How do you identify the next promising technology? One way to do it is to throw a lot of money (preferably other peoples’ money) at all the fancy tech that you can find and see which one grows. This is called venture capital. The other is to throw even more of other people’s money at a technology, recommended by the highest-paid consultant-de-jure, and then tough it out until you run out of (other’s) money. This is called strategic investment.
In the last couple of years, both ways have been tried in hydrogen technology with truly spectacular results. There are many technologies involved in hydrogen, but most new hydrogen projects are banking on water electrolysis – the technique of getting hydrogen by splitting hydrogen from water, using electricity. This is the way to make “green” hydrogen, by using electricity generated from wind and solar power plants and water. Now all this water stirring is causing a tsunami to rise.
The technology behind water electrolysis is, predictably, an electrolyzer. In 2024 the total capacity of electrolyzer manufacturing worldwide has reached 35GW, according to Bloomberg. In a race to meet the hallucinatory demand of 175 to 420 GW by 2030, investors have been throwing money at building capacity to match it. Now, the total installed capacity of electrolyzers in 2023 was just 2 GW.
With nothing to support this 35 GW of overhanging capacity, it is a matter of (short) time before this electrolyzer tsunami comes crashing down, washing away the hopes and money of investors. Will there be anything left of hydrogen technology after it passes?
The alternative approach to identifying a potentially disruptive technology was described at the end of last century by Clayton Christensen, in his book “The Innovator’s Dilemma”. Rather than throwing huge amounts of someone’s else money at technology, this approach advocates looking for specific traits of the emerging technology. For one, it should appeal to a niche, currently unserved market. It could be very expensive, relative to the existing solution, but it should solve the specific problem, faced by the niche in a way, that makes it worth paying the premium. Finally, the technology should be able to quickly evolve to deliver benefits outside the initial niche. For example, hydraulic excavators were initially used only for digging small trenches by farmers, and inkjet printers, with their high cost per printed page, first found their application among private specialists.
Recently I was analyzing the hydrogen technology scene and startups for a client, and the PEM (Proton Exchange Membrane) electrolyzer stood out, as it seems to have some of the properties, described by Mr. Christensen. PEM technology is expensive, about five or seven times that of a more widespread alkaline electrolyzer. Still, PEM is compact and has lower weight, making it convenient for a wide range of applications. The high electric current density allows for using less energy to produce hydrogen, and the hydrogen produced is of high purity. They are also good at handling intermittent energy from wind and solar, making them a good choice for “green” hydrogen applications. Finally, the PEM unit capacity is small, Most electrolyzers today are in the 0,5 to 10 MW capacity, which is the perfect range for the PEM electrolyzer. The recent tendency to go over 10 MW I attribute to the abundance of cheap other peoples’ money in the hydrogen sector, not to real demand.
Currently, the cost of "green" hydrogen produced using renewable energy is 2-3 times higher than the cost of "gray" hydrogen. I expect “green” hydrogen to replace existing “grey” hydrogen uses. There are very few new use cases for green hydrogen, but the existing industrial use is coming under pressure from governments around the world, for example in the form of the Carbon Border Adjustment Mechanism in the EU.
With its maneuverability, modularity, and robustness, PEM electrolyzers may fill this opening niche. As PEM technology evolves, the price will gradually decrease in price and make green hydrogen more accessible. So after the electrolyzer overcapacity tsunami passes, PEM technology might emerge as a survivor. However, I do not think this will happen in the next decade. Few investors plan for such a long term.