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Cracking the Hydrogen Code: Can Hydrogen Compete? The Market Needs More Than Tech
04/15/2025
Hydrogen project developers continue to face a familiar conundrum: how to develop a viable hydrogen market when both policy and technology need to advance simultaneously. Leaders across the energy industry are emphasizing the need for supportive regulations, financial incentives, and improvements in production technologies to close the cost gap between low-carbon hydrogen and conventional fuel sources.
“There’s no way you can take a methane molecule or a natural gas molecule, build a steam methane reforming (SMR) system, add carbon capture, store the carbon—and have that hydrogen come out cheaper than what you put in,” said Steve Kellogg, Hydrogen Strategy Adviser at ExxonMobil, during a recent hydrogen conference in Houston. “So, policy is going to be required.”
Incentives Are Key to Cost Reduction
Low-carbon hydrogen has the potential to reduce emissions in heavy industrial sectors and offer a cleaner alternative to fossil fuels. However, the current cost of production, especially when using carbon capture or renewable-powered electrolysis, remains higher than traditional methods like SMR without carbon capture.
In the U.S., the hydrogen production tax credit (45V) could offer up to $3 per kilogram of hydrogen, depending on carbon intensity and other factors. Yet, policy uncertainty has left companies like ExxonMobil awaiting more guidance before making major investment decisions. The company aims to make a final investment decision on its Baytown, Texas hydrogen project in 2025.
Europe’s Model: Carbon Contracts for Difference
Kellogg pointed to Europe’s “contracts for difference” (CfD) as a model the U.S. could adopt. These long-term contracts are designed to reduce financial risk for hydrogen developers by bridging the cost gap between fossil and low-carbon alternatives.
According to a report from the International Renewable Energy Agency (IRENA), Carbon Contracts for Difference (CCfDs) could be instrumental in scaling the hydrogen market. CCfDs would not significantly impact government budgets since the government would only cover the difference between the strike price and actual carbon pricing under emissions trading systems (ETS).
IRENA notes that as ETS prices rise over time, the net annual cost of CCfDs will fall, potentially becoming revenue-generating.
“Estimates indicate that CCfD prices in Europe may be in the order of a few million euros per country to decarbonize 10% of the hard-to-abate sectors,” IRENA said.
Currently, the U.S. does not have a CfD system in place for hydrogen. But according to Kellogg, eventually, the country will need “market-forming policy” such as carbon taxes, carbon intensity standards, or a more mature ETS to support deep decarbonization and encourage long-term investment.
Technology Needs Time and Scale
On the technology side, while production processes like SMR and electrolysis are well-established, challenges remain in scaling carbon capture and reforming systems effectively.
“There is also opportunity to improve technology,” Kellogg said. “Ammonia, for instance, is a proven hydrogen carrier. But the logistics change drastically when you scale it up for use as an energy source rather than fertilizer. We’re going to need a bigger boat.”
Ammonia plays a vital role in hydrogen storage and transport, but larger-scale shipping infrastructure is needed for it to be cost-effective in energy markets.
A Call to Action: Start Small, But Start Now
Nicolas de Coignac, Deputy CEO for the Americas and Hydrogen at John Cockerill, also emphasized the need to act despite uncertainty.
“We would like the market to grow and see enough committed uptake,” de Coignac said. “But of course, users want stable regulations and lower prices first. It’s the classic chicken-and-egg.”
He emphasized that many hydrogen-related technologies, such as alkaline electrolysis, are not new but still require investment and refinement to reach commercial maturity.
“We know exactly what to do to improve the technology dramatically,” de Coignac said. “But this takes time. One thing I learned living in Texas—someone once told me, ‘You don’t grow carrots faster by pulling on their leaves.’”
That experience and iteration come through starting projects, even a smaller scale.
“You go down the experience curve just by starting to prime the pump with several projects,” he added. “They don’t need to be gigawatt-scale, but they must happen. And this is where regulation and incentives matter.”
Big Tech Turns to Hydrogen and Nuclear to Power the AI Data Center Boom
As artificial intelligence drives unprecedented energy demand, tech giants like Google, Microsoft, Amazon, and Meta are exploring alternative energy sources to fuel the rapid expansion of their data centers. With traditional power grids under pressure and environmental goals in focus, hydrogen and nuclear energy are emerging as serious contenders.
Hydrogen-Powered Data Centers: A Fast, Low-Carbon Alternative
Yuval Bachar, a data center veteran with experience at Meta, Microsoft, and Cisco, is now betting on hydrogen through his startup ECL. The company builds modular hydrogen-powered data centers to reduce emissions and accelerate deployment.
According to Bachar, hydrogen facilities can be activated in half the time it takes to build traditional grid-connected data centers—an appealing feature for tech companies racing to scale infrastructure to support AI workloads.
ECL operates a 1-megawatt pilot facility next to its headquarters in Mountain View, California. Hydrogen is delivered twice a month by truck and sourced primarily from natural gas, which remains the leading fuel for U.S. electricity generation. In the future, the company plans to transition to green hydrogen made via electrolysis.
ECL is small, with just 10 employees and 18 contractors, but it has already signed two customers and received additional pre-orders. Within the next four years, the company also plans to build a 1-gigawatt hydrogen-powered data center in Texas using dedicated hydrogen pipelines.
Tech Giants Eye Nuclear Power
Hydrogen isn’t the only low-emission energy source under exploration. Several major players also turn to nuclear energy, tiny modular reactors (SMRs), to power their AI infrastructure.
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Microsoft has signed a power purchase agreement to help restart a shuttered nuclear reactor at Pennsylvania’s Three Mile Island. It is partnering with Helion, a nuclear fusion startup backed by OpenAI’s Sam Altman.
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Amazon, Google, and Oracle also actively explore SMRs as part of their long-term clean energy strategies.
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Last Energy, a Washington-based SMR startup, is working with large tech firms to bring its on-site modular reactors to market. “We’re working with major tech companies... to integrate our plug-and-play solution for on-site power generation into data centers,” said founder and CEO Bret Kugelmass.
Despite the promise of nuclear power, Bachar points out that building such infrastructure will take time. “We have a problem we must solve right now,” he said.
The Broader Push for Alternative Energy
In addition to hydrogen and nuclear, geothermal and solar technologies are also being explored.
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Google has partnered with Fervo Energy, a geothermal startup in Nevada that drills horizontal wells to produce large-scale electricity.
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Altman has also invested in Exowatt, a solar energy company focused on data center applications.
- According to CEO Hannan Happi, some Exowatt partners operate data centers that consume more than half the available energy in their states.
Rising Demand, Urgent Solutions
AI-driven computing requires massive amounts of power, particularly from Nvidia GPUs that train and run large language models like ChatGPT. Tech companies may seek alternatives elsewhere if a data center lacks sufficient power, making speed and flexibility essential.
A 2023 report by Lawrence Berkeley National Laboratory projects that by 2028, U.S. data centers could demand between 74 and 132 gigawatts of electricity, up from 4.4% of national energy consumption in 2023 to potentially 12%.
ECL and its backers are betting hydrogen will be part of the solution.
“The concern we have is can we grow fast enough to address the unprecedented demand for AI data centers,” Bachar said.
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