Humans have been producing hydrogen for hundreds of years using different method. Today, more than 85 million tons of hydrogen are produced a year
More than 95% of the hydrogen produced is produced from fossil fuels, emitting almost 10kg of CO2 per kg of hydrogen produced.
Green hydrogen cost: Why wind and solar energy change the equation
The different colors are used to categories different types of hydrogen production technologies. Green hydrogen, Blue hydrogen and grey hydrogen
However, historically production has been produced from fossil fuels or through coal gasification. It is called grey hydrogen. Or has been produce from natural gas through a process called steam methane reforming (SMR) which called blue hydrogen. Blue hydrogen is a transitional hydrogen.
Green hydrogen
Green hydrogen is produced using water electrolysis and electricity. As long as the electricity is from clean power, green hydrogen has zero carbon emissions. The main challenge green hydrogen production faces today are cost and transportation.
We are a green hydrogen production solution supplier using wind power and solar power or hybrid power.
The higher the proportion of hydrogen production use wind power/solar power, the lower the cost of green hydrogen production. Because, the cost of purchasing the electricity from grid is always higher than the price of selling electricity to the grid.
Although existing PEM electrolyzer can adapt to larger power fluctuations, such as the power can fluctuate from 20% to 110%, it mainly adapts to current changes and is not the voltage, the adaptability to voltage fluctuations is still similar with the traditional electrolysis. Whether the wind power or solar power, the power changes are all caused by voltage changes, so existing PEM electrolysis using wind or solar power for hydrogen production still needs to be connected to the grid to maintain the relatively stable voltage fluctuations. The proportion of wind/solar power is still not high, and grid electricity is still used to hydrogen production at most of time. The cost reduction of green hydrogen is limited.
Electrolysis is a traditional technology with hundreds of years. However, the cost of traditional green hydrogen is too high to compete with grey, even with blue hydrogen. This is the reason why the amount of green hydrogen is rounding less than 4% in hydrogen production industry.
But the good news is, when use wind/solar power to produce hydrogen, the costs of green hydrogen will drop rapidly. In the process of hydrogen production, the higher the proportion of wind power/solar power generation, the lower the cost of green hydrogen. If 100% use wind/solar power without grid power to hydrogen production, the cost of green hydrogen is the lowest. Because the cost of purchasing the electricity from grid always higher than selling electricity to grid.
But the problem is that, the wind/solar power are always unstable, the electrolysis requires relatively stable power.
Green hydrogen is clean – it has no greenhouse gas emissions associated to its production. This doesn’t help much if it is far too expensive, but with the falling cost of renewable electricity, the cost of green hydrogen too is falling rapidly. Furthermore, green hydrogen can be produced anywhere there is a (renewable) electricity source and water, making it flexible geographically. Today, one of the largest cost components of hydrogen is its distribution. If an electrolyser enables producing closer to the site of use, significant cost savings can be had, in part offsetting today’s higher cost of production for distributed off-taker.
Cost curves for green hydrogen have been declining rapidly. Initiatives such as the US Department of Energy’s Hydrogen Shot are accelerating this cost decline, pursuing a target of 111 – $1 per 1 kg of hydrogen in 1 decade (by 2030). We anticipate that green hydrogen will be the preferred path for hydrogen manufacture beyond 2030 when costs approach those of grey hydrogen. A major remaining concern is water sustainability issues given the significant water input requirement for electrolysis.
We identified four main types of electrolysers. Without going into the technical details, it is worth being aware of their comparative advantages and disadvantages. Today, alkaline remain the most commonplace but most new projects are PEM. PEM electrolysers have the unique advantage of being able to ramp up and down quickly, making it possible to turn on when there is excess renewable power (the sun is shining or the wind is blowing more than there is demand) and to turn off when there is not.
Green hydrogen cost: Why wind and solar energy change the equation
The extent and speed at which green hydrogen will contribute to decarbonising industry will be driven by the evolution of its production cost. The production cost (also known as levelised cost of green hydrogen production, or LCOH) is dependent on two main factors. One of them is the capital cost of electrolysers discussed above. The second and typically even more important factor is the availability of cheap renewable electricity, which can be broken down into two components: The electricity price and the capacity factor.
