P R I S M : HYDROGEN – THE ELECTROSHOCK TO THE ENERGY TRANSITION

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ARTHUR D. LITTLE

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P R I S M : HYDROGEN – THE ELECTROSHOCK TO THE ENERGY TRANSITIONAUTHORS
Florence Carlot, Oliver Golly, Carlo Stella, Benedikt Unger,
Thomas Oosterlinck

While much of the focus on achieving

net zero has been on green electricity,

momentum is growing behind hydrogen

within the energy transition, with the IEA

predicting a four-fold increase in demand
between now and 2040.

Governments are increasingly supporting its adoption througha range of incentives, such as those within the US Inflation
Reduction Act (IRA), EU funding programs, India’s Hydrogen
Mission, and Australia’s Hydrogen Headstart program. Together
with electrification, hydrogen will

TO G E THER WITH
ELEC TRIFICATI O N ,HYDRO G EN WILLHELP AC C ELER ATE
TR ANS FO RMATIVEDECARB O NIZ ATI O N ,ES PEC IALLY IN
S EC TO RS IN WHIC H
EMIS S I O NS AREOTHERWIS E HARDTO ABATE .

help accelerate transformative
decarbonization, especially in sectors
in which emissions are otherwise hard
to abate.
However, uncertainties still exist aroundhydrogen’s growth and relevant businessmodels, including questions aroundsupply, demand, transportation, andregulation. For this reason, players in theenergy ecosystem, whether suppliers,
customers, or investors, all need totake a fresh look at their strategies andinvestment plans. This article explores
the opportunities for hydrogen in theenergy sector and outlines the criticalfactors that companies across the ecosystem must consider tosuccessfully integrate it into their strategies.

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ARTHUR D. LITTLE

THE ROLE OF HYDROGEN ACROSS THE
E N E R GY VA L U E C H A I NHydrogen has the potential to impact the upstream, midstream, anddownstream energy value chains.

UPSTREAM
Adding Carbon Capture Utilization and Storage (CCUS) technology tofossil fuel-based hydrogen production or electrolysis using renewableelectricity significantly reduce greenhouse gas (GHG) emissions.
However, viability relies on the availability of affordable renewableelectricity – for example, electrolysis-based hydrogen production
typically requires the availability of at least 4,000-5,000 hours ofelectricity per year.

MIDSTREAM
Hydrogen can be transported via pipelines, trucks, or ships. However,existing pipelines and storage facilities are designed for natural gas
and will require large-scale transformation to transport and storehydrogen. Hydrogen transportation

ADDIN G CARB O N
CAP TURE UTILIZ ATIO N
AND S TO R AG E (C CUS)TEC HN O LO GY TO FO S S IL
FUEL- BAS ED HYDRO G EN
PRO DUC TI O N O R
ELEC TRO LYS IS US IN G
RENE WABLE ELEC TRIC IT Y
S IG NIFICANTLY REDUC E
G REENH O US E GAS (G H G)
EMIS S I O NS .

through trucks or ships (as liquidhydrogen, ammonia1, or a liquid organichydrogen carrier [LOHC]) will also require
new or repurposed infrastructure.
Large-scale storage of hydrogen has
the potential to dramatically increasesystem resilience, as it can be used tostore energy generated from renewablesources, which can then be used during
peak demand periods. Midstream impacts
will depend on the cost and availabilityof infrastructure and the regulatory
framework for hydrogen transportation.
Many gas transmission system operators(TSOs) are already analyzing the requiredchanges, running pilots, designing projects, attracting investments,and starting preparatory construction works.

DOWNSTREAM
Hydrogen can be used for transportation, industrial processes (suchas steelmaking, refining, and chemical production), power generation,and residential heating, as illustrated in Figure 1. Another viable use
is as a source for e-fuel 2 when coupled with CCUS technologies, anexample being the Haru Oni pilot plant in Chile. Adoption and theimpact on the downstream value chain will depend on hydrogen
availability, as well as the cost and efficiency of hydrogen-based
technologies such as vehicles and heating systems.

1. Ammonia can be used as a hydrogen carrier to transport it more effectively andsafely over long distances due to its more favorable characteristics, having higher
energy density and being less flammable.
2. E-fuels are fuels produced from renewable sources such as solar or wind power.

