It can be tempting to view the nascent clean hydrogen industry in isolation from the rest of the global energy complex. After all, hydrogen-specific government policies, subsidies and electrolyser technology are the key drivers of this new industry as it attempts to scale up, right?

However, the turmoil unleashed in the wider energy market in early March, as the US/Israel-Iran conflict escalated across the Middle East, served as a stark reminder that the clean hydrogen sector is also highly exposed to global energy markets and geopolitics.

Natural gas prices in Europe surged 50% at one stage as military strikes led to the suspension of LNG production at Ras Laffan in Qatar, a complex responsible for around a fifth of global LNG exports.

Higher gas prices obviously mean higher blue hydrogen costs, though the relative competitiveness with grey hydrogen would not necessarily alter dramatically as grey must also absorb gas costs. However, an elevated outright price for blue, even for a limited period, will make it a harder sell, especially to risk-averse industries that are being asked to spend billions converting their processes to run on hydrogen for the first time.

Price volatility can be managed to a certain extent with hedging instruments and long-term contracts, but there is no getting away from the fact that extreme price fluctuations are less than helpful to blue hydrogen, which is already struggling to find buyers.

Green power

Green hydrogen is also exposed. Electricity prices—which account for about 70% of the green production cost—on general grids are in many markets still dictated by gas, which is the marginal generation fuel and the back-up for intermittent renewables. Therefore, a period of power price volatility will not be supportive of a green hydrogen business case that envisages electrolysers drawing from a general grid, the load on which is also growing on the back of datacentres and electrification.

Financiers already much prefer projects with their own dedicated, or ‘behind the meter’ renewable generation. Fresh bouts of price volatility in the wider market will make them even more insistent on this as a must-have to make a project bankable.

Security

Project bankability also depends on security. The conflict will do little to encourage international lenders to back new hydrogen projects in the Middle East. Renewed security risks could at a stroke undermine all the recent efforts by governments in the region to reassure investors with subsidies and the construction of new legal frameworks to enable the hydrogen economy to grow. Oman is a case in point. As the conflict escalated, several drones targeted Oman's Duqm port, the focus of plans to develop a green hydrogen production hub with a shipping corridor into Europe.

However the conflict plays out, the ramifications are likely to include increased pressure on governments to raise defence spending, potentially squeezing funds available to support clean hydrogen and the rest of the transition to low carbon. Add to that the potential for higher interest rates if high crude oil prices drive inflation, and the implications for the near-term ramp-up of clean hydrogen start to look significant.