When Europe and the US each declared their intent to kick-start a global clean hydrogen economy, electrolyzer suppliers got ready, announcing factories to meet the surge in demand from government subsidies for the hydrogen sector. But now, a few years later, that demand has yet to materialize, forcing tough decisions for manufacturers to either wait it out or call off their construction plans.

The amount of time between policymaking and getting "real money in the hands of people buying the electrolyzers" has been much longer than anyone anticipated, said Kjell Christian Bjørnsen, CFO of Norwegian electrolyzer-maker Nel ASA. "Lift-off of the industry is slower, but it's still happening," Bjørnsen said in an interview.

By 2030, electrolyzer manufacturing capacity is expected to surpass 100 GW worldwide, assuming vendors follow through on their factory construction and expansion plans, according to S&P Global Commodity Insights' latest Hydrogen Market Monitor.

The figure would represent a threefold increase from global manufacturing capacity in 2023, which totaled about 34 GW.

But so far, electrolyzer demand has fallen short of what manufacturers have the capacity to produce, according to Commodity Insights data. The analysis shows that less than half a gigawatt of electrolyzer systems were installed at hydrogen and ammonia plants last year. Even in 2025, if all factories meet their full potential, annual electrolyzer output would exceed the capacity of electrolyzers installed by at least 12 times.

Not ready to fold

Electrolyzer vendors maintain there will still be a market for zero-emission hydrogen, but the demand has been held up by policy delays.

In May, Germany's thyssenkrupp nucera AG & Co. KGaA reported its alkaline electrolyzer orders totaled €11.6 million in the first three months of 2024, down 86% from the previous year. The company attributed this to the Biden administration's delay in setting the rules around who qualifies for hydrogen tax credits, the incentive for most of the electrolytic hydrogen development in the US.

Though the US released draft rules in December 2023, nearly 18 months after the tax credit program was authorized, those rules have yet to be finalized. "This situation is causing a level of uncertainty in the market and is therefore dampening investment momentum," Christoph Noeres, head of green hydrogen at Thyssenkrupp Nucera, said in a May 15 statement.

In Europe, funding support for hydrogen is underway. But some market watchers say incentives are spread across too many complex mechanisms.

The CFO of another electrolyzer supplier, Siemens Energy AG's Maria Ferraro, recently reported "delays in the release of funding commitments due to regulatory uncertainties." Nonetheless, the manufacturer remains committed to its plan to scale factory capacity, Ferraro told analysts in a May earnings call.

Meanwhile, US vendor Plug Power Inc. has been losing money and warned investors in November 2023 that it could run out of cash in 12 months, though the company has since resolved its liquidity issues.

Based in Latham, NY, Plug Power is the world's top electrolyzer supplier, followed by Thyssenkrupp Nucera, Siemens Energy and Nel, according to Commodity Insights. The company also manufactures fuel cells and recently inaugurated the first commercial "green" hydrogen plant in the US.

As with Plug Power's European peers, CEO Andy Marsh expressed confidence in hydrogen's long-term demand, particularly once the US government's production tax credit program is fully implemented. "Five years from now, we won't even remember how challenging it was during these times," Marsh said in an interview.

But the unanticipated period of uncertainty in the US, and to some extent in Europe, "has caused many of us to overinvest, including Plug," Marsh said. "I think it's probably clear to say [by] over a billion dollars."

Analysts at BloombergNEF also note an overcapacity for electrolyzer manufacturing, although many factories are not fully staffed and upstream component suppliers serving electrolyzer producers are more conservative in their ramp-up, according to Xiaoting Wang, analyst at BNEF.

While Western manufacturers are grappling with overcapacity, the issue is even more pronounced in China, where some producers are scaling up with a view to build market share, Wang said. By late 2023, around 70% of global stack assembly capacity was in China, and prices are under pressure, BNEF said.

Western markets are unlikely to see a repeat of the ongoing import surge of Chinese solar panels, however, Wang said. This is because Chinese components carry bankability risk, and also for policy reasons.

"After seeing what happened in solar and batteries, governments are very cautious and local manufacturers are lobbying for protection," Wang said in an interview.

Small number of 'real' players

Challenging years are ahead for electrolyzer producers as they wait for hydrogen developers to ramp up construction, said Brian Murphy, a senior analyst who covers hydrogen and low-carbon fuels at Commodity Insights. "It's possible we'll see some business failures or consolidation."

Toward the end of the decade, however, Murphy expects the electrolyzer supply-and-demand gap to narrow as more hydrogen plants start to get built. "In our view, companies that survive the next few years and continue to innovate and improve their product will have a robust market to sell into in 2027/2028 and beyond," Murphy said.

But Wang said, "I do believe that many of the brands we hear of right now will disappear within two years or quicker." The immediate reason is that manufacturers will not receive enough orders to justify operations.

Even companies who can survive the first two years may face challenges in the performance of their equipment and the guarantees they are prepared to give when off-take deals eventually get negotiated.

Early hydrogen projects have displayed frequent technical issues and output turned out to be much lower than promised in the contract, Wang said.

Incumbent vendors caution that announced manufacturing capacity is likely an overestimate of electrolyzer output, as not all proposed factories are sure to get built. According to Nel's Bjørnsen, such figures are overinflated with hypothetical endeavors, while the electrolyzer market has fewer than 10 "real competitors."

The manufacturers to be taken seriously hold back capacity expansion until real demand materializes, Bjørnsen added. Nel itself has built two production lines in its Norwegian factory, with half of the plant still unfilled.

At the same time, "real money" is going into companies, including listed ones, that are unserious, the CFO said. Bjørnsen declined to provide any examples.

A Siemens Energy spokesperson said the availability of electrolyzers has long been considered a bottleneck in the market ramp-up. The industry in turn moved ahead with new factories. "Now we are seeing a delay in the actual implementation of projects because the delivery of subsidies is taking longer, or project plans have to be adapted to new regulations," the spokesperson added.

Siemens Energy's gigawatt-scale electrolyzer production site in Berlin can react to fluctuating market demand by making small adjustments to the production process and using a multi-shift system, the spokesperson continued. "When the expected projects are due to start, we will be prepared."