While the United States pursues a vision of energy dominance focused on hydrocarbons, China is on its way to dominating another future energy supply chain. Key technologies for producing low-emissions hydrogen are quickly emerging as one of the latest challenges in geoeconomic competition, and the United States could once again fall behind.
Hydrogen is often referred to as the “Swiss Army Knife” of the energy transition and is uniquely flexible. It can be made from different types of resources, including natural gas and renewable energy. One of the biggest value propositions of hydrogen is that it can help decarbonize the “hard to contain” sectors that lack low-cost, clean alternatives and are difficult to electrify. These include key industrial base sectors such as petrochemical refining and steelmaking, as well as innovative clean fuels for the maritime and aviation sectors. In addition, hydrogen can act as an energy storage device over long periods of time, improving the integration, resilience and reliability of energy systems.
While the United States pursues a vision of energy dominance focused on hydrocarbons, China is on its way to dominating another future energy supply chain. Key technologies for producing low-emissions hydrogen are quickly emerging as one of the latest challenges in geoeconomic competition, and the United States could once again fall behind.
Hydrogen is often referred to as the “Swiss Army Knife” of the energy transition and is uniquely flexible. It can be made from different types of resources, including natural gas and renewable energy. One of the biggest value propositions of hydrogen is that it can help decarbonize the “hard to contain” sectors that lack low-cost, clean alternatives and are difficult to electrify. These include key industrial base sectors such as petrochemical refining and steelmaking, as well as innovative clean fuels for the maritime and aviation sectors. In addition, hydrogen can act as an energy storage device over long periods of time, improving the integration, resilience and reliability of energy systems.
In short, the use of hydrogen could give U.S. industry a competitive advantage on the global stage while creating new export opportunities and strengthening the country's energy system.
The worry now is that there could be a repeat of history, with the United States and its allies leading in innovation but falling behind in production and cost reductions. The result would be a global supply chain that lacks resilience and resilience to supply disruptions. China already dominates the global supply chains for solar photovoltaics and electric vehicle batteries. Now the company is ramping up its efforts to do the same with electrolyzers, the crucial machines that use electricity to split water into hydrogen and oxygen. In addition, the company is investing heavily in the development of advanced electrolyzer technologies – with an eye on export opportunities around the world.
There isn't enough Superlatives to describe China's hydrogen efforts, but a few headlines stand out. China is primarily the world's largest producer and consumer of hydrogen, as well as the country with the largest installed electrolyzer capacity. In addition, China is the world leader in alkaline electrolyzer (ALK) manufacturing, with around 60 percent of global capacity. China's latest focus is to expand its expertise beyond ALK and master proton exchange membrane electrolyzer (PEM) technology – the kind that is more flexible and compatible with renewable energy sources.
Still, it would be wrong to assume that China is pursuing hydrogen solely for its climate benefits. Yes, China's efforts to advance clean hydrogen technologies will undoubtedly help reduce its own emissions while facilitating the global energy transition. In addition to being the world's largest emitter of greenhouse gases, China is also the world's largest producer of steel and cement – two of the most carbon-intensive materials. Hydrogen could help produce cleaner materials that comply with new emissions-based tariff systems. But China also sees clean hydrogen as important in many other ways, beyond its use to reduce emissions. It also links the clean molecule to efforts around energy sector resilience and energy independence.
The good news is that the race is not over yet. The United States and Europe were the first innovators and manufacturers of PEM electrolyzers and their subtechnologies such as membranes. For example, U.S.-based chemical companies have manufactured PEM membranes that are widely considered the industry standard while driving technological advances in the field.
But in what could be a sign of things to come, Europe is sounding the alarm about a possible tsunami of cheap Chinese electrolysers flooding its domestic markets. Europe is a world-leading innovator in both ALK and PEM electrolysis technology and is ramping up efforts to prevent a repeat of the production decline in its solar and EV battery sectors. Among other measures, the European Hydrogen Bank has introduced strict “resilience requirements” in its auctions to boost domestic production of electrolysers in Europe after noting a strong Chinese presence among the winners of its first auction. One of the key requirements is that projects supported by the bank must ensure that no more than 25 percent of their electrolyzer stack capacity comes from China.