The capacity factor represents the percentage of the maximum production capacity of an electrolyser utilized in a given period. The main reason for the capacity factor to be substantially below 100% is the availability and cost of electricity. When connecting an electrolyser to the grid, the capacity factor can be up to 100%, albeit may be lower to avoid buying electricity when it is most expensive. When directly connecting an electrolyser to a renewable power source, the capacity factor can range from ~25% for solar to ~35% for wind to ~100% when using non-intermittent sources of electricity.
To better understand the (different components of) LCOH, we analysed the cost based on three different scenarios (numbers are based on BloombergNEF’s most optimistic estimates):
Solar in United Arab Emirates: ~3ct/kWh at 20% capacity factor
Onshore wind in Brazil: ~2ct/kWh and 40% capacity factor
Hydropower in Iceland: ~4 ct/kWh at 90% capacity factor
The below image represents the hydrogen cost and its breakdown in different cost buckets for each of these scenario’s. As visible in the graph, the opex/capex split is highly dependent on the capacity factor. While capex represents ~60% of the cost in the UAE case with 20% capacity factor, only ~25% of LCOH is related to capex in the Iceland case with 90% capacity factor.
To better understand the impact of capacity factor and renewable electricity cost, we ran the numbers in the three different scenarios for a 100MW PEM electrolyser with a CAPEX cost of $1,000/kW (with 8% WACC, 35% BoP, 1.1 installation factor). The below sensitivity table represents the levelised cost of hydrogen production with electricity cost between $1-8 ct/kwh and a capacity factor between 10 and 100%. This cost only represents production and does not take into account any costs for transportation or storage.
The LCOH is significantly more sensitive to the cost of electricity than the capacity factor (Which is driven by the relative importance of opex versus capex). As electrolysers become cheaper, colocating them with renewable energy assets (with capacity factors of 30-50%) will be an increasingly economically attractive way to produce cheap green hydrogen.
The LCOH of $1.1-6.5/kg of green hydrogen is a wide range though partly overlaps with the $0.7-2.5/kg of grey hydrogen. Electricity prices as low as 3 ct/kWh are needed for green hydrogen to become cost competitive with grey hydrogen. Geographies with cheap renewables will be at the
forefront of green hydrogen adoption.
It is important to note that these costs are purely the production cost in isolation. Additional costs from compression, liquefaction, storage and distribution are significant for hydrogen and may change the playing field for green. Cost savings from locating electrolysers closer to where hydrogen is used can reduce delivered costs by as much as 50%. We will explore this more in our next article.
Cost: Carbon taxes will help favour green but won’t do it on their own
Finally, the cost competitiveness of green hydrogen versus grey hydrogen will improve remarkably if significant carbon incentives become widespread. As grey hydrogen production comes with 9kg CO2 emitted per kg hydrogen produced, grey hydrogen will become more expensive when carbon taxes are factored in. The below graphs illustrate the impact of carbon taxes on grey hydrogen prices compared to the green hydrogen production cost in 2022 and 2030, which is independent of carbon prices assuming the usage of 100% renewable electricity. The assumed electrolyser capex is $1,000/kW and $400/kW in 2022 and 2030 respectively. While carbon taxes will help to improve economic viability of green hydrogen, we need progress in electrolyser costs, efficiency, lifetime as well as increased availability of cheap renewable electricity for green hydrogen to disrupt the industry.
Summary
In the long term, green hydrogen is the most promising carbon-free hydrogen production method. The jury is still out on how the transition will look and different technologies might win for different applications.
The availability of cheap renewables will drive adoption of green hydrogen. Electrolysers are expected to be operated flexibly to (1) work with direct connection to renewables without the need for electricity storage (avoiding high costs from using the public grid for electricity distribution), or (2) to take advantage of volatility of prices on electricity market when connected to the grid.
Carbon prices will help favour green over grey but will not move the needle on their own. Electrolyser cost reductions and technology improvements and the continued the deployment of renewables are indispensable for the green hydrogen industry to contribute to a net-zero economy.
Finally, in this article we have looked at production cost in isolation. The ability to deploy electrolysers in a distributed fashion, locating them geographically close to the area of demand may reduce distribution costs significantly, with a potential to reduce the cost of delivered hydrogen by as much as 50%. Watch out for our next article where we dive into hydrogen storage and distribution.