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P R I S M : HYDROGEN – THE ELECTROSHOCK TO THE ENERGY TRANSITION

TRANSPORTINDUSTRY

POWER

HOUSE
HEATING

GREENIFICATION OF
USE CASES FOR WHICH
ELECTRIFICATION IS
NOT AN ALTERNATIVE(E.G., SHIPPING, HEAVYTRUCK, AVIATION)APPLICATIONS IN THE STEEL(AS A REDUCING AGENT),CEMENT (ALTERNATIVE FOR
COAL IN HIGH-TEMPERATURE
FURNACES), AND PETROCHEM
INDUSTRIES (AS RAW MATERIAL
AND REPLACEMENT FOR
NATURAL GAS IN FURNACES)

USAGE IN GAS TURBINES TO
INCREASE POWER SYSTEMFLEXIBILITY OR IN
COAL-FIRED POWER PLANTS
TO REDUCE EMISSIONSALTERNATIVE FOR
NATURAL GAS TO
GENERATE HEAT FOR
BUILDINGS(MICRO-COMBINED HEAT
AND POWER COULD
REPLACE NATURAL GASBOILERS IN HOUSEHOLDS)PROJECT EXAMPLES
THE CORADIA ILINT™,
THE WORLD’S FIRSTPASSENGER TRAIN
POWERED BY A
HYDROGEN FUEL
CELL, PRODUCING
ELECTRICAL POWER
FOR TRACTION

THYSSENKRUPP SWITCHING ITSSTEEL PRODUCTION TO
DIRECT REDUCTION BY 2021
WITH HYDROGEN SUPPLYFROM RWECONSORTIUM DEVELOPING
A POWER-TO-HYDROGEN-TO-POWER PROJECTPARTNERSHIP DEVELOPING
FIRST UK PUBLIC DEMONSTRATION OF A HOME
FUELED ENTIRELY BY
HYDROGENFIGURE 1: HYDROGEN APPLICATION IN VARIOUS SECTORSAs detailed in Figure 2, a range of opportunities will emerge acrossthe value chain, particularly around green energy supply and hydrogenproduction. Businesses should explore where these fit with theiroverall strategy, capabilities, and risk appetite, and move quickly
to secure the right energy sources and form partnerships to accesshydrogen volumes at good prices.
ECONOMIC SET-UP OF HYDROGEN ECONOMY IN 2050 IN EUROPE
ENERGYSUPPLYH2 PRODUCTION
INCL. CCUS

TRADING

TRANSMISSION

DISTRIBUTIONRETAILTOTAL
MARKET

29.1

32.6

0.6

11.7

4.7

183
104.0

FIGURE 2: VALUE GENERATION ALONG THE H2 VALUE CHAIN IN EUROPE BY 2050

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ARTHUR D. LITTLERISKS TO THE DEVELOPMENT OF THE
HYDROGEN ECONOMY
While the hydrogen value chain provides major opportunities
for incumbents and new players, it also faces multiple risks anduncertainties, including:– Cost/competitiveness: The cost of producing, transporting, andstoring hydrogen is currently higher than that for conventional
fossil fuels, due to the immature technologies across the value
chain and expensive long-haul transport. Although costs are
expected to decrease significantly in the long term, companies
investing now in hydrogen infrastructure and technology may not
generate short-term profits. Even if costs fall, producing hydrogenmay still be more expensive than alternatives such as renewable
power from an upstream perspective. However, due to its ability
as a stored energy carrier, and its usage in otherwise difficult-todecarbonize sectors, many expect it to be ultimately competitive
with alternatives.
– Lack of infrastructure: Available infrastructure to support the
production, transportation, and storage of hydrogen is limited,

AC C O RD IN G TO THE EURO PE AN
HYDRO G EN BAC K B O NE ,PIPELINE O PE X C O ULD AM O UNTTO US D 3 .6 B ILLIO N PER YE AR
IN EURO PE ALO NE .

preventing scaling of supply
and demand. For example,
fuel cell vehicle uptake will
go hand-in-hand with the
ramp-up of hydrogen refuelingstations. The underlying
challenge is that infrastructureis expensive to operate and maintain safely. According to theEuropean Hydrogen Backbone, pipeline OPEX could amount to USD
3.6 billion per year in Europe alone. To overcome this, alongsidedirect financial support, many economies (such as the UnitedStates, Canada, Australia, and Korea) are establishing regionalhydrogen hubs. Establishing hydrogen production close to end users
minimizes the cost of infrastructure construction and operation,
jumpstarting adoption.
– Market design/regulatory development: The regulatory frameworkfor hydrogen is still evolving, and there is uncertainty around how
governments will incentivize or regulate hydrogen technology.
For example, the role TSOs can play in the upstream part of thevalue chain, or which requirements will be set regarding thecarbon intensity of hydrogen to classify it as low emission, are still
unclear. Potential new internationally agreed emissions accounting
frameworks could also create short-term uncertainty. This presents
an opportunity for countries/regions to differentiate themselves
and accelerate development by rapidly creating favorable
regulatory environments for investment.

