09 Aug 2022 3 min read

Hydrogen economy: widespread adoption or niche solution?

By John Daly , Charlie Miller

In the second of a two-part blog on the hydrogen economy, we look at the economics of hydrogen use, and consider the implications for investors in the sector.


The idea of using hydrogen for fuel has been around a long time. Proponents champion it as a fuel of the future, but how much do we know about the potential applications of this revolutionary technology?

In a previous blog we covered the topic of ‘green hydrogen’, which is made through electrolysis – where electricity is used to split water into hydrogen and oxygen. It’s zero carbon, as the electricity is generated from renewable sources but, with current technology, around 20% of the energy is lost at the electrolysis stage1, putting hydrogen at an immediate disadvantage to electricity.

Hydrogen cars – still inefficient

Despite large advances in the efficiency of petrol engines, gasoline-powered vehicles typically remain highly inefficient, with only around 20% of the total energy they consume resulting in forward motion2.

Hydrogen-fuel cell powered cars offer a significant improvement, though they are still only around 35% efficient.3 This is because energy is lost at the electrolysis, liquification and transportation stages, and again as hydrogen is transformed back to electricity by the car’s hydrogen fuel cell. However, battery electric vehicles are miles ahead of both, at around 80% efficiency.


But there are automotive applications where hydrogen fuel cells, we believe, could compete economically and environmentally. In buses, trucking, industrial mobility and shipping, where battery weight and recharge times are prohibitive, hydrogen can realistically win, in our view.

BloombergNEF analysis suggest a hydrogen price of $1/kg4 (see part one of this blog to learn more about current productions costs) would make hydrogen buses and trucks economic, while using the gas as a shipping fuel would be on the margin.

Hydrogen for domestic energy

Turning to domestic energy applications, ‘blending’ hydrogen into the natural gas network is appealing, but it’s not a complete solution. The maximum that can be blended is around 15-20% without significant retrofits to boilers, displacing only 6% of emissions.5

Running homes on pure hydrogen requires entirely new infrastructure because of diffusion losses, embrittlement of materials and the need to pump the gas. Hydrogen pipeline investments still carry technology risk, since heat pumps offer a credible alternative.

Co-firing green hydrogen and natural gas to provide dispatchable power to the grid requires low-cost supply and seasonal storage (e.g. salt caverns or depleted gas fields). It provides an essential service to the grid but leaks a significant proportion of the stored energy; better options may evolve.

Reaching the parts other energy sources can’t

Another area where hydrogen may offer a compelling solution is in ‘hard-to-abate’ sectors, where few other technology options are available or appropriate.

According to BloombergNEF analysis6, $1/kg hydrogen would make it economic to replace coking coal in steel making, high-grade heat in cement production, fertiliser production, aluminium and glass manufacturing at current EU Emissions Trading System carbon prices.

The aviation industry is also exploring green hydrogen as an alternative to jet fuel, which is responsible for around 3% of global CO2 emissions.7 Aviation requires energy-dense fuels. Hydrogen has a high-energy density by weight but has a low-energy density by volume. This creates an issue for aircraft designers as fuel tanks need to be large, which means fewer passengers, thereby changing the economics for airline operators. Other considerations such as NOx emissions, resulting from high temperature hydrogen engines, will need solutions as the technology develops.

Can hydrogen realise its potential?

Based on current technology, hydrogen’s prospects for deployment in cars and home heating remain limited by virtue of efficiency versus electricity. However, high-value hydrogen represents an appealing proposition for producing high temperature heat, and in industrial furnaces for iron and steel production.

The International Energy Agency estimates that cumulative investment in hydrogen needs to increase to $1.2 trillion by 20308 to put the world on track to meet net-zero emissions by 2050. In 2021, $400 million was pledged to projects expected to deploy electrolysis capacity, far short of where we need to get to. 

For hydrogen to become a credible decarbonisation option, technological improvements, significant private investment, market guidance via carbon pricing and government support will be required. And there are significant barriers to overcome, a point made in a previous blog.

In particular, clear policy guidance to mobilise capital investment across the whole hydrogen value chain will be required for hydrogen to realise its potential.


1. Source: https://thundersaidenergy.com/downloads/hydrogen-opportunities-an-overview/

2. Source: https://sciendo.com/pdf/10.2478/rtuect-2020-0041#:~:text=The%20total%20WTW%20efficiency%20of,from%2012%20%25%20to%2022%20%25

3. Source: https://theconversation.com/hydrogen-cars-wont-overtake-electric-vehicles-because-theyre-hampered-by-the-laws-of-science-139899

4. Source: LGIM analysis of Bloomberg data; https://data.bloomberglp.com/professional/sites/24/BNEF-Hydrogen-Economy-Outlook-Key-Messages-30-Mar-2020.pdf

5. Source: LGIM analysis of HyDeploy data; https://hydeploy.co.uk/faqs/hydrogen-level-set-maximum-20/#:~:text=20%25%20is%20the%20level%20at,hydrogen%20mix%20up%20to%2023%25

6. Source: https://data.bloomberglp.com/professional/sites/24/BNEF-Hydrogen-Economy-Outlook-Key-Messages-30-Mar-2020.pdf

7. https://ourworldindata.org/co2-emissions-from-aviation

8. Source: https://iea.blob.core.windows.net/assets/e57fd1ee-aac7-494d-a351-f2a4024909b4/GlobalHydrogenReview2021.pdf

John Daly

Senior Solutions Strategy Manager

John is a Senior Solutions Strategy Manager within the Solutions Group and has over 20 years of industry experience working in asset-management companies. He focuses on long-term global investment-grade credit and active liability investment strategies. His role encompasses designing developing and servicing investment strategies for DB pension schemes and other financial clients. John has been with LGIM since 2009 and has previously held institutional distribution roles at PIMCO and Fidelity. John holds a BSc in Business Economics from Cardiff University and is a CFA charterholder.

John Daly

Charlie Miller

Climate Strategist, Climate / Investments

Charlie is responsible for integrating climate analysis into LGIM's investment process through metrics and research. Charlie joined LGIM in 2021 having previously worked in Legal &General Retirement as an investment analyst where he delivered projects on ESG integration in the annuity portfolio and gained experience in the TCFD reporting process. He began his career at Mercer specialising in insurance investment. Charlie graduated with an MSc in Earth Sciences from University of Oxford in 2015.

Charlie Miller