China's hydrogen electrolyzer industry facing technology, cost challenges

China's hydrogen electrolyzer industry is grappling with significant challenges, including slower-than-expected technological advancement, high system costs, and limited demand in both domestic and international markets, according to recent studies.

These critical bottlenecks could hinder the country's ability to replicate its remarkable success in other clean energy manufacturing sectors.

As the world's largest clean energy manufacturer, China has secured a dominant position in global markets for solar PV modules, wind turbines, electric vehicles, and batteries.

However, the hydrogen electrolyzer industry is lagging in its development, posing challenges to the country's ambition of becoming a comprehensive leader in global green energy supply chains.

"Unlike solar PV and batteries, which are competitive with other types of power generation in many markets and likely to keep expanding, green hydrogen demand in China and globally has yet to match the optimistic expectations of the past few years, leaving existing manufacturing capacity without a sightline to end-users," S&P Global Commodity Insights analysts said in a report published in January.

China's electrolyzer manufacturing capacity reached 39 GW per year in 2024. However, tenders in the first 10 months of the year only created 693 MW of demand, Commodity Insights analyst data showed, implying a severe shortage of offtakers.

The demand shortage is caused by both technical challenges and cost burdens, according to the Commodity Insights report.

Technologies and costs

China International Engineering Consulting Corporation said in a recent study that the country's hydrogen technologies and projects have different focuses from those in the EU and US.

CIECC said China's manufacturers focus more on controlling costs, saving energy consumption, and expanding capacities, while their EU and US counterparts focus more on adapting hydrogen production systems to intermittent renewable power supplies and setting stringent standards to ensure system stability.

The Commodity Insights report showed that, due to the technological challenges to accommodate renewable power, the current system cost to produce green hydrogen in China is significantly higher than that of grey hydrogen, which refers to hydrogen produced from unabated fossil fuel.

China's average low-carbon hydrogen price was Yuan 28.36/kg ($3.90/kg) on Feb. 17, according to a cost-based price assessment developed by Shanghai Environment and Energy Exchange. The price was slightly higher compared with markets like South Australia and the US Gulf.

Consequently, the high system cost and lack of demand for low-carbon hydrogen led to oversupplies of electrolyzers and declining electrolyzer prices, which made manufacturers hesitant to expand their capacities further, the report highlighted.

The unit price of a 1,000-normal-cubic-meters-per-hour alkaline electrolyzer system decreased from $200-$224/kW in 2023 to $185-$200/kW in the first half of 2024, the report showed, adding that this has approached production costs and severely squeezed manufacturers' profit margins.

Standards and policy incentives

The CIECC research called for the Chinese government to develop solid standards to safeguard the development of the hydrogen industry, adding that these standards should be aligned with international best practices.

CIECC said standards are needed to calculate emissions embedded in hydrogen production and provide definitions of high-quality, low-carbon hydrogen and its derivatives, such as low-carbon methanol and ammonia.

"Using low-carbon methanol as an example, China has planned for an annual production capacity of 10 million mt/year, but there's no standard for methanol production regarding the raw material, technological pathways, product design, and carbon footprint calculation," CIECC said.

The lack of standards will impose a significant policy risk on the entire value chain, creating hurdles for brand recognition and marketing for upstream products like electrolyzers to downstream low-carbon fuels, CIECC said.

CIECC also highlighted the importance of establishing emissions-related standards to quantify to what extent low-carbon hydrogen can reduce emissions in the transportation, industrial, and building sectors to stimulate demand.

The Commodity Insights report added that more effective policy incentives, such as introducing a higher carbon price, would be needed to address the price gap between green and grey hydrogen and support low-carbon fuels.

Barriers to trade, technology transfer

Chinese electrolyzer manufacturers have also planned to export more products overseas to digest their excessive supplies, but potential trade barriers, especially from US and EU, could hinder the growth in exports, the Commodity Insights report said.

The report highlighted that, in the US, the administration of President Donald Trump may dismantle some of the supports for renewable electrolytic hydrogen established under the former administration.

And in the EU, the European Hydrogen Bank has changed auction requirements to limit projects to sourcing no more than 25% of electrolyzer stacks from China.

The US and EU have also set barriers to limit technology transfer and trade of high-tech equipment, which could significantly affect China's manufacturers of PEM electrolyzers, according to a recent study by the Oxford Institute for Energy Studies.

OIES said China's PEM electrolyzers currently lag behind the EU. For key components such as proton exchange membranes and precious metal catalysts, China's PEM manufacturers still rely on imports, whereas alkaline electrolyzer manufacturers mainly use domestic products, OIES added.

Without effective strategies to sail through these internal and external headwinds, China could risk falling behind in its ambition to maintain its leadership in this critical clean energy sector.