply are estimated to be around $2.60/kg. This puts green hydrogen supply in proximity to or already crossing critical economic thresholds for competition with other hydrogen pathways and, in turn, approaching levels that could disrupt the economics of other industrial value chains such as steel production in the decade ahead.
  3. Cascading effects. Green hydrogen is a potentially versatile “energy carrier” that could transform various energy systems and value chains over time, and complement a high-renewables electricity system. Variable renewable electricity generation promises the lowest-cost electricity supply ever known, but also creates challenges and opportunities associated with managing the variability of renewably sourced electricity supply. Green hydrogen opens new pathways in the energy system to store and ship low-cost (often zero marginal cost) electricity and, in turn, transform other value chains in the energy system. While green hydrogen could be a $15–$90 billion global industry by 2030, the impacts would extend to many other sectors of the energy system.
  4. Potential for massive scaling. The extraordinary progress on technology learning curves for wind, solar, and batteries is due in part to the large and constantly expanding global markets for these technologies as costs decline. Today, solar analysts are exploring the cost implications of terawatt-scale solar panel manufacturing, with the cost of solar energy projected to be less than $0.02/kWh by 2050 as the industry continues to grow. The same dynamics could apply to green hydrogen in the decades ahead. Some projections already anticipate that the market for green hydrogen could be $15–$90 billion by 2030, and even greater growth is possible.
  5. Opening new value pools. The development of low-cost green hydrogen production at scale, coupled with rapid advances in other sectors to increase green hydrogen demand, would open vast new horizons for value creation in the energy system. Low-cost renewable power generation resources in some parts of the world, including Australia, Chile, and parts of Africa, the Middle East, and India are constrained by limitations on potential electricity demand. Green hydrogen opens the possibility of transporting low-cost energy from these areas to other parts of the world or of drawing energy-intensive industrial processes to these areas of low-cost supply. The new value creation catalyzed by the green hydrogen revolution could be many times larger than that from production of this commodity itself.

However, the fact that green hydrogen is close to critical tipping points and could, in turn, trigger much wider changes that benefit the economy and planet does not ensure a fast transition. Incumbents often slow changes in systems that threaten established value chains, at least until disruptors build enough strength to threaten their established positions. And policymakers often lack the vision to make early investments and align incentives to stimulate growth needed to cross critical cost thresholds. Systems changes such as this often happen, or fail to materialize, based on the actions of key actors.

Question 2: How Rapidly Does Green Hydrogen Need to Scale to Help Meet 1.5°C?

Integrated assessment models and energy system models provide a useful tool to understand the range of industry or sectoral decarbonization milestones and targets, solution growth rate, and key system implications for green hydrogen to limit warming to 1.5°C. Examples of how industries must decarbonize and rapidly grow new systems are shown below. Although these model results show smooth, equally paced paths toward decarbonization, it is likely that different sectors will begin decarbonizing faster than others as a result of technology readiness, market adoption, and policy priorities.

Question 3: How Can System Efficiencies Be Captured?

Many of the largest blind spots come from a limited vision of how efficiency can rewrite the rules for how things are done today. Efficiency is not synonymous with conservation; a wider perspective on efficiency opportunities can be achieved by looking for opportunities resulting from electrification, digitization and “smart” systems, dematerialization and service business models, decentralization, product design, innovations, and circularity. The exhibits below show how a view on efficiency can help identify priority sectors, use cases, and additional market opportunities that may otherwise be missed by models and analysis. This can help improve the effectiveness and competitiveness of a hydrogen deployment strategy.

Connecting Sectors to Green Hydrogen Solutions

Hydrogen is a priority decarbonization strategy for shipping, aviation, steel, fertilizer, and heavy transport. Other end uses, such as building heating, light-duty transport, and power generation can also be decarbonized with hydrogen but can often be more efficiently decarbonized with electrification. These end uses can have benefits such as seasonal storage and ease of hydrogen blending when decarbonized with hydrogen. The pace and cost-effectiveness of renewable energy expansion needed for hydrogen suggests that it is critical to use hydrogen primarily for those end uses (shipping, long-haul aviation, fertilizer, petrochemicals, and steel) where weight, range, or feedstock sensitivities make alternative decarbonization pathways more challenging. Using hydrogen to decarbonize other sectors, such as building heating, should be evaluated carefully, as it can make scaling additional infrastructure more difficult.

