China's hydrogen industry enters a decisive shake-out phase

China's hydrogen energy sector is entering a period of deep restructuring. According to information shared at the 2nd Shanghai International Hydrogen Energy Conference, held on 15 May, the industry is expected to move from rapid policy-driven expansion into a much more competitive and market-driven phase.

From 2026 to 2028, experts expect an intensifying price war and a reduction in production capacity. Assembly-only companies without core technologies, as well as demonstration projects that depend entirely on subsidies, are likely to disappear. One forecast presented at the conference suggested that around 40% of companies in China's hydrogen energy sector could vanish by the end of 2026, and that by the end of 2029 only about 10% of today's players may remain.

By 2029–2030, the industry is expected to enter a more profitable phase dominated by large, technologically stronger companies. In this sense, China's 15th Five-Year Plan period, from 2026 to 2030, could become the turning point for hydrogen: from pilot projects to large-scale commercialisation, and from policy-led growth to market-led development.

Big pipeline, small operating base

China has already become the world's largest hydrogen producer. Total hydrogen output exceeded 37 million tonnes in 2025, while annual green hydrogen production capacity surpassed 250,000 tonnes. China has also become one of the global leaders in the production of key hydrogen equipment, especially electrolysers.

The green hydrogen project pipeline is much larger than today's operating base. According to recent data cited by the National Energy Administration, China's operating and under-construction green hydrogen capacity has exceeded 1 million tonnes per year. Independent reporting puts this figure at over 1.1 million tonnes as of March 2026, including roughly 250,000 tonnes already operational and more than 900,000 tonnes under construction.

Hydrogen-derived fuels are also expanding quickly. By the end of last year, more than 150 green methanol projects and more than 100 green ammonia projects had been signed or registered, with planned production capacity exceeding 50 million tonnes of green methanol and 20 million tonnes of green ammonia.

But the gap between ambition and reality remains large.

During the 14th Five-Year Plan period, regional hydrogen plans across China targeted tens of millions of tonnes of capacity. In reality, by the end of last year, annual green hydrogen production capacity had reached only around 250,000 tonnes. This is a classic early-stage clean technology problem: huge announcements, fast-moving capital, and a large pipeline – but still limited operating assets.

Most existing hydrogen applications are concentrated in refining and chemicals. Transport use is growing, and demonstration clusters have been created, but hydrogen used in vehicles still comes mainly from industrial by-products rather than dedicated green hydrogen. One reason is geographical mismatch: green hydrogen production is concentrated in China's "Three Norths" – Northeast, North and Northwest China – while vehicle demand is concentrated in demonstration clusters elsewhere.

Europe sets the market signal

A second challenge is the imbalance between domestic and international demand.

The global green hydrogen and green fuels market is increasingly shaped by Europe. EU carbon regulation is creating a demand pull for low-carbon fuels in hard-to-abate transport sectors, especially shipping. Since January 2024, the EU Emissions Trading System has covered CO₂ emissions from large ships of 5,000 gross tonnage and above entering EU ports, regardless of flag. From 2026, shipping companies must surrender allowances for 100% of in-scope emissions after the phase-in period.

FuelEU Maritime adds another layer of pressure. Applying in full from 1 January 2025, it promotes renewable and low-carbon fuels and clean energy technologies for ships operating in the EU/EEA. This makes Europe one of the most important early markets for green methanol, green ammonia and other hydrogen-based marine fuels.

This policy environment has encouraged major shipping companies, including Maersk, CMA CGM and COSCO Shipping, to invest in greener vessels and secure access to alternative fuels.

Costs and technical bottlenecks

China's domestic market, however, is still not fully formed. There are two main reasons. First, there are still few mandatory requirements pushing end-users to buy more expensive green fuels. Second, costs remain high. Green methanol currently costs around 4,500–5,000 yuan per tonne, with expectations that it may need to fall toward about 3,500 yuan per tonne before large-scale adoption becomes realistic.

Green hydrogen also remains more expensive than fossil-based hydrogen. Even in the low-cost "Three Norths" region, green hydrogen costs about 13–15 yuan per kilogram, while coal-based hydrogen near coal-producing regions can cost less than 10 yuan per kilogram. In the more developed eastern regions, green hydrogen is even more expensive.

Technical barriers remain as well. Key challenges include improving CO₂ hydrogenation catalysts and scaling biomass gasification furnaces. On the regulatory side, hydrogen is still treated as a hazardous chemical in China, and the legal framework for its storage and transportation remains incomplete. Safety standards for ammonia and methanol also need to be strengthened.

Green power, storage and standards

China has not yet created a formal market premium for green hydrogen, but implicit incentives already exist. For example, some project approvals require a certain share of green hydrogen capacity. As regional carbon regulation tightens, these requirements could become stricter.

A key technology pathway is direct connection to green electricity. As wind and solar capacity continues to grow, not all renewable power will be easy to feed into the grid. One solution is to connect renewable energy directly to flexible industrial loads, such as hydrogen production, using fully off-grid or partially grid-connected models.

This matters because the falling cost of wind and solar power is gradually creating the economic basis for green hydrogen production. At national level, China is actively encouraging integrated projects that combine green hydrogen, green ammonia and green methanol production with direct renewable electricity supply.

Experts at the conference argued that cost reduction should not come mainly from destructive price wars between companies, but from technological breakthroughs in key bottlenecks.

Storage and transport are seen as weak links. Much more research has focused on hydrogen production and fuel cells than on the infrastructure needed to move and store hydrogen at scale. In the future, storage, transport and pipeline infrastructure may become decisive. One proposal is for China's national pipeline company to take a leading role in planning hydrogen pipelines and storage infrastructure in the "Three Norths" region.

Carbon markets could also become an important mechanism. If shipping is included in China's national emissions trading system, companies using green fuels could save carbon allowances and sell them on the market. This would create a market-based incentive for green fuel adoption, rather than relying only on subsidies or administrative targets.

Standards and certification are another bottleneck. China needs to accelerate the creation of its own green fuel standards and certification system. One important question is whether industrial carbon sources – for example CO₂ from chemical plants and thermal power plants – should be recognised as eligible carbon sources for green fuel production. This is highly relevant for both energy security and industrial transformation.

A "two standards" approach has been proposed. Under this logic, China could produce one set of green fuel products that meets strict EU certification requirements and can be exported at higher prices, while developing a separate domestic standard that does not simply copy the European model.

This is where Europe becomes central to China's green fuel strategy. EU rules are not only climate policy; they are also becoming a de facto global market signal. Producers that can meet European requirements may gain access to premium markets, while those that cannot may remain dependent on lower-margin domestic demand.

The filter ahead

Globally, the hydrogen sector is still at an early stage. The IEA estimates that low-emissions hydrogen production grew in 2024 and was on track to reach around 1 million tonnes in 2025, but still accounted for less than 1% of total hydrogen production.

That puts China's challenge into perspective. The country has scale, equipment manufacturing capacity and a large project pipeline. But the next phase will be harder: fewer subsidies, tougher competition, stricter standards, stronger links to carbon markets, and a need to connect green hydrogen production with real demand in shipping, chemicals, aviation fuels and industrial decarbonisation.

China's hydrogen industry is no longer just expanding. It is being filtered. The companies that survive the next few years will likely be those that can combine low-cost renewable power, core technology, storage and transport solutions, certification capability, and access to international markets – especially Europe.

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