Germany's Hydrogen Fantasies—A $25 Billion Pipe Dream

Why the "hydrogen core network" is a terrible idea

“It is better to have the philosophy of thinking more than your competitors than spending more than them”. – David Ogilvy

Coming up with a good idea is hard. I wrestle with this challenge every day. My job in financial publishing can be described as “coming up with an idea.”

A useful rule of thumb: out of 10 ideas, four are worth executing. And if just one of those four succeeds—meaning it generates a critical amount of revenue—you’re among the top performers.

Not a good idea.

You can quickly test ideas and discard the ones that aren’t working. Half the readers will see one headline, the other half see an alternative. You stick with the one that attracts more readers. It’s called an A/B test.

That’s the beauty of the digital world.

In a previous life, I’ve been involved in infrastructure projects, and you can’t run an A/B test when it comes to those. But when billions of taxpayer dollars are on the line, you want to make sure you’re not going all in on an idea that might be foolish.

Yet that’s exactly what the German development bank, KfW, seems to have just done.

A €24 Billion Pipe Bomb

Two weeks ago, KfW announced a €24 billion (US$25) loan to build a “hydrogen core network.” Private companies will build and run this pipeline network. However, if the project turns out to be unprofitable, they won’t have to repay all that cash. Taxpayers will foot the bill.

Map of the authorized hydrogen core network

This network will be massive. Between 2025 and 2032, a basic framework of 9,040 kilometers (5,617 miles) is planned for construction.

As KfW’s describes it:

For the hydrogen core network, existing natural gas pipelines will be repurposed and new hydrogen pipelines built. Integrating potential hydrogen production sites and connecting key industrial centres will enable the industrial use of hydrogen as a climate-neutral energy source.

This network is supposed to be part of the “European Hydrogen Backbone,” a fantasy—I mean, “initiative”—anticipating a total length of 57,600 kilometers by 2040.

Hydrogen has been essential for many industrial processes for more than 100 years. For example, combining hydrogen and nitrogen produces ammonia, a critical component of fertilizers. It’s also used in methanol production, oil refineries and food production. Hydrogen turns liquid vegetable oil into a solid fat. That’s how you get margarine.

Almost all hydrogen today is made from natural gas, but there are various other methods (see

Doomberg

’s The Hitchhiker’s Guide to Hydrogen for an overview). Since the EU and Germany think they can achieve net-zero emissions, they are determined to push only “green” hydrogen through these billion-dollar pipelines.

“Green” hydrogen is produced by splitting water into hydrogen and oxygen using electricity from renewable energy sources like wind and solar. A process called electrolysis.

On paper this sounds like a brilliant idea…

Electrolysis seemingly solves wind and solar power’s biggest challenges: intermittency and volatility. When there’s plenty of wind and sun, resulting in excess electricity—and negative prices on the spot market—you use that surplus energy to produce hydrogen.

When there’s no wind or sun, you can use the stored hydrogen to generate electricity. You either burn it—emitting only water—to power turbines, or use fuel cells that generate electricity through reverse electrolysis.

Hydrogen as a battery! One that doesn’t require lithium or any rare minerals. What’s not to like?

Turns it, making this idea work is much harder than it sounds.

For starters, “green” hydrogen is anything but efficient. PEM electrolyzers, considered cutting edge technology, operate at around 80% efficiency. In other words, you lose 20% of the energy you put in.

Add another 10–15% energy loss for compression and storage. Converting hydrogen back into usable energy—whether through fuel cells or combustion—results in an additional 20–60% efficiency loss.

When you add that all up, you’re left with just 50% of the energy you started. And that’s the best-case scenario. At worst, you’re down to 5%. Yes, 95% of the energy put in disappears along the way. That’s why some call the idea of using hydrogen as energy storage…

A Cage Fight With Physics

Given these inefficiencies, it’s no surprise that replacing natural gas with green hydrogen leads to skyrocketing costs. As

Energy Bad Boys

have noted, generating one megawatt hour of electricity in the U.S. costs $243.93 with green hydrogen vs. $9.83 with natural gas. (Make sure to subscribe to their brilliant Substack, by the way.)

But what about places that are really windy and sunny?

Ordos, a city in the Inner Mongolia Autonomous Region of northern China, is indeed very windy and sunny. That’s why Chinese oil giant Sinopec built the world's largest green hydrogen plant there in 2023. It was projected to produce 30,000 tonnes of green hydrogen annually.