Hydrogen Demand Can Be Reduced through Three Main Pathways

At the heart of most system improvements is a more efficient way of doing things. New designs, innovative products and materials, process efficiencies, and circularity are examples of how future demand estimations based on today’s technologies often fail to materialize and make the challenge appear larger than it is. This is especially true today, as many resource-intensive processes become digitized. One of the emerging hypotheses and strategies to support nascent green hydrogen industries is to leverage hydrogen’s ability to play a role in demand-side grid balancing, especially by better valuing renewable resources that would be otherwise curtailed or have low market value. Also, a decentralized approach to hydrogen production, where hydrogen supply facilities are co-located with industry hubs and/or renewable energy generation, can improve system efficiency.

Question 4: What Positive Feedbacks Can Create Exponential Growth?

Solutions that occur on S-curves can scale non-linearly due to positive system feedbacks. Bottom-up analysis of trends in investment commitments and targets, country strategies and policy initiatives, and analysis of tipping points can help to identify the extent to which non-linear change is poised to occur.

How Policy and Action Can Create Exponential Change

Announcements of electrolyzer projects for hydrogen supply have grown at a 250% CAGR over the past ten years and actual electrolyzer deployments are expected to grow at a rapid pace. The existing project pipeline already exceeds investment forecasts due to policy commitments in 2025 and sales outlooks suggest a 1,000x increase in supply by the end of the decade. Forecasts for electrolyzer capacity have jumped every year. The accelerating action capacity additions shown below consider what future capacity would be if this forecast trend continues. It suggests that continued momentum building and action acceleration could be in line with 1.5°C, if ambitions continue to grow and translate to actions.

a bar chart showing how policy and action can create exponential change

The Number of Countries with Hydrogen Strategies or Roadmaps Is Rapidly Increasing

The number of countries with hydrogen strategies or roadmaps is rapidly increasing. Although just a few countries in the world had hydrogen strategies in 2019 at the beginning of the pandemic, many other countries are now in the process of creating strategies. These strategies for hydrogen are beginning to show what the hydrogen supply chain of the future may look like. Countries like Japan, South Korea, and Germany see themselves as primarily being importers of hydrogen whereas countries with abundant land and renewable energy resources such as Australia and Morocco see themselves as exporters in the future.

Question 5: What Barriers Are Slowing Market Transformation?

The next two steps rely on an understanding of what is needed at each phase of transition to inform what actions must be taken to ensure rapid scaling. By understanding what stage of an S-curve the technology is in, we can identify the most important barriers to solve.

Accelerating Progress Requires Tackling Key Barriers along the S-Curve

Scaling hydrogen will require overcoming critical technological, market, infrastructure, and policy barriers. Some barriers are common to all sectors, such as the limited availability and high costs of green hydrogen, and the buildout of new hydrogen delivery and storage infrastructure. Other barriers are sector specific, typically associated with the phase of development the specific sector is in. For example, aviation and shipping face low technological readiness levels and a subsequent lack of sectoral alignment on the “winning technology.” Meanwhile, the steel and fertilizer sectors face barriers with market dynamics such as difficulties connecting sellers to buyers across long supply and complex chains and leveraging green premiums.

a graph showing where hydrogen stands in different industries

Question 6: How Can Ambition Loops Help Speed Solution Development?

Understanding the key systemic barriers and which phase(s) of the S-curve they affect helps us prioritize the actions that must be taken to address the barriers in order. The objective is to identify the types of coordination that are critically important.

Because some barriers require a long time to align on solutions, it can be helpful to “plant seeds” for how they might be solved earlier, especially with thought leadership, analysis, and stakeholder engagement that can be used for alignment and momentum building. However, case studies have also shown that investments that prematurely target later stages or ignore learning curves or important efficiency opportunities can result in stranded assets that could have been avoided.

