Tackling cost barriers and creating demand certainty is essential to accelerate sluggish hydrogen market development
Realising the potential of low-emissions hydrogen is no longer a question of future technological breakthroughs: it's a policy challenge of the present, and countries across Asia, Europe and the Americas are implementing measures to ramp up development.
Over the past five years, project announcements for low-emissions hydrogen production have multiplied, but the final investment decisions (FIDs) required to realise those projects are trailing behind. Potential low-emissions production for 2030 has now grown to 37 million tonnes per annum (Mtpa), but only 11% of this capacity corresponds to projects that have reached a final investment decision or are already operational, according to the upcoming edition of the IEA’s annual Global Hydrogen Review, which provides key insights into the latest market and policy developments.
Two main factors are at play. Firstly, the cost premium for low-emissions hydrogen and hydrogen derivatives in comparison with their fossil fuel counterparts, and secondly, the lack of offtake contracts that are sufficiently long-term to reduce risks and improve the bankability of projects by providing demand certainty.
Cost premia and the willingness to commit to offtake can differ at each step in the value chain. For example, for renewable ammonia, the cost premium today can be 85% to 100% in Europe, which can be significant for an ammonia producer concerned with competitiveness and market share. However, further down the value chain, the premium can fall. For example, say renewable ammonia is used as feedstock for fertiliser, which is then used for coffee plants. The premium for the resulting cup of coffee from this crop would be less than 0.1% of the sales price, which is likely acceptable to the final consumer. That said, how this premium is distributed across stakeholders in the value chain can be complex, and it poses a coordination challenge among value chain actors, who typically lack close ties.
High costs and demand uncertainty are recurring challenges, but market contexts and policy responses differ. While some countries rely mainly on market forces and end-users' willingness to pay a premium for low-emissions hydrogen, others are developing various support schemes and regulations. IEA Energy Policy Reviews of Germany, Sweden and the Netherlands, as well as a forthcoming review of Korea, provide insights into the different approaches being taken to create more demand certainty.
Sweden's policy and market conditions have supported low-emissions hydrogen
As part of their decarbonisation plans, many countries and regions have developed hydrogen strategies and roadmaps that include ambitious targets for low-emissions hydrogen. Sweden, for example, has an ambitious energy policy framework built on the 2015 “Fossil Free Sweden” initiative, which brings together industry, civil society and government to build consensus around a common vision for decarbonisation. Sweden took further steps to provide long-term policy certainty by enshrining a commitment to net zero greenhouse gas emissions by 2045 into law.
Based on this long-term policy framework, Sweden is currently significantly advancing industrial development for low-emissions processes, including hydrogen-based steel production. Stegra (formerly H2 Green Steel) is building a plant with 700 megawatts (MW) of electrolyser capacity that is set to start operations in 2026, while Swedish steel manufacturer SSAB is constructing a 500 MW plant that is expected to begin operations in 2027. Over 60% of Stegra's planned output is secured through offtake agreements that span five to seven years from different companies in the automotive, steel processing and residential sectors, which were signed even before the FID. Initially, 18 different companies signed as offtakers, sharing and minimising individual risk. These offtakers were willing to pay a premium of up to 20% in an effort to meet their own decarbonisation targets.
Some existing features of Sweden's energy system make low-emissions hydrogen attractive. Sweden has one of the lowest electricity prices in the European Union; this improves the economics of low-emissions hydrogen production, since electricity is the main driver of costs. Sweden also has one of the lowest power carbon intensities in the world (8 grammes of CO2 per kilowatt-hour), which qualifies hydrogen produced via grid-connected electrolysis as renewable and possibly lowers fixed costs. In addition, the European Union’s Emissions Trading System, with prices of EUR 60-85 per tonne of CO2 in 2025, helps close part of the cost gap with hydrogen produced with fossil fuels.
Access to grants and guarantees has also helped to make these first-of-a-kind steel production projects possible. Sweden's “Industrial Leap” programme supports the transition of the industrial sector to low-emissions alternatives. As part of this programme, SSAB's HYBRIT initiative received a grant of SEK 3.1 billion (Swedish kronor), or USD 310 million, out of a total investment of SEK 20 billion (USD 2 billion). Meanwhile, nearly 20% of Stegra's plant investment came from public finance, with grants making up 40% of that portion.