101

P R I S M : HYDROGEN – THE ELECTROSHOCK TO THE ENERGY TRANSITION– Technology evolution/uncertainty: The technology for producing
and storing hydrogen is still developing, and how to best optimize
processes for maximum efficiency and cost-effectiveness iscurrently unclear. Scalability is lacking around many technologies,
such as ammonia cracking (to reconvert ammonia to hydrogen)or liquefaction/re-gasification. These are therefore likely to see
significant future improvements in efficiency.
– Market demand: While interest in hydrogen as a fuel and energy
storage medium is increasing, how quickly and widely it will be
adopted is still unclear. However, awareness of hydrogen as analternate energy solution is growing, as shown by the range ofstrategies and initiatives being put in place acrossleading economies.
– Competition: A growing number of companies are entering
the hydrogen market, including traditional energy players, gridcompanies, automotive manufacturers, industrial gas providers, andtechnology and chemical companies. This could lead to increased
competition and potential market saturation.
– Geopolitical risk: If the

EMBR AC IN G HYDRO G EN WILLENABLE BUS INES S ES TO
ALIG N WITH SUS TAINAB ILIT YG OAL S , AT TR AC T CUS TO MERS ,D IFFERENTIATE THEIRO FFERIN G S , FO S TER
C O LL AB O R ATI O NS , AND DRIVE
BUS INES S M O DEL INN OVATI O N .

majority of hydrogen is
supplied by Middle Easternand African states (suchas Qatar, Saudi Arabia, andMorocco), regions such as
Europe will simply tradedependency on Russian
gas for dependency onhydrogen from othercountries, which could
create risk.

These factors complicate the decision-making process around whichinvestments to make and when and where to make them for all actors
within the ecosystem, from suppliers to users.

T H E N EC E S S I T Y A N D A D D E D VA L U E
O F I N N O VAT I O NInnovation along the hydrogen value chain will be essential to
overcome technical and economic challenges, scale up hydrogenproduction and utilization, reduce costs, and drive the transition to asustainable and low-carbon energy future.
As well as advances within generation, storage, and transportinnovation, hydrogen’s versatility will enable multiple sectors
to innovate, create synergies, and optimize energy systems. For
instance, innovations in hydrogen utilization technologies, such asfuel cells and hydrogen-powered vehicles, will drive the adoptionof hydrogen as an alternative energy source.

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Embracing hydrogen will enable businesses to align withsustainability goals, attract customers, differentiate their offerings,
foster collaborations, and drive business model innovation. By
generating hydrogen without emitting carbon, companies will earncarbon credits, which can be sold or used to offset emissions acrosstheir wider operations, providing a further financial incentive forhydrogen investment. By adhering to certification requirements (notlimited to carbon footprint, but also including purity and safety),businesses can build trust and credibility, opening up opportunities
for new partnerships, market access, and premium pricing.

S U C C E S S F U L LY P L A Y I N G I N T H E
HYDROGEN ECONOMY
Given the fast-moving and dynamic nature of the hydrogen economy,organizations and investors will need to be extremely agile to build acompetitive position, which will require them to transform internally.

DEFINING NEW BUSINESS MODELS
Organizations need to understand and plan their positioning in thehydrogen economy. For example, hydrogen players in Japan and Korea
might need to invest in electrolyzer capacity and hydrogen production
overseas in Australia or Malaysia, and create a supply chain back totheir country. This international business model is likely to impact
the capabilities and organizational structures they develop and thepartnerships they form.

DEVELOPING A CUSTOMERCENTRIC MIND-SETGreater competitiveness and uncertainty require previously dominant
players in the gas industry, such as TSOs, to transform their mind-set
and operations. They are unlikely to be the sole player in hydrogenmarkets, so they need to move away from monopolistic thinking andfocus on becoming agile, fast-moving, and customer centric. They
must start by understanding client requirements and using this tobuild stronger relationships.

C R E AT I N G E C O S Y S T E M
PA R T N E R S H I P S
Exploiting new opportunities will require collaboration with partners
all around the globe, for example, with companies using solar power tocreate hydrogen in regions such as the Middle East and Australia, as
well as forming joint venture agreements with worldwide customers
to guarantee large-scale, stable demand. Partnerships between
the public and private sector will drive change. One example is theestablishment of Thailand Hydrogen Group, initiated by oil and gas
company PTT, which aims to engage public and private sector players
to promote the development and adoption of hydrogen in Thailand.

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P R I S M : HYDROGEN – THE ELECTROSHOCK TO THE ENERGY TRANSITION

D E V E L O P I N G N E W O R G A N I Z AT I O N A L
STRUCTURES
To deal with the broad uncertainties around feasibility andinvestment choices, companies need to create new organizational
structures that are faster-moving and more adaptable to changing
conditions. This should include creating teams with skills in businessdevelopment, engineering (especially technical expertise in thehydrogen space), and finance, as well as effective communication tocreate awareness, build stakeholder support, and lobby for the right
regulatory frameworks and support mechanisms.