How Can Key Actors Drive the Green Hydrogen Ambition Loop?

To succeed in driving rapid change, coalitions must engage key actors and stakeholders across the value chain that are highly motivated to solve the problems they face. NGOs, governments, investors, and emerging industry organizations are all potential stakeholders to create or advance ambition loops. A systems view of green hydrogen, as described here, shows how various actors can help to unlock the vast potential of this transition:

Governments: Governments should look at the potential for new value creation from green hydrogen from a systems perspective, considering the role their jurisdiction can play on green hydrogen production, and the wider set of opportunities across value chains. Early movers can gain sustainable competitive advantage at national and regional scales. Governments should consider the different roles their jurisdictions can play in this future system and develop a hydrogen strategy based on considerations such as energy security and price volatility, availability of cheap renewables at large scale, and transport options.

To support aviation and shipping, which are still in the proof-of-concept phase, national governments should coordinate and finance pilots and demonstrations to reduce uncertainty about what the winning solutions are likely to be for medium- and long-haul flights. Subnational governments should coordinate with national governments, utilities, finance, and other governments to develop hydrogen hub demonstration projects and share best practices on regulations for safe hydrogen storage and distribution. In more advanced sectors, governments should prioritize engaging in policy and collaborations such as government procurement, adoption incentives, transparency, and standards creation to spur demand creation for early adopters.

Producers: Recognition of the lack of market growth confidence led to the creation of initiatives (e.g., Green Hydrogen Catapult) to foster commitment and action to rapidly scale green hydrogen supply in advance of growing demand. Leading green hydrogen producers are moving quickly to scale production, and the development of green hydrogen production equipment, such as electrolyzers, and supply chains must grow rapidly to prevent bottlenecks.

Supply-push policies and commercial activity by hydrogen producers alone cannot succeed without pathways to simultaneously increase demand. Producers need to be able to connect with buyers more easily. Coordination is also needed to develop green hydrogen production standards for more advanced sectors such as green steel and green fertilizer. Coordination opportunities can leverage improvements in distributed traceability protocols and the high climate ambition of consumer-facing corporations to become early adopters.

Buyers: In the context of a transition like this one, buyers are not just passive takers of supply. Buyers’ actions, specifically their firm commitments to purchase supply from new sources, can be a powerful driver of market transformation. Buyers of green hydrogen, green steel, and other services and commodities in the green hydrogen ecosystem can help to drive demand creation and rapid scaling, support policy development, and create ambition loops that leverage transparency and standards to drive further ambition setting. Coalitions or platforms that convene buyers and sellers across supply chains may leverage other stakeholders (e.g., from finance or government) to increase engagement along long supply chains with intermediaries (e.g., fertilizer and steel).

Investors: Investors should be aware of the system change potential of the green hydrogen transition and the possibility, or even likelihood, that it will deliver surprises that are beyond the scope of what is considered in conventional energy systems models. Rapid transitions always hold the possibility of stranding investments in assets that become uneconomic as conditions shift. Investors should learn from these experiences and develop policies to protect against stranded asset risks, such as blue hydrogen investments that will be outcompeted before their useful life is over. Investors, including institutional investors and public or blended finance institutions, should also consider their role in pilots, demonstrations, and green infrastructure procurement, especially in the Global South.

Researchers and NGOs: Researchers and NGOs play an important role in spurring coordination and collaboration of organizations to create ambition loops. They also play an important role as independent or neutral parties. This is important for verification and standard development as well as for preparing for future stages of solution development. Research, analysis, and stakeholder engagement are critical to support momentum building to overcome anticipated future barriers such as advocating for supportive policy and social buy-in, infrastructure planning and assessment, and understanding both positive and negative economic, social, and ecological impacts.

Modelers and analysts: Energy modelers and analysts often create an “incumbent future” — a view of the way the system will evolve that is implicitly assumed or deeply imbedded in model assumptions that fail to consider disruptive pathways. Green hydrogen needs scenario analysis that takes full advantage of the dynamics of technology learning curves, rapid scaling, and innovative policy options in order to explore the real solutions space in this area.