Support for low-emissions hydrogen demand from governments provides more certainty for investors
Investors in an immature hydrogen market face high risks without sufficient long-term offtake agreements that provide clarity about the direction of travel. Stable support frameworks and bankable offtake contracts are important to provide long-term investor certainty about hydrogen demand.
Germany, for example, uses a mix of mechanisms to stimulate low-emissions hydrogen demand and reduce risks for investors. The H2Global mechanism covers both producers and consumers by introducing an intermediary that compensates for the price difference for low-emissions hydrogen in auctions. Producers receive a long-term contract to reduce uncertainty, and consumers can conclude one-year contracts to avoid a lock-in effect. The European Union has also established a platform to connect buyers and suppliers of hydrogen, providing transparency to market players and information for financial support.
Germany also has a carbon contract for difference scheme for energy-intensive industries. This aims to close part of the cost premium when switching to low-carbon production alternatives for 15 years, providing certainty on cash flows. The funds are not only for hydrogen, but they are sizeable, with EUR 2.8 billion allocated in the first round and larger amounts planned for the second round.
In Korea, the power system is expected to become the main demand driver for low-emissions hydrogen, complementing nuclear and renewables. Korea is considering ammonia co-firing in coal power plants and the use of hydrogen in gas turbines. To promote this, Korea is opting for operational cost support through auctions with sustainability criteria. KEPCO, Korea's largest electricity utility, covers the cost premium between the market and bidding prices over 15 years. While the tender conditions are still being fine-tuned, the first tender in 2024 awarded 750 gigawatt-hours per annum, and a second round launched in May 2025 aims to support 3 terawatt-hours per annum of generation from low-emissions hydrogen.
Public procurement has not yet been widely used for low-emissions hydrogen. However, it can both help create a market for low-emissions hydrogen and close the cost gap, with initial public offtake agreements that can in time lead to economies of scale. Canada, Germany, the United Arab Emirates, the United Kingdom and the United States have endorsed the Green Public Procurement Pledge, with the intention of procuring over 30 Mtpa of low-emissions steel. Korea is also using public procurement schemes to stimulate hydrogen demand in transport and services by deploying fuel cell buses and garbage trucks. Complemented by fuel subsidies, these early-stage initiatives also aim to scale up domestic hydrogen-powered, heavy-duty vehicle production.
Clear regulatory frameworks can also drive demand for low-emissions hydrogen, including from existing users
In addition to subsidies, a clear regulatory framework for low-emissions hydrogen can help increase offtake and provide certainty for investors. One example is the EU’s Renewable Energy Directive (RED), which requires hydrogen produced from renewable electricity to account for at least 42% of all hydrogen used in industry by 2030, increasing to 60% by 2035. As nearly all existing hydrogen use in the European Union comes from industry, these binding targets will drive demand for renewable hydrogen.
EU member states are choosing a range of strategies to implement the directive, from incentive schemes to industry-level obligations. While setting an obligation has the benefit of providing markets with certainty on low-emissions hydrogen demand without relying on taxpayer money, inflexible enforcement may reduce compliance.
The effective design of regulations is essential. For example, one challenge if quotas are used for low-emissions hydrogen is the need to avoid “carbon leakage” from industrial firms relocating to other jurisdictions with no or less stringent regulation. Policy makers need to strike the right balance between regulatory obligations and support for the uptake of low-emissions hydrogen.
Overall, more demand-side action is needed to stimulate growth in hydrogen markets
While there is no one-size-fits-all policy, enabling growth in hydrogen markets in line with the ambitions countries have set will require a greater focus on demand-side measures. There is currently a mismatch between stated low-emissions hydrogen demand-side targets and policies in place, and the production targets set in various strategies and roadmaps.
Countries will need to find the right model for demand creation based on their specific contexts. In general, support for hydrogen should aim to create more certainty for market-based investments with a focus on applications that lack more cost-efficient or energy-efficient solutions. Existing hydrogen consumption in industry is a good place to begin, as it can be the first driver of low-emissions hydrogen demand that kickstarts broader market development, particularly when it is supported by well-designed policy measures.
Hydrogen market development holds a lot of promise, though it has proven to be challenging for industry and policy makers to navigate. The IEA can provide a platform for collaboration and sharing best practices between countries, including through its Energy Policy Reviews and continual analysis of the hydrogen market and technological developments, from the recent Northwest European Hydrogen Monitor to the upcoming Global Hydrogen Review.
Source: IEA