What is hydrogen energy?

3D render of blue colored hydrogen molecules.

Fuel has always powered humankind’s technological advances, from the wood-burning fires first used to cook food to the fossil fuels that propelled the Industrial Revolution and have made modernity possible. But the use of fossil fuels has come under scrutiny in light of their role in climate change.

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Bernd Heid is a senior partner in McKinsey’s New York office, Filipe Barbosa is a senior partner in the Houston office, Rachid Majiti is a senior partner in the Dubai office, and Tarek El Sayed is a senior partner and the managing partner of the Riyadh office.

Some scientists believe that hydrogen energy may be a cleaner, more efficient way to power our world. Hydrogen is a naturally occurring gas and the most abundant substance in the universe. (The word in Greek means “water former” because hydrogen creates water when burned.) When used alongside other technologies, such as renewable power and biofuels, hydrogen has the potential to decarbonize a whole host of industries, including some of the biggest emitters of greenhouse gases. According to McKinsey analysis, hydrogen demand is expected to grow two to four times by 2050. This growth, while significant, is lower than we previously anticipated due to fundamental cost increases, as well as some continued uncertainty around regulation that is delaying adoption in some regions.

Yet hydrogen’s potential contribution to achieving net zero is not lost on organizations and governments. As of December 2023, more than 1,400 large-scale hydrogen projects have been announced globally, amounting to $570 billion in direct investments. In Europe, where $193 billion worth of investments in hydrogen projects has already been made, McKinsey expects hydrogen to play a significant role in meeting decarbonization targets.

How, exactly, might hydrogen play a role in decarbonizing industries? What are the types of hydrogen energy, and what’s standing in the way of widespread adoption? Read on to find out.

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What is net zero?

Net zero refers to an ideal state where the amount of greenhouse gas emissions released into the atmosphere is equal to the amount removed. To prevent a permanent—and catastrophic—warming of the planet, all industries must achieve net zero. Decarbonization, a reduction of carbon in the atmosphere, can be achieved by switching to energy sources that emit less carbon and by counteracting any carbon that is emitted. Many organizations and governments have pledged to decarbonize, or make the transition to net zero, in the coming years. To achieve net zero by 2050, the use of clean hydrogen will be required.

What is renewable hydrogen?

Renewable hydrogen is hydrogen derived from water. It’s created using a process called electrolysis, wherein electricity from renewable sources is used to split the hydrogen molecules from the oxygen molecules in water. Because the electricity used here comes from renewable sources, there are no greenhouse gas emissions. Renewable hydrogen is also known as green hydrogen.

Renewable hydrogen is a relatively new technological development. Traditionally, most of the world’s hydrogen has been derived from fossil fuels, such as coal or natural gas. Traditional production methods, such as steam reforming (where natural gas is treated with steam in the presence of a catalyst, such as nickel), produce greenhouse gases (called “gray hydrogen”) that will need to be captured or offset in the future. If the carbon produced in these processes is captured and stored, the resulting hydrogen is called “blue hydrogen.”

Renewable hydrogen will be critical to the energy transition. Production costs are expected to fall by approximately 30 percent by 2030. After 2024, nearly all new hydrogen production is expected to create clean (that is, green or blue) hydrogen. By contrast, the production of gray hydrogen is projected to be significantly more expensive with the inclusion of carbon costs. As a result, McKinsey anticipates that by 2050, clean hydrogen could account for 75 to 90 percent of total hydrogen demand.

There are a few derivatives of renewable hydrogen:

Renewable ammonia is produced from both green hydrogen and nitrogen that’s extracted from the air. Ammonia can be used as a precursor for fertilizers, as clean fuel, or as a hydrogen carrier molecule.
Renewable e- or green methanol is derived from both renewable hydrogen and CO₂ that’s either obtained from biogenic sources or directly captured from the air. Renewable methanol can be used as a precursor for commodity chemicals, as a clean fuel in maritime transportation, and as a feedstock for the production of other fuels, such as methanol-to-jet fuel.
Synfuels or e-fuels, similarly to renewable methanol, are also derived from both renewable hydrogen and CO₂. Synfuels can be used as drop-in fuel in current combustion engines or turbines.

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How can hydrogen help various high-emissions sectors meet climate targets?

Currently, hydrogen demand is driven largely by the fertilizer and refining industries. Looking ahead, industries that rely heavily on fossil fuels, such as heavy industries and long-haul transport, stand to benefit the most from hydrogen energy in the short term. The steel industry, which accounts for 8 percent of global annual emissions, represents a particular opportunity. McKinsey has studied how players in the European steel industry could decarbonize by converting plants to run on renewable hydrogen, once it becomes available in sufficient volumes and at a competitive cost. By 2030, hydrogen-based steelmaking could account for nearly 20 percent of emissions avoided via hydrogen.

The aviation sector also faces serious pressure to meet its goal to decarbonize by 2050, and hydrogen energy can help. This industry is expected to account for up to 15 percent of hydrogen-based energy demand by 2050, due to the high demand for synthetic kerosene that can be used as jet fuel.

For the long-haul transport industry, the hydrogen combustion engine could potentially help it meet regulatory challenges. While we’re still a long way from widespread adoption, hydrogen combustion engines could represent a relatively easy switch from internal combustion engines—as opposed to engines that run on batteries or fuel-cell technology. What’s more, these engines could draw on the automotive industry’s existing supply chains, production capacities, and skills and knowledge within its workforce.

