Electrolysers for the Hydrogen Revolution

Nickel and platinum: Indonesia and South Africa are (hardly) an alternative to Russia and China

AEL units require no rare metals. Only nickel and (nickel-plated) stainless steel are needed. Although nickel deposits are nei­ther rare nor spatially concentrated, the sup­ply of nickel is problematic. To date, be­tween 35 per cent and almost 50 per cent – meas­ured in either trade value or weight – of all nickel imports to Germany and the entire EU originate from Russia. The coun­try ranks fourth in the world for nickel re­serves and is therefore a relevant player for both un­refined and refined nickel (see Figure). Other countries, such as India (22 per cent), the Philippines (5 per cent), and Australia (22 per cent), account together for almost half of the world’s global nickel reserves; they also hold a similar share in global nickel mining output (see Figure). Thus, they may represent an alternative to Rus­sian supply. However, in 2020, Indonesia prohibited the export of raw nickel to keep nickel refining and its value added within its borders. The EU has already raised a com­plaint with the World Trade Organization against Indonesia’s policy. The Phil­ip­pines are pursuing a similar strategy. Aus­tralia’s refining capacity, on the other hand, covers only 7 per cent of the global market.

China is a key player in nickel smelting (an important precursor to refining) and refining, despite Indonesian and Philippine ambitions. Although China does not pos­sess major nickel reserves, its smelting and refin­ing operations are estimated to exceed three-quarters and one-third of global sup­ply, respectively. Thus, the EU has to decide between purchasing smelted or refined nickel from Indonesia – for which it will compete with China – or raw nickel from Australia and the Philippines that has most­ly been smelted in China thus far. The pro­spec­tive costs and risks that arise with the ambitions to break away from Russia are significant.

Yet, the situation concerning PEM electrolysers is even more challenging. Cath­odes and anodes in PEM units are usually made from platinum and iridium, respectively. They belong to the so-called plati­num-group metals (PGMs) and are among the most scarce, carbon-intense, and expen­sive metals. There are no known alternatives for the use of iridium in PEM units. Europe’s import dependency on platinum and iridium reaches 98 per cent and 100 per cent, respectively.

Global PGM deposits are strongly concentrated in South Africa, which is the world’s largest supplier of platinum and iridium (see Figure). The current mining rates of both metals will only allow for an annual increase of PEM electrolysis capacity from 3 to 7.5 GW. However, the demand is expected to increase massively by 2030 – which will require a substantial growth in mining activity.

The iridium shortage is less a result of geological scarcity than one of the social and economic conditions required for in­creased mining activity. In 2013, for exam­ple, violent protests against working con­ditions in South African platinum mines led to a temporary export ban and high price spikes. Russia is the world’s and Europe’s second-most important supplier of platinum, as it accounts for 13 per cent of all supply. Decoupling from Russia will therefore further cement Europe’s import dependence on South Africa. Zimbabwe (which currently supplies 7 per cent of all platinum in the world and 5 per cent of iridium) faces conditions that are similarly fragile as those in South Africa, and is there­fore exposed to the same risks. A genuine diversification of PGM supply is virtually impossible, since South Africa has also by far the largest reserves (90 per cent). More stable mining countries, such as the United States (US) and Canada, will experience an increase in PGM demand themselves – especially since US companies are also eying manufacturing PEM electrolysers. The US is relying on the Defense Production Act to push domestic PGM production to supply its own demand, which is why the US, which accounts for only 2 per cent of global platinum supply, might cease to supply the world market.

As a bottom line, diversifying the nickel supply away from Russia yields consider­able yet surmountable costs, whereas Europe’s dependence on nickel smelting in China and PGMs from South Africa has no workaround.

Dependencies on critical components for PEM electrolysers

The production of AEL units does not re­quire any components whose security of supply poses specific risks. All components are ordinary industrial materials and can be obtained from within Europe.

The supply chain for PEM electrolysers is similar to that for AEL units, albeit less devel­oped and with fewer suppliers. The high market concentration creates depend­encies, mainly on firms from the US, Japan, and the United Kingdom (UK) (see Figure). Although they hardly pose a geopolitical risk, the market concentration makes the EU vulnerable to price developments and logistics issues.

Three PEM components are considered to be especially critical: polymer electrolyte membranes, support catalysts, and the mem­brane electrode assembly (MEA).

Polymer electrolyte membranes replace the liquid electrolyte used in AEL models and are critical to the performance of PEM electrolysers and the purity of the hydrogen. There is a Europe-based producer that supplies the membrane’s raw material, so that risk is manageable. However, the mem­branes themselves have to be imported from the UK, the US, or Japan. This allows these three countries to maintain existing advantages in technology and production scaling.

Support catalysts in PEM electrolysers enhance the electrochemical reactions of the cell. The three leading companies for these components are based in the EU, the UK, and Japan, respectively. Also in this case, the incumbents’ technological lead is a major entry barrier for newcomers.

The MEA – a harmonised assembled stack of proton exchange membranes, cata­lysts, and electrodes – is essential for the electrolysers’ performance. One of the lead­ing producers is based in the UK, but other manufacturers worldwide, especially in China, are scaling up their manufacturing capacity.

