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27 November 20237 minute read

Hydrogen as a future source of energy for Germany’s manufacturing industry

Germany, renowned for its engineering prowess and commitment to environmental sustainability, is among the leading economies in the global shift towards renewable energy. In recent years, the notion of a "hydrogen economy" has gained considerable traction. Within the framework of Germany’s ambitious decarbonization goals, hydrogen stands out as a cornerstone for a sustainable energy transition, especially in Germany’s robust manufacturing sector. The hydrogen powered energy transition of Germany’s manufacturing industry and the corresponding need for substantial investment is also starting to appeal to private investors. Likewise, key players of the manufacturing industry (including steel producers and the chemical industry) are joining forces to implement hydrogen as a future source of energy for its industry.


The promise of hydrogen and its role in Germany’s energy transition

Hydrogen has several attributes that make it a promising energy carrier: it boasts high energy content per unit mass, making it suitable for a variety of applications, it’s easily transported and when used as a fuel, the only by-product is water. Unlike fossil fuels, green hydrogen, ie hydrogen produced from renewable resources, has the potential to be a zero-emission energy source.

These characteristics make hydrogen a key element of Germany's Energiewende (energy transition), which focuses on reducing greenhouse gas emissions, increasing energy efficiency, and expanding renewable energy. Hydrogen’s pivotal role in this transition can be exemplified by:

  • Storing energy: Renewable sources like wind and solar are intermittent. Hydrogen and its derivatives can serve as an energy storage medium, converting surplus renewable energy into hydrogen through electrolysis and releasing this stored energy when required. Hydrogen power plants could replace current gas power plants in the future for stabilizing the power grid.
  • Supporting industry: The manufacturing sector requires high-temperature heat, which is challenging to supply through direct electrification. Green hydrogen can fill this gap, offering a clean alternative to fossil fuels.
Germany’s manufacturing industry and hydrogen integration

Germany’s manufacturing industry, one of the mainstays of its economy, can benefit from the hydrogen revolution. A few applications include:

  • Steel production: Traditional steel-making processes use coal, releasing significant CO2 emissions. Hydrogen can replace coal, leading to the emission of water instead of CO2. Steel producers like Thyssen-Krupp and Salzgitter Stahl have started to transition their processes to hydrogen powered plants and play a central role of those advocating the use of hydrogen.
  • Chemical Industry: Hydrogen is essential in synthesizing ammonia, a key component for other essential chemical products. With green hydrogen production, the chemical industry can substantially reduce its carbon footprint. Current strategy papers estimate hydrogen demand will increase sevenfold until 2050.1 Recognizing the role of hydrogen in helping to reduce carbon dioxide emissions across many industries, including the chemicals sector, industrial gases and engineering company Linde is currently building one of the world's largest electrolyzer plants in Germany to supply its customers through the company's existing pipeline network with green hydrogen.
  • Transport: While not strictly within the domain of manufacturing, Germany’s automobile manufacturing sector can drive hydrogen fuel cell technology, offering an alternative to battery-electric vehicles, especially for long-haul trucks where battery solutions may be less practical.
Challenges and actions for implementing hydrogen solutions

While hydrogen offers numerous advantages, its widespread adoption is not without challenges. Most notable is the production costs of green hydrogen, which are currently higher than for its fossil-fuel-derived counterpart. This will hamper adoption unless addressed through technology improvements, economies of scale or policy measures. And Germany's current energy infrastructure is built around fossil fuels. Accordingly, transitioning to hydrogen requires significant investment in new or the change of use of existing natural gas pipelines, storage facilities, refueling stations and conversion technologies.

Acknowledging the potential of hydrogen and its key role for the Energiewende, the German government has already taken several initiatives to address these challenges:

  • National Hydrogen Strategy: Germany launched its National Hydrogen Strategy in 2020, outlining steps to make the country a global leader in hydrogen technologies. The strategy emphasizes the importance of green hydrogen for a variety of sectors and sets out a roadmap for its adoption, including the construction of a 1,800 km core-grid for hydrogen until 2027/2028 with further distribution-grid to follow.
  • International Collaboration: While the federal government plans to scale up the existing domestic electrolyzation capacities to at least 10 GW by 2030, Germany is engaging in international partnerships to import green hydrogen, recognizing that domestic renewable resources might not be enough to produce all required hydrogen. Several initiatives, including H2Global, aim to support the development of hydrogen production and use.
The appeal of hydrogen to investors

Germany's renewed aggressive pursuit of a green energy future, particularly through hydrogen, is also creating a ripple effect that resonates deeply with private investors. With a progressive national stance on green energy, besides traditional utilities and (natural gas) network operators taking a key role in the development of the hydrogen infrastructure, infrastructure funds and private equity firms are recognizing the lucrative potential of investing in Germany's hydrogen infrastructure.

Hydrogen's promise as an efficient, clean energy carrier, especially for sectors challenging to electrify, makes it a compelling proposition. But beyond the environmental allure, the economics of hydrogen are beginning to stack up. Despite current challenges, trends of decreasing production costs, advancing technologies, and supportive governmental policies are transforming hydrogen into an appealing investment opportunity.

Private investors have started to acknowledge the long-term value hydrogen holds. Private equity players, recognizing the technology's disruptive potential, especially for Germany’s manufacturing industry, have begun to invest heavily in startups and established entities focusing on hydrogen technologies. These investments range from hydrogen production techniques to storage and transport solutions.

The inherent nature of hydrogen infrastructure, from production facilities to refueling stations, also makes it a perfect fit for infrastructure funds. In search of stable, long-term investments, hydrogen infrastructure fits the bill, especially in a country with an ambitious hydrogen agenda like Germany. Numerous infrastructure funds are showing keen interest in backing the creation of refueling stations across Germany and other hydrogen-related projects. Germany's National Hydrogen Strategy has paved the way for collaboration between the government and private entities. These PPPs offer private investors a cushion of security, knowing that they have governmental support and a clear, strategic direction.


Hydrogen partnerships in Germany’s manufacturing industry

Furthermore, renowned players in the manufacturing industry (some of them also involving some of the leading utilities providers) are joining forces to fulfill ambitious hydrogen projects to harness the benefits of hydrogen for Germany’s manufacturing industry and to overcome the current challenges of implementation. These joint ventures benefit from combining expertise in infrastructure, production techniques, and market strategies, accelerating the transition to a hydrogen-based economy and underlining a strong trend in hydrogen-related joint venture and M&A activities. For instance, partnerships between German automobile manufacturer Daimler and industrial gases specialist Linde or the joint venture between Daimler, Volvo, IVECO, Shell and OMV underscore the industry’s ambition to develop a robust hydrogen fuel cell vehicle market, complemented by a nationwide network of refueling stations. Similarly, Deutsche Bahn and Siemens have teamed up to explore the use of hydrogen for powering trains, especially in non-electrified sections of the rail network.


Challenges and outlook

While challenges related to technology maturity, regulatory frameworks, and market acceptance remain for hydrogen to become one of the key future sources of energy for Germany’s manufacturing sector, the convergence of national ambition and private enterprise with regard to Germany’s hydrogen infrastructure holds promise for rapid advancements. Increasing investments by private investors and strategic partnerships between corporates are leading to a surge in competition, innovation, and efficiency, ultimately driving down costs and paving the way to making hydrogen a mainstream energy source, especially for Germany’s manufacturing industry.

1 Gemeinsame Strategie von IG BCE und VCI zu einer Wasserstoffwirtschaft (Version 2.0), accessed October 7, 2023.