As important as manufacturing competitiveness is, it goes without saying that continued investment in innovation remains critical to a robust and diversified supply chain. Between 2005 and 2020, the United States, Germany and Japan accounted for nearly two-thirds of the top 10 countries' international patent applications related to electrolyzers. During this period, only 3 percent of Chinese patents were international as Chinese efforts focused on the huge domestic market. However, the picture is changing quickly. China is reportedly the world's leading patent holder for hydrogen-related technologies, particularly hydrogen production, in 2022. China has not yet mastered the complex stack design and construction as well as the production of stack assemblies and compressors for PEM electrolyzers. But it could only be a matter of time before China overtakes the West in terms of innovation.
Meanwhile, the hydrogen economy in the United States is at an inflection point. The incentive structures for scaling the manufacturing and deployment of electrolyzers under the Infrastructure Investment and Jobs Act (IIJA), as well as the prospect of a robust ecosystem for clean hydrogen production as advanced by the Inflation Reduction Act, are in limbo. IIJA's $1.5 billion in research, development, demonstration, and deployment support for the manufacturing and recycling of electrolyzers – which was instrumental in helping the United States remain globally competitive – has been impacted by the recent wave of project cancellations. The combination of funding cuts with a grim outlook for electrolysis-based domestic hydrogen projects leaves the U.S. electrolyzer sector facing a perilous future.
To make matters worse, time is not on the United States' side. China aims to overcome technological challenges and build supply chains for PEM technology by 2035, a key goal in the country's hydrogen industry development plan. According to a report from the state-owned company from August 2024 China DailyChina is now “on the verge of adopting another important potential export product in the new energy products sector – hydrogen electrolyzers.” The article points to several Chinese companies that are in the process of expanding their production capacity to meet overseas demand, including the case of Beijing-based PERIC Hydrogen Technologies Co., whose revenue from electrolyzer exports has roughly doubled every year since 2021. Chinese electrolyzer manufacturers begin shipping to several regions including Asia, Europe, Latin America and the Middle East.
Competitiveness with China requires a strategic government role, especially in a sector as young but promising as hydrogen technology. Although demand for hydrogen and electrolyzers may be slow to materialize in the U.S., global markets are growing as several countries see future economic and energy opportunities in emerging value chains.
To meet them For now, the United States needs a two-pronged approach. First, the country should pragmatically scale clean hydrogen production for the few sectors where demand is both real and persistent, such as petrochemicals and steel. Targeting such anchor projects would serve to boost domestic production of electrolyzers while expanding U.S. hydrogen supply to meet growing global demand. European demand could open up export opportunities equal to the United States' current consumption, while Japan and South Korea also plan to import much more by 2050.
Second, the United States should position itself as a technology leader and preferred provider for allies pursuing their own hydrogen ambitions. This means targeted investments in manufacturing capacity to export state-of-the-art, U.S.-made electrolyzers and related equipment. Using financial institutions like the International Development Finance Corp. to reach emerging markets could be one way to expand global opportunities for U.S. electrolyzer makers. The same geopolitical agility that the United States demonstrated during its high-level visit to the Arabian Peninsula this year – where it secured trillions of dollars in investments and commercial partnerships – should now extend to the next frontier of energy technologies. After all, there is no reason why a U.S. company shouldn't supply the electrolyzers that would advance the region's hydrogen aspirations – such as Saudi Arabia's pioneering NEOM green hydrogen project, the largest in the world.
Only by encouraging innovation, incentivizing domestic production, and promoting their products in growing markets can the United States and the West create a global supply chain that is robust, transparent, and reaps the benefits of both energy security and emissions reductions from clean hydrogen.