Realigning Without Retreating: Germany's Hydrogen Balancing Act

Germany finds itself at a delicate juncture in its hydrogen journey. Having committed billions of euros and substantial political capital to a sweeping hydrogen strategy, the country now needs to recalibrate its approach without sending a signal to industry and investors that it is abandoning the technology altogether. It is a balancing act that will require clear communication, strategic prioritization, and the willingness to admit that some early assumptions were wrong.

The stakes are high. Germany's industrial sector — the backbone of the country's economic strength and export prowess — needs a credible decarbonization pathway. For sectors like steel, chemicals, and heavy manufacturing, hydrogen remains the most viable option. If Germany's realignment is perceived as a retreat, it could trigger an investment freeze that sets back decarbonization efforts by years. If it is executed well, it could make the country's hydrogen investments more effective and position Germany as a leader in the applications where hydrogen genuinely matters.

Step One: Define Where Hydrogen Is Non-Negotiable

The foundation of any successful realignment is clarity about priorities. Germany needs to clearly delineate the sectors where hydrogen is essential from those where it was always more of a nice-to-have.

The Must-Have Applications

In certain industrial processes, hydrogen is not one option among many — it is the only realistic option for deep decarbonization. These include:

  • Steel production: Direct reduced iron (DRI) using green hydrogen can replace coal-based blast furnaces, eliminating one of the largest industrial sources of CO2. ThyssenKrupp, Salzgitter, and ArcelorMittal are all pursuing hydrogen-based steelmaking in Germany, and these projects need sustained policy support.
  • Chemical feedstocks: Hydrogen is a fundamental building block in the production of ammonia, methanol, and countless other chemicals. While the energy used to produce chemicals can be electrified, the hydrogen itself — as a molecular ingredient — cannot be substituted.
  • Refining and synthetic fuels: For aviation and potentially maritime shipping, synthetic fuels produced from green hydrogen may be the only way to decarbonize without fundamentally redesigning the vehicles themselves.
  • Seasonal energy storage: Germany's renewable energy system produces surplus electricity in summer and faces shortfalls in winter. Hydrogen, stored in underground salt caverns, can bridge this seasonal gap in ways that batteries cannot.

The Can-Wait Applications

Conversely, several applications that were included in Germany's original hydrogen strategy are now looking less promising:

  • Residential heating: Heat pumps have proven far more efficient and cost-effective than hydrogen boilers. The idea of blending hydrogen into the natural gas network has also lost support as studies have shown it offers minimal emissions reductions at disproportionate cost.
  • Passenger transport: Battery electric vehicles have won the competition with hydrogen fuel cell cars decisively. Even in Germany, where the automotive industry initially hedged its bets, virtually every major manufacturer has now committed to battery electric platforms.
  • Short-distance freight: Battery electric trucks are becoming viable for regional delivery routes, reducing the need for hydrogen in this segment, though hydrogen may still play a role in long-haul trucking.

Step Two: Fix the Import Strategy

Germany's original hydrogen strategy envisioned significant domestic production. While this made sense from an energy sovereignty perspective, the reality is that Germany will never be the cheapest place to produce green hydrogen. The country's renewable energy resources — while substantial — are modest compared to the solar potential of North Africa, the wind resources of Patagonia, or the combined solar and wind capacity of Australia.

A realistic hydrogen strategy must accept that Germany will be primarily an importer of hydrogen, much as it has historically been an importer of natural gas and oil. The key is to diversify supply sources and build the infrastructure needed to receive and distribute imported hydrogen.

Several important steps are already underway:

  • The H2Global initiative uses an auction mechanism to bridge the price gap between what exporters need to charge and what German buyers are willing to pay, with the government funding the difference
  • Pipeline connections to the Netherlands, Denmark, and Norway are being planned or constructed, providing access to hydrogen produced from North Sea wind power
  • Port infrastructure in Hamburg, Wilhelmshaven, and Brunsbüttel is being upgraded to handle hydrogen and ammonia imports from overseas suppliers
  • Bilateral agreements with countries including Morocco, Namibia, Chile, and the United Arab Emirates have been signed to secure future hydrogen supply

Step Three: Accelerate the Backbone Infrastructure

None of Germany's hydrogen ambitions — whether for steel, chemicals, or energy storage — will be realized without a functioning hydrogen transport network. The planned hydrogen backbone, which would connect major industrial centres, import terminals, and storage facilities through approximately 9,700 kilometres of pipelines, is the single most critical piece of infrastructure in Germany's hydrogen strategy.

Delays in this network are arguably the biggest risk to the entire strategy. Without pipelines, producers cannot reach customers, and customers cannot commit to hydrogen-based processes. The government needs to treat hydrogen pipeline construction with the same urgency it has applied to LNG terminal construction — a process that was dramatically accelerated during the 2022 energy crisis and demonstrated that Germany can build energy infrastructure quickly when political will exists.

Regulatory Streamlining

Concrete measures to accelerate infrastructure include shortening permitting timelines from years to months, allowing construction to begin before all regulatory approvals are finalized (with appropriate safeguards), and providing financial guarantees that reduce investment risk for pipeline operators during the early years when utilization will be low.

Step Four: Maintain Investor Confidence

Perhaps the most important element of Germany's hydrogen realignment is managing perceptions. The global competition for hydrogen investment is intense, with countries from the United States to Saudi Arabia to Australia competing for the same pool of capital. If Germany's realignment is framed as a retreat, investors will take their money elsewhere.

The government should be explicit that it is not reducing overall hydrogen investment but rather concentrating it where it will have the greatest impact. It should point to the concrete projects underway — hydrogen-ready steel plants, electrolyzer manufacturing facilities, pipeline construction — as evidence of continued commitment. And it should set clear, measurable milestones that hold the government accountable for delivering on its revised strategy.

The Opportunity in Realignment

Done well, Germany's hydrogen realignment could actually strengthen the country's position in the global hydrogen economy. By focusing resources on the applications where hydrogen is most needed and most valuable, Germany can become the world's leading market for industrial hydrogen — a market that will be worth hundreds of billions of euros annually by mid-century.

The alternative — continuing to spread hydrogen investments across too many applications, including those where it is not competitive — risks diluting efforts and achieving mediocre results across the board. In the energy transition, as in business, focus is a competitive advantage.

Germany has the industrial base, the engineering talent, and the financial resources to be a hydrogen leader. The question is whether it has the strategic discipline to concentrate those assets where they matter most. The next 12 months will tell.