A solar energy power station in Ordos.

However, the actual operating capacity has apparently not been made public.

For good reasons, it seems. Sinopec’s second largest green hydrogen project called Kuqa was only operating at about 20% of its projected capacity (20,000 tonnes annually) as of early 2024. Sinopec doesn’t expect to solve these problems until late 2025.

The main issue stems from the wind’s and sun’s fickleness, even in sunny and windy places.

As Ankit Sachan from SPGCI's Energy Transition Consulting explains:

When there's not enough electricity, the production rate is low and efficiency decreases, leading to incomplete electrolysis. If the power supply drops below a certain level, there's a risk of gases mixing, which could potentially create explosive gas combinations.

To address this, Sinopec is forced leave a portion of its electrolyzers sit idle.

On top of safety and efficiency concerns, electrolyzers are expensive. They require platinum and iridium—both of which are more costly than gold.

Sinopec announced plans to auction off the Ordos project in April 2024. It seems like the operational problems of producing green hydrogen at scale aren’t worth the effort.

Sinopec’s decision to get rid of the project just 14 months after breaking ground suggest the company was well aware of the difficulties it would face. But as a state energy firm, Sinopec had no choice but to bite the bullet and at least try.

Western hydrogen projects don’t do any better. Numerous green hydrogen projects in Europe, the U.S. and Canada are being scrapped as

Robert Bryce

points out. Make sure to subscribe to his great Substack, by the way.

What About Technological Progress?

Sure, in theory, breakthroughs in electrolyzer technology that solve hydrogen’s efficiency problem could be just around the corner. Maybe even breakthroughs in compression, storage, and fuel cell tech, while we’re at it.

But does that make Germany’s idea to start sinking €24 billion into a hydrogen network before these potential breakthroughs materialize a good idea?

The Hindenburg: Another bad hydrogen idea.

I’m not an engineer, so I can’t say how likely such breakthroughs are. But a useful proxy for evaluating an idea is to look at what others are doing.

Remember, Germany’s hydrogen network will have a length of 9,040 kilometers. How does this compare to similar projects? China wants to build a 6,000-kilometer hydrogen pipeline. However, China is 27 times the size of Germany.

As of today, only 5,000 kilometers of hydrogen pipelines exist worldwide—usually developed organically by industrial demand, rather than through central planning.

To sum up, Germany wants to own the world’s largest hydrogen network, even though no one can reliably produce green hydrogen at scale for the time being.

As always, many people will profit from this foolishness. I’d be surprised if my former employer isn’t already positioning itself to grab a slice of the pie.

The Hydrogen Manipulation Burns Bright

Of course, KfW doesn’t mention any of that. Here’s how the bank sells this project to the public:

Due to market failure, green hydrogen is currently not competitive with fossil-based alternatives […] Reliable regulatory frameworks and support mechanisms are needed to stimulate demand for hydrogen.

According to EU competition law, a “market failure” occurs when the market on its own does not lead to an economically efficient outcome. As we’ve seen, physics prevents the desired outcome, not the market.

But physics isn’t something KfW wastes time on:

[Hydrogen] is essential for decarbonizing industry, parts of the transport sector such as long-distance air and maritime travel, and as a seasonal storage medium to ensure electricity and heat supply during extended periods of low wind and solar energy generation.

Essential, you say? As in absolutely necessary? Framing certain measures as absolutely necessary creates binary choices—the hallmark of manipulation. We’ve talked about this before.

Largely hidden from the public eye, the German government revealed in another document that it’s well aware of how unpredictable this project’s success is.

This relatively obscure document is the decision by the European Commission to raise no objections to the KfW loan on the grounds of competition law. In this decision, Germany is quoted as having pointed out:

[The] comparatively high uncertainty on the success or not of the hydrogen ramp up.

A highly uncertain project can be essential when no alternative exists, of course. But such an alternative does exist: nuclear power.

Restarting nine of Germany’s decommissioned nuclear reactors is estimated to cost €20 billion. That’s €4 billion cheaper than the “hydrogen core network.” One that might never be used to its full capacity due to a lack of sufficient supply.

If these options were openly discussed, the suggestion to rush into building the world’s largest hydrogen network would likely end up where it belongs:

On the graveyard of bad ideas.

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