Europe has a strong position, but there are barriers to upscaling

The (lack of) production capacities for elec­trolysers is another obstacle to the realisa­tion of the EU’s goals. According to the EC, reaching the REPowerEU targets for domes­tic production alone will require 120 GW of electrolysis capacity. However, the EU-wide electrolysis capacity in 2021 was just 0.135 GW, and the global production capacity in 2020 was capped to some 2 GW per year. The EU already announced 118 GW of elec­trolysis capacity for 2030 (of which 73 GW will be in Spain), but the final investment decisions are still pending in most cases. Only 64 out of 750 pilot projects within the Clean Hydrogen Alliance deal with elec­trolyser manufacturing.

Europe already hosts electrolyser manufacturers with expertise in all variants, as well as strong research facilities. These actors include both large industrial players, such as thyssenkrupp and Siemens, as well as smaller companies, which often focus on emerging technologies that are not yet mature. Currently, 60 per cent of global elec­trolyser manufacturing capacity and 40 per cent of electrolysis capacity are located in the EU. Moreover, Europe has the lead in terms of technology: It holds approximately 40 per cent of all relevant patents. Its lead is particularly strong when it comes to PEMs.

Electrolyser manufacturers, however, often complain that their customers have yet to make final investment decisions, which is why manufacturing capacities can­not be scaled up. Their customers, in turn, criticise the strict legal requirements pro­posed in drafts for the EC’s delegated act. It is decisive for the definition of green hydrogen and the conditions required for its production.

The original draft specified “additionality”: From the end of 2026 onward, only elec­tricity from newly built and non-subsidised solar and wind parks was to be used for elec­trolysis. Secondly, it required spatial and temporal correlation: From 2027 on­wards, an electrolyser was only to be allowed to use electricity generated in the same hour, in the same bidding zone, and by plants directly connected to the elec­trolyser. However, these strict rules ignore the fact that electrolysers must be operated for at least 4,000 hours each year to be cost-competitive. Hence, a recent vote by the Euro­pean Parliament rejected these two pro­visions. For a quick market ramp-up, fur­ther discussions about the definition of “clean hydrogen” are necessary.

China on its way to a market takeover

In addition to the regulatory obstacles, the European electrolyser industry is also facing strong competition – first and foremost from China (see Figure). At present, China holds about 35 per cent of the world’s manu­facturing capacity for electrolysers. Although European manufacturing capac­ity exceeds China’s capacity, the latter has already become the world’s largest pro­ducer of electrolysers. China’s advantage is grounded in significantly lower costs: It can produce electrolysers with similar efficiency and quality levels as the European ones, but at one-fifth of the cost. China has focussed on AEL units so far, of which it accounts for half of global production.

The trend is accelerating: In 2022, China’s manufacturing capacity is expected to in­crease fivefold to 2.5 GW per year. This development is being actively pushed by state and industry. China’s 14th Five-Year Plan (2021–2025) names the hydrogen industry as one of six industrial priorities. Leading manufacturers of solar PV systems as well as state-owned companies have entered the market. They are pursuing the same strategy that has already yielded dominance in other sectors, such as the solar industry: massively upscaling pro­duc­tion, thereby reducing unit production costs, and promoting rapid technological progress. Until now, China has only sup­plied its domestic market. However, the industry is increasingly turning to inter­national customers, at higher prices – for example in the Arab Gulf States.

A global race for market share ... and electrolysers

Whether the European electrolyser industry will face the same fate as Europe’s former domestic solar industry remains an open question. However, both industries are struc­turally different: Solar PV modules are small in size, easily transportable, and their production is largely standardised. In con­trast, electrolysers are more bulky and typically customised. Moreover, the Euro­pean solar industry was mainly dominated by smaller and younger companies, where­as most European electrolyser manufacturers are large multinationals. In any case, China’s rise as the world-leading producer of AEL units shows that Europe’s techno­logical lead and market position is deterio­rating. Even with PEM technology, China is gradually gaining a foothold. The US is also increasingly interested in the market, and the country has become a serious competi­tor for PEM electrolysers.

Therefore, electrolysers themselves could turn out to be a global bottleneck for the hydrogen market ramp-up. Even the ex­pected fivefold increase in European production capacity by 2023 is unlikely to achieve the EU’s ambitions. Realising the plans would require unparalleled progress in capacity expansion – something only feasible with wartime-like, centralised con­trol over resources. Hence, to reach its aims, Europe might have to rely on the growing Chinese electrolyser industry – new de­pend­encies included.

Notably, REPowerEU not only aims at producing green hydrogen within the EU, but it also necessitates an equal amount of imports – which will require electrolysers, too. Since global electrolyser manufacturing capacities are limited, the parallel ramp-up of imports and domestic production might create difficult trade-offs. More­over, plans for hydrogen production and use also exist beyond Europe’s borders. With the China Hydrogen Alliance, the coun­try is aiming at a scale similar to the EC’s: 100 GW by 2030. Therefore – and depending on the speed of the (global) expansion of electrolyser manufacturing capacities – the high installation targets could cement new dependencies and/or mas­sively drive up the prices for elec­trolysers.