BUILDING INFORMED AND DIVERSIFIEDI N V E S T M E N T S T R AT E G I E S
To reduce risks in a rapidly evolving and complex market, companies
should diversify investments across hydrogen technologies andmarket segments, such as by allocating resources to both fuel cell
technology and hydrogen production technology. Alternatively, they
could consider projects outside (but related to) hydrogen, such as
green ammonia and methanol, especially as hydrogen is part ofa broader ecosystem. Investments should also be divided evenly
between hydrogen and other less volatile energy sectors to spread
financial risks, guided by the company’s risk appetite.
In this challenging landscape, making informed decisions is crucial.
Scenario planning serves as a valuable tool to assess the resilience ofpotential strategies across different scenarios. It aids in identifying“no regret” decisions that can be implemented immediately, while
also establishing monitoring mechanisms for triggers that may
impact other investment choices. Sustainability scenario planningis described in more detail in Navigating the sustainability journey(Prism S1 2023).

B U I L D I N G A L O N G -T E R M P E R S P E C T I V E
In the evolving hydrogen ecosystem, roles within the value chain
remain fluid, particularly due to evolving regulatory policies andincentives. Players need to take a long-term perspective, assessing
the potential growth and scalability of hydrogen technologies and themarket before making investment decisions. For example, producers
and transporters need to evaluate the potential hydrogen volumes
per sector in their respective areas and identify attractive businessmodels while considering their specific circumstances.

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By actively collaborating with industry stakeholders, such astechnology providers, energy companies, hydrogen users (off-takers),
and government agencies, producers, transporters, and investors cangain valuable insights into market developments. Building long-term
partnerships and working together allows for cross-leveraging of
capabilities, reduces inherent uncertainty, and mitigates operationaland demand risks.
Assessing policy evolutions and regulatory frameworks on a global
scale is essential to understand their potential impact on investment
decisions. For example, subsidies and tax incentives can create
favorable investment environments in specific areas of the value
chain. Initiatives to focus on include the US Inflation Reduction Act,
Hydrogen Headstart in Australia, the EU Hydrogen Strategy, the Fitfor-55 package, the Innovation Fund, and the European Green Deal.

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P R I S M : HYDROGEN – THE ELECTROSHOCK TO THE ENERGY TRANSITIONINSIGHTS FOR THE EXECUTIVE
Hydrogen has a key role to play in successfully delivering a low
carbon economy. However, its ecosystem is still developing, meaning
opportunities are not yet clear for players such as producers, energy
companies, transporters, distributors, retailers, end users, andinvestors. To understand how to play, organizations should focus on:– Building internal understanding: Investigate market opportunities,
potential impacts on operations, and the optimal timing aroundentering the hydrogen market. Companies should evaluatehydrogen volumes, market prospects, and required business models,and understand customer needs. Implementing technology andmarket monitoring, along with scenario planning, ensures strategic
preparedness.
– Developing the right organization and capabilities: For existingenergy players, success in the hydrogen economy will requireorganizational transformation. This could include developing a morecommercial, customer-focused mind-set, with new teams hunting
for and realizing opportunities in the hydrogen value chain.
– Working closely with regulators: Across the globe, from the EU
to the United States and Asia, national and regional governments
are actively involved in setting the ground rules for the hydrogen
economy. Be clear on the opportunities that are available (suchas through subsidies) and the regulatory decisions that could
constrain strategies or operations.
– Capitalizing on value pockets: Go beyond the hype around thedemand side to understand where opportunities exist (such as
in e-fuels, direct combustion, or heavy transport) and focus andcapture them.
– Collaborating across the ecosystem: Building a successfulhydrogen economy requires collaboration across upstream,
midstream, and downstream operations. Complex global
ecosystems are emerging, involving a range of new and incumbent
players. Understand the opportunities and build partnerships toposition your organization in key relevant areas, technologies,
projects, and geographies.
– Investing in innovation: Embracing innovation in technologies,
processes, and business models will help to differentiate, go
beyond basic regulatory compliance, and allow price premiums.

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FLORENCE CARLOT
is a Partner in Arthur D. Little’s Brussels office and amember of the Energy & Utilities Practice.
OLIVER GOLLY
is a Partner in Arthur D. Little’s Frankfurt office and amember of the Energy & Utilities Practice.
CARLO STELLA
is a Partner in Arthur D. Little’s Dubai office and amember of the Energy & Utilities Practice.
BENEDIKT UNGER
is a Principal in Arthur D. Little’s London office and amember of the Energy & Utilities Practice.
THOMAS OOSTERLINCK
is a Manager in Arthur D. Little’s Brussels office and amember of the Energy & Utilities Practice.

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