Hydrogen in Europe: confronting challenges, enabling scale

Long hailed as the “Swiss army knife of decarbonisation”, hydrogen promises deep emissions cuts across hard-to-abate sectors and a new era of clean energy independence for the EU – which has set its sights on becoming the world’s first climate-neutral economy by 2050. Yet, despite a wave of enthusiasm and political support for net zero, a growing number of projects across the EU are being cancelled or delayed. As the EU races to deliver on its climate and energy goals, how to scale effectively requires us to confront economic barriers, regulatory gaps and market hesitancy, and doing so with a unified, cross-sector approach.

Cleaner hydrogen, brighter future

Hydrogen is already an integral part of the European economy, with approximately 9 million tonnes consumed in 2023, by sectors such as oil refining and chemical manufacturing. However, most of this hydrogen is grey – produced from fossil fuels – and therefore associated with substantial CO₂ emissions. A significant amount is also generated as a by-product from existing industrial processes, such as steam cracking and catalytic reforming, which limits its potential for replacement with low- or zero-carbon alternatives. Transitioning away from these high-emitting sources presents both a technical and economic challenge, but also a clear opportunity.

Low- and zero-carbon hydrogen alternatives, including blue hydrogen (from fossil sources with carbon capture) and green hydrogen (produced from renewable electricity) among others, have the potential to replace grey hydrogen and serve broader applications: direct replacement in specific sectors and processes; as a feedstock to produce synthetic fuels such as e-methane, e-ammonia and sustainable aviation fuels (SAF). Critical in sectors less suited to electrification, such as aviation and deep-sea maritime transport, scaling clean hydrogen as a pathway to emissions reduction supports industrial decarbonisation and long-term energy system transformation.

The path to decarbonisation starts with policy

The EU is revising and expanding its legal and policy framework to accelerate the uptake of hydrogen and its derivatives. Key instruments in the Renewable Fuels of Non-Biological Origin (RFNBOs) report include the revised Renewable Energy Directive (RED III), which came into force in November 2023 and introduces binding sub-targets for adoption of RFNBOs in industry and transport. Complementing this, the Hydrogen and Gas Decarbonisation Package, effective as of August 2024, modernises gas market rules and, crucially, establishes the first dedicated regulatory framework for hydrogen infrastructure across the EU.

The EU's policy landscape also supports inter-regional hydrogen trade, identifying multiple potential importing origins, such as the MENA region and the North Sea, reflecting the EU's ambition to diversify supply sources while building energy resilience. Importantly, there is consistency between the rules and standards that apply to domestically produced and imported hydrogen, including the certification requirements for RFNBOs, ensuring transparency and accountability with guarantees of origin and renewable energy certificates (RECs). While these mechanisms offer valuable safeguards, they also introduce complexity and compliance costs – particularly for non-EU exporters seeking access to the EU market. Ensuring these requirements are harmonised and effectively enforced will be key to the success of cross-border hydrogen flows.

Implementation ultimately depends on how individual EU Member States translate the directives into national policies, targets, and investment frameworks. The 2024 National Energy and Climate Plans (NECPs) reveal two key insights: most Member States recognise hydrogen’s strategic role, referencing EU-wide initiatives such as Repowered and cross-border projects like the European Hydrogen Backbone; and, there is a disconnect between NCEPs and previously published hydrogen strategies, with hydrogen-specific plans often inconsistently addressed or insufficiently integrated.
This fragmentation creates economic challenges. Hydrogen’s potential as a traded commodity in European and global markets requires a harmonised policy and regulatory environment to reduce uncertainty and lower the cost of capital. An issue which is then amplified as hydrogen remains less competitive versus current fossil-based alternatives.

Infrastructure investment issue

Developing the hydrogen market requires substantial upfront investment in infrastructure, production, and end-use applications – none of which can be achieved without stable demand, predictable revenue streams, and targeted public support. This economic gap is already evident in the wave of project cancellations and delays across the EU.
A key driver of green hydrogen cost is electricity pricing. Under the EU’s additionality principle, renewable electricity used for RFNBO production must be matched temporally and geographically to avoid diverting renewable energy from other sectors. In theory, long-term power purchase agreements (PPAs) between hydrogen producers and renewable electricity investors could stabilise input costs and provide investment certainty. However, recent energy price volatility has disrupted this model making merchant market participation more attractive for renewable electricity suppliers (RES). As a result, RES investors are less inclined to enter fixed-price contracts with hydrogen producers, limiting the latter's ability to lower RFNBO production costs and therefore secure offtake agreements.

However, recent declines in European gas futures have begun to ease electricity prices. Potentially long-term PPAs are therefore more attractive for RES producers, opening new opportunities for hydrogen developers to access affordable electricity. Lower gas prices could also reduce hydrogen’s competitiveness relative to natural gas, particularly in cost-sensitive sectors. These dynamics demonstrate the need for coordinated market design, long-term planning, and targeted incentives to assist the design and growth of the hydrogen market.

Hydrogen economics are also shaped by logistics: compression, liquefaction, storage, and transportation introduce significant capital and energy costs. From localised fuelling hubs to regional networks, infrastructure investments must be factored into any realistic assessment of hydrogen’s cost-competitiveness.

Recommendations: Bridging the economic and technical gap

Closing the economic gap for hydrogen deployment requires financial support and coordinated action across markets, policy, regulation and technology. The following priorities can help create investable, technically viable conditions for hydrogen scale-up:

• De-risk early-stage projects with targeted financial tools

Instruments such as Cads, investment grants, blending quota obligations (e.g. for SAF), and public guarantees are critical to make projects bankable and accelerate learning.

• Support long-term electricity contracting and system optimisation

Stable PPAs between hydrogen producers and RES developers should be encouraged, alongside guidance for optimal electrolyser sizing, flexible operation, and grid alignment.

• Stimulate demand through structured offtake mechanisms

Public procurement, RFNBO auctions, RFNBO blending quotas and CCfDs contracts can provide certainty for early hydrogen off takers.

• Align definitions, certification, and technical standards

EU-wide clarity on what qualifies as low- and zero-carbon hydrogen, including robust additionality rules to secure cross-border trade and investor confidence.

• Plan infrastructure based on system needs

Strategic investment in hydrogen pipelines, storage, and repurposed gas networks should reflect expected load factors and interoperability with electricity systems.

• Promote transparency and share technical benchmarks

An EU-wide platform should publish project data, pricing trends, and technical metrics such as max volume of hydrogen blending in current infrastructures, electrolyser efficiency and RES integration factors.

Scaling hydrogen will require smart market design, technical coordination, and regulation and policy certainty. The foundations are in place – clear climate goals, strong policy frameworks, and a growing base of technical expertise – but moving to full-scale deployment demands coherent market signals, cross-border coordination, and investment in the right technologies, at the right scale, in the right places.

As the EU enters a decisive phase for its energy transition, the task is not only to support hydrogen’s growth, but to shape its role as a system-wide enabler, linking renewables, off-takers, and infrastructure in a way that strengthens both climate resilience and economic competitiveness.

Drawing on our work at the intersection of policy, technology, and investment, we see first-hand how essential it is to connect strategic frameworks with on-the-ground implementation – while factoring in the perspectives and interests of all stakeholders: both EU-wide and EU Member State levels. As Europe builds its hydrogen economy, we remain committed to supporting public and private sector leaders in navigating complexity, scaling innovation, and creating the conditions for long-term, sustainable success.