While the United States pursues a vision of energy dominance that centers on hydrocarbons, China is inching toward dominating yet another future energy supply chain. Key technologies to produce low-emission hydrogen are quickly becoming one of the latest frontiers for geoeconomic competition, and the United States may yet again fall behind.
Often referred to as the “Swiss Army knife” of the energy transition, hydrogen is uniquely flexible. It can be produced from various types of resources, including natural gas and renewables. One of hydrogen’s biggest value propositions is that it can help decarbonize the “hard to abate” sectors that lack cost-effective clean alternatives and are difficult to electrify. These include critical industrial base sectors, such as petrochemical refining and steelmaking, as well as innovative clean fuels for the maritime and aviation sectors. What’s more, hydrogen can act as a store of energy over long periods, meaning that it can be used to enhance energy system integration, resilience, and reliability.
While the United States pursues a vision of energy dominance that centers on hydrocarbons, China is inching toward dominating yet another future energy supply chain. Key technologies to produce low-emission hydrogen are quickly becoming one of the latest frontiers for geoeconomic competition, and the United States may yet again fall behind.
Often referred to as the “Swiss Army knife” of the energy transition, hydrogen is uniquely flexible. It can be produced from various types of resources, including natural gas and renewables. One of hydrogen’s biggest value propositions is that it can help decarbonize the “hard to abate” sectors that lack cost-effective clean alternatives and are difficult to electrify. These include critical industrial base sectors, such as petrochemical refining and steelmaking, as well as innovative clean fuels for the maritime and aviation sectors. What’s more, hydrogen can act as a store of energy over long periods, meaning that it can be used to enhance energy system integration, resilience, and reliability.
In short, hydrogen use could give U.S. industries a competitive edge on the global stage while creating new export opportunities and buttressing the nation’s power system.
The concern now is that we could witness a repeat of the story where the United States and its allies lead in innovation but fall behind in manufacturing and cost reductions. The result would be a global supply chain that lacks resilience and robustness against supply disruptions. China has already dominated the global supply chains for solar photovoltaics and electric vehicle batteries. Now, it is ramping up its efforts to do the same for electrolyzers, the critical machines that use electricity to split water into hydrogen and oxygen. Plus, it is also heavily investing in developing advanced electrolyzer technologies—with an eye toward export opportunities around the world.
There aren’t enough superlatives to describe China’s hydrogen endeavors, but a few headlines stand out. First and foremost, China is the world’s largest producer and consumer of hydrogen, as well as the country with the largest installed electrolyzer capacity. Moreover, at about 60 percent of global capacity, China leads the world in the manufacturing of alkaline-based (ALK) electrolyzers. China’s latest focus is to extend its expertise beyond ALK and to master proton exchange membrane (PEM) electrolyzer technology—the type that is more flexible and compatible with renewable energy sources.
Yet it would be misguided to assume that China is pursuing hydrogen solely for its climate benefits. Yes, China’s efforts to advance clean hydrogen technologies will undoubtedly help with reducing its own emissions while also facilitating the global energy transition. In addition to being the world’s largest emitter of greenhouse gases, China is also the world’s top producer of steel and cement—two of the most carbon-intensive materials. Hydrogen could help it produce cleaner materials that comply with emerging emissions-based tariff regimes. But China sees clean hydrogen as important in many other ways beyond its use in lowering emissions. It links the clean molecule to efforts surrounding power sector resilience and energy independence, too.
The good news is that the race is not yet over. The United States and Europe have been the early innovators and manufacturers of PEM electrolyzers and their sub-technologies such as membranes. For example, U.S.-based chemical companies have been manufacturing what are widely considered the industry standard of PEM membranes, all the while progressing technological advancements in the field.
