The world is buzzing with the promise of hydrogen as the fuel of the future. This clean and abundant energy source has the potential to revolutionise industries like transportation, power generation, and manufacturing. As a result, investors worldwide have been pouring billions of dollars into hydrogen start-ups, hoping to find the next unicorn. India, with its growing energy needs and ambitious climate goals, is also looking to boost its hydrogen economy. The Indian hydrogen start-up ecosystem is nascent, with only a few start-ups having raised their initial funding round. However, for such start-ups to attract plenty of venture capital, a lot of roadblocks need to be resolved.

Investors betting on hydrogen start-ups are pinning their hopes on two crucial factors: first, declining cost of renewable energy and electrolysers and the increasing efficiency of electrolysers. As the cost of renewable energy and electrolysers falls, producing hydrogen through electrolysis becomes more affordable. Simultaneously, advancements in electrolyser technology are improving the efficiency of hydrogen production, further reducing its cost.

Consumers not ready

If these two factors align as expected, green hydrogen will achieve parity with other fuels and there will a lot of demand for green hydrogen, paving the way for the success of hydrogen start-ups. These start-ups will build next generation electrolysers, fuel cells and hydrogen storage systems. However, with early-stage investors typically aiming for exits within 7-8 years, the hydrogen story must unfold by 2030. Yet, potential consumers of green hydrogen are not yet ready for the transition and may require mandates, additional time and incentives.

The most compelling use cases arise in carbon-intensive industries, such as refining and fertilizers, which currently rely on fossil fuel-derived hydrogen. However, these industries need to incur significant capital expenditure to set up green hydrogen infrastructure. Moreover, they must absorb the higher costs of green hydrogen, impacting their profit margins. Therefore, mandates and incentives from respective governments are crucial for these industries to adopt green hydrogen. Globally, a lack of clear demand mandates has led to customers delaying or stalling their plans to adopt green hydrogen.

Indian hydrogen start-ups are at a disadvantage vis-a-vis companies in China, Europe, and the US, as the hydrogen industry in these economies is more than 50 years old. As such, Indian electrolyser manufacturers will have to rely on technology partnerships and provide manufacturing expertise, a job better suited for large corporates as compared to start-ups. We have already seen Indian conglomerates announcing plans to tie-up with international players to set up giga scale manufacturing facilities for electrolysers.

Start-ups could focus on what these large companies cannot effectively do, which is innovate and innovate fast. Areas such as decentralised hydrogen production, usage of fuel cells in novel applications, developing sector-specific solutions, etc., could be some opportunity areas. But all these will scale only after green hydrogen achieves parity with other fuels, with or without incentives or carbon taxes.

The journey to profitability for hydrogen companies is lengthy and demanding. Even publicly listed hydrogen companies have struggled to turn profits. Operating losses and significant capital expenditure for product development mean continuous fundraising, resulting in significant shareholder dilution. The lacklustre performance of large hydrogen companies may also deter investors from venturing into start-ups.

The hydrogen start-up ecosystem in India will benefit from studying global trends, identifying gaps, and focusing on suitable opportunities rather than blindly jumping on the bandwagon.

The writers are with FineTrain LLP