US and European Hydrogen Stocks: The Hype, the Challenges, and the Path Forward

The collapse in US and European hydrogen stocks underscores the stark challenges faced by the clean hydrogen sector. Once hailed as pivotal to decarbonising high-emission sectors like steelmaking and shipping, hydrogen’s prospects have dimmed, leading to share price drops of up to 50% for key players like Plug Power, Ballard Power, and ITM Power. The S&P Kensho Global Hydrogen Economy Index has returned to levels last seen in 2020, effectively wiping out gains driven by initial enthusiasm for the industry’s potential.

Demand & Cost Barriers

The green hydrogen sector is grappling with significantly lower-than-expected demand, compounded by rising production costs. Project delays are becoming common, with the levelised cost of renewable hydrogen (LCOH) rising between 30% and 65% from 2022 to 2023 due to increased capital expenditure (capex) and ongoing supply chain issues. Additionally, while global electrolyser shipments continue to double yearly, driven by $308 billion in government funding, producers still struggle to find demand for this clean fuel. McKinsey’s latest models predict that hydrogen’s deployment will not be on pace to meet climate targets by 2030, particularly under its "Further Acceleration" scenario, which suggests a net-zero pathway is not feasible within this timeline.

Regulatory Roadblocks & Investment Hesitation

Policy and regulatory frameworks in both the US and EU are a critical issue. In the US, clarity on tax credits under the Inflation Reduction Act (IRA) remains elusive, creating hesitancy for final investment decisions. The EU’s stringent definitions for “green” hydrogen further complicate the market, often making large-scale projects financially unviable without significant subsidies or policy adjustments. For example, despite announced projects, only 18% of North American and 5% of European clean hydrogen projects planned for 2030 have reached the final investment decision stage. This lack of clear regulatory support dampens enthusiasm among investors, with Mark Lacey of Schroders noting that green hydrogen remains "uninvestable" under current conditions.

MY ANALYSIS

From an investment perspective, the recent setbacks reflect a classic "hype cycle," where initial investor excitement has been met with the reality of immature market demand and unresolved technical and regulatory challenges. While governments are striving to foster clean hydrogen markets, their focus largely remains on production incentives rather than fostering demand, particularly in industries like transport and heavy manufacturing, where hydrogen could be transformative. The industry's reliance on significant, ongoing subsidies and a rigid regulatory landscape further highlights the financial and structural barriers ahead.

That said, the growing involvement of established oil companies, especially in the Middle East, signals that hydrogen’s potential isn’t dead—it’s merely evolving. For example, Saudi Aramco and Adnoc’s investments indicate that regions with low-cost renewable energy resources may be best positioned to lead in hydrogen production, particularly for export markets.

In the long term, green hydrogen may reach viability if governments globally pivot to policies that create robust demand while incentivising necessary infrastructure, including robust demand while incentivising necessary infrastructure, including storage and transport networks for hydrogen, to integrate clean hydrogen into energy and industrial value chains. A shift in focus from mere production incentives to a balanced approach that actively promotes end-use adoption in high-emission sectors, such as steel and cement, could gradually strengthen market fundamentals.

In my view, the market's current turbulence reflects an industry in transition, as both investors and regulators recalibrate expectations. The volatility underscores a critical lesson: emerging technologies, especially those reliant on public policy and infrastructure, require a well-defined path to demand. The Middle Eastern model, leveraging low-cost energy for hydrogen export, could provide a sustainable template that Western markets may emulate. However, for US and European markets, clarity on policy and consistent subsidies to anchor both demand and supply could be the linchpin that drives clean hydrogen adoption at scale.

As a prospective investor or advisor in investment banking and private equity, I see the hydrogen market’s downturn as a case of misplaced expectations colliding with real-world constraints. Any strategic engagement in this sector will require patience, a discerning eye for regulatory shifts, and an appetite for innovation in demand generation.