But in what could be a sign of things to come, Europe is starting to sound the alarm for a potential tsunami of cheap Chinese electrolyzers flooding its domestic markets. A world-leading innovator in both ALK and PEM electrolyzer technologies, Europe is stepping up its efforts to avert a repeat of the manufacturing demise seen in its solar and EV battery sectors. Among other measures, the European Hydrogen Bank has introduced stringent “resilience requirements” in its auctions to bolster Europe’s domestic electrolyzer manufacturing after finding a strong Chinese presence among the winners of its first auction. One of the key requirements is that projects receiving subsidies from the bank must ensure that no more than 25 percent of their electrolyzer stack capacity originates from China.
As important as manufacturing competitiveness is, it also goes without saying that continued investments in innovation will remain crucial to a robust and diversified supply chain. Between 2005 and 2020, the United States, Germany, and Japan accounted for nearly two-thirds of electrolyzer-related international patent filing by top 10 countries. During this period, only 3 percent of China’s patents were international, as Chinese efforts were focused on its massive domestic market. The picture, however, is fast changing. As of 2022, China reportedly emerged as the world’s top patent holder in hydrogen-related technologies, particularly in those for hydrogen production. China has yet to master complex stack design and engineering or the manufacturing of stack assemblies and compressors for PEM electrolyzers. But it may be only a matter of time before China surpasses the West in innovation, too.
Meanwhile, the hydrogen economy in the United States is at an inflection point. The incentive structures for scaling electrolyzer manufacturing and deployment under the Infrastructure Investment and Jobs Act (IIJA), as well as the prospect for a robust clean hydrogen production ecosystem as spurred by the Inflation Reduction Act, are in limbo. The IIJA’s $1.5 billion in support for research, development, demonstration, and deployment for electrolyzer manufacturing and recycling—which was an instrumental enabler for the United States to remain globally competitive—has been struck by the recent wave of project cancellations. Coupling the funding cuts with a bleak 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 strives to overcome technological challenges and establish PEM technology supply chains by 2035—a key goal under the country’s Hydrogen Industry Development Plan. According to an August 2024 report in the state-owned China Daily, China is now “on the brink of embracing yet another major potential export product in the realm of new energy products—hydrogen electrolyzers.” The article points to several Chinese companies in the midst of expanding production capacity to meet overseas demand, including the case of Beijing’s PERIC Hydrogen Technologies Co., whose revenue from electrolyzer exports roughly doubled every year since 2021. Chinese electrolyzer producers are starting to supply in multiple regions, including Asia, Europe, Latin America, and the Middle East.
Being competitive against China calls for a strategic role by government, especially in a sector as nascent yet promising as hydrogen technologies. Although U.S. hydrogen and electrolyzer demand may be slow to materialize, global markets are growing as multiple countries see future economic and energy opportunities from the emerging value chains.
To meet the moment, the United States need a dual-pronged approach. First, the country should pragmatically scale clean hydrogen production for the few sectors where demand is both real and durable, such as petrochemicals and steel. Targeted deployment of such anchor projects would serve to jump-start domestic electrolyzer manufacturing while expanding the U.S. hydrogen supply to meet emerging global demand. European demand could unlock export opportunities equivalent to how much the United States currently consumes, 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 provider of choice for allies pursuing their own hydrogen ambitions. That means targeted investments in manufacturing capacity to export cutting-edge, U.S.-made electrolyzers and related equipment. Leveraging financial institutions such as the International Development Finance Corp. to reach emerging economies could be one way to expand global opportunities for U.S. electrolyzer makers. The same geopolitical agility showcased by the United States during its high-level visit to the Arabian Peninsula this year—where it secured trillions of dollars’ worth of investments and commercial partnerships—should now extend to the next frontier of energy technologies. After all, there’s no reason why a U.S. company shouldn’t be supplying the electrolyzers that would power the region’s hydrogen aspirations—as exemplified by Saudi Arabia’s landmark NEOM green hydrogen project, the largest in the world.
Only by nurturing innovation, incentivizing domestic manufacturing, and promoting their products in growing markets can the United States and the West realize a global supply chain that is robust and transparent, reaping both the energy security and emissions reduction benefits of clean hydrogen.
