No Single Region Will Come to Dominate Global Electrolyzer Supply

To compete on the global market, manufacturing industries tend to concentrate in regions with low production costs. In the clean energy sector, China accounts for approximately three-quarters of solar PV manufacturing and four-fifths of lithium ion (Li-ion) battery manufacturing output globally. Low material costs, inexpensive labor, and government support for strategic industries have all played a role in securing China’s dominance in clean energy technology manufacturing.

Policymakers in North America and Europe have made the development of their own regional clean energy manufacturing industries a clear priority. Landmark initiatives such as the Inflation Reduction Act (IRA) in the US and the Green Deal Industrial Plan in the European Union (EU) have been interpreted as a return to a more proactive and interventionist approach to industrial policy. Objectives include shoring up regional supply chains for established technologies as well as asserting leadership in emerging growth industries.

International Competition in the Electrolyzer Industry

The electrolyzer industry exemplifies the latter category. Significant investments in new manufacturing capacity over the past few years have been buoyed by aggressive deployment targets. However, the prospect of international competition has prompted warnings from some market observers. Chinese alkaline electrolyzers are by far the cheapest systems available on a per-kilowatt basis. If the industry follows a similar trajectory to solar PV or Li-ion battery manufacturing, new factories in Europe and North America could be left as stranded assets.

Guidehouse Insights’ recent Electrolyzer Supply and Demand Outlook report assesses the likelihood of regional consolidation. It argues that the complexity of implementing green hydrogen projects requires a close working relationship between manufacturers; engineering, procurement, and construction companies; and developers—as well as technology offerings that are well adapted to end users’ needs. These requirements point toward the development of a globally diversified electrolyzer manufacturing footprint oriented around key end-user markets.

Technology Risks Favor Trusted Manufacturers with a Strong Regional Presence

Developers of green hydrogen projects face a common set of challenges. One problem is that technology providers can only demonstrate relatively limited performance track records for their products, and typically for much smaller systems than the industrial-scale projects currently under development. Higher than expected degradation rates, unforeseen reliability concerns, integration challenges, and other performance issues could fundamentally alter the economics of projects with multi-decade operational lifetimes.

Securing a trusted manufacturing partner with a strong regional presence is therefore essential. Developers need to be confident that manufacturers will be on hand to provide post-sales support and to quickly replace defective stacks or components. Manufacturers’ creditworthiness also influences the terms of project financing for green hydrogen facilities, and consequently the price at which hydrogen can be marketed to potential offtakers.

An additional barrier to the use of imported technologies is variations in product standards across regions. The lower cost of Chinese electrolyzers is partly attributable to the use of lower grade materials and reduced requirements for reliability-related design redundancies. Adapting these systems for use in overseas projects typically eliminates any cost benefits once logistical expenses have been included.

Leading OEMs Aim to Develop a Global Manufacturing Footprint

The strongest indication of the future geographical distribution of electrolyzer manufacturing comes from OEMs’ own expansion plans. Consider the example of three Western manufacturers that currently produce electrolyzers at factories located in China: HydrogenPro, John Cockerill, and Cummins. Although HydrogenPro has committed to ship a 220 MW electrolyzer system to project developers in the US next year, it also plans to establish a 500 MW manufacturing facility in Texas. John Cockerill and Cummins are both expanding their manufacturing presence in Europe, with the former also planning two facilities in the Middle East and North Africa.

Similarly, European players such as Nel and Topsoe have responded to the IRA by announcing new manufacturing sites in the US rather than attempting to ship domestically produced technologies overseas. Significantly, these decisions have not been predicated on the inclusion of local content requirements within the eligibility criteria for federal green hydrogen subsidies in the US—a measure which the EU is currently evaluating.

Over the long term, Guidehouse Insights expects increasing manufacturing automation to drive a gradual convergence of system costs across regions. Then, as now, it will be electrolyzer manufacturers’ status as trusted project partners that proves to be the most important competitive differentiator, rather than differences in upfront costs.