What are some challenges preventing wide-scale adoption of hydrogen energy?

The hydrogen value chain is both complex and capital-intensive. Many segments of the value chain are not yet developing at the same rate—for those technologies and regulations that are developing quickly, staying up to date can be a challenge. There is also a significant degree of uncertainty around hydrogen demand in new applications, which stems from a lack of clarity in government incentives, slow development of infrastructure, and competition with other decarbonization technologies.

What’s more, hydrogen energy does produce emissions, but the amount varies widely and is easier to control than that of other energy production methods. For example, green hydrogen can be produced from 100 percent solar and wind power in renewables-rich regions and delivered to any refueling station.

That said, the reason hydrogen is not currently making a meaningful contribution to decarbonization is because of too little investment. By 2030, $460 billion in further investment in hydrogen is needed to achieve a pathway to net zero. This investment gap breaks down into three categories:

Production. Clean-hydrogen production needs roughly $150 billion more in investments through 2030.
Transmission, distribution, and storage. Investments here are critical to enabling access to cost-competitive hydrogen supplies. These might include developing refueling infrastructure for vehicles or building pipelines to supply industrial plants. The investment gap here is currently more than $165 billion.
End-use applications. Meeting projected demand in hydrogen’s various end-use applications, including steel production and transportation, will require additional investments of $145 billion.

For hydrogen to contribute to the energy transition, a scale-up over the next decade is critical.

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What is needed for the hydrogen energy market to scale?

To fulfill the vast potential of hydrogen energy, hydrocarbon-rich countries will need to address the following issues:

Scaling competitive supply. Hydrocarbon-rich countries will need to scale both green and blue hydrogen. Blue hydrogen will likely be easier to scale in the short to medium term; green hydrogen will take a larger market share in the medium to long term, as it becomes increasingly economically viable.
Stimulating local demand. To create a healthy hydrogen ecosystem, there will need to be local markets for hydrogen in addition to major exports. Regulations concerning decarbonization and clean air could help stimulate demand.
Developing transportation technology. Hydrogen is difficult to transport, whether by pipeline or by shipping over land or sea. When shipped, it must either be in liquid form or transformed into ammonia. Both are expensive processes, and liquefying hydrogen is technically challenging as well: it needs to be cooled down to –252°C, one of the lowest boiling points of all the elements.
Facilitating cooperation among a range of stakeholders. For the nascent clean-hydrogen value chain to develop consistently, customers, countries, and other stakeholders across the value chain must work together to ensure uniform progress. This might include agreements, such as those between customers, producers, or intergovernmental partners, that could decrease risk.

What role can actors in the hydrogen space play to speed global adoption?

All stakeholders in hydrogen-rich countries have key roles to play.

Governments can play a leading role in the initial development of the hydrogen economy, both locally and internationally. This would require developing hydrogen road maps, implementing decarbonization regulations, setting up intergovernmental partnerships, developing a perspective on the localization of hydrogen production across the value chain, and supporting hydrogen deployment through regulatory support.

Corporate stakeholders in hydrogen value chains, including utility companies, chemical companies, energy-intensive industries, and shipping companies, can develop hydrogen strategies to take advantage of the opportunity. These stakeholders should focus on areas such as talent development, partnerships, and expanding the supply market.

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How does hydrogen demand vary by region?

Asia is currently the world’s largest consumer of hydrogen, and that’s expected to remain the case through 2050. This is driven by the region’s demand for chemicals that already exist today, as well as the transport, iron, and steel sectors in China and India. In Japan and South Korea, a large share of hydrogen demand is expected to come from electricity generation, as coal and gas plants begin incorporating hydrogen and ammonia into their production processes. The region will likely rely on hydrogen imports from elsewhere: for instance, Oceania, North America, and the Middle East.

In both Europe and the United States, the chemicals sector is likely to remain a significant driver of hydrogen demand. New applications in sectors such as steel and synthetic fuels are expected to significantly contribute to demand growth.

As green hydrogen becomes more cost competitive, we expect it to account for up to 65 percent of hydrogen supply by 2050. Blue hydrogen is expected to account for the next-largest share of supply, up to 35 percent. The ratio of blue to green hydrogen production is expected to differ significantly by region, driven mainly by cost. Blue hydrogen production is projected to be concentrated in regions with abundant and cost-competitive natural gas, including the Middle East and North America. Meanwhile, green hydrogen is projected to have a higher share in regions with more renewable resources, such as Australia and the Iberian Peninsula.

How can hydrogen developers use digital twins?

Digital twins stand to help hydrogen developers deliver on their own net-zero ambitions—as well as those of their clients. Digital twins can potentially help hydrogen developers reduce the risks of investment, lower costs, and speed up project timelines by simulating a physical plant from the planning stage all the way through the end of its lifetime.

For example, digital twins can help minimize production costs over a plant’s lifetime by evaluating as many as thousands of options and combinations of components that could optimize plant design and increase investor confidence. A digital twin also supports decision making early in the process of plant construction, the period when the bulk of a plant’s lifetime operating costs are locked in.

One global energy company with a series of megaprojects for renewable hydrogen and ammonia was able to identify, through the use of digital twins, $500 million of net-present-value improvement potential.

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This article was updated in October 2024; it was originally published in September 2023.

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