What is the real cost of green hydrogen?
NOVEMBER 28, 2020tags: hydrogen
By Paul Homewood
h/t Dennis Ambler
There’s an informative, but also rather garbled, article in Euractiv concerning the cost of hydrogen
Green hydrogen is much in the news. In October Cap Gemini published a report called “Net Zero 2020”. Page 36 had a section on green hydrogen with the declaration “At around €6 per kg, green hydrogen is not competitive today with fossil energies (parity at €1/kg equivalent to €25/MWh)”.
Last week another hydrogen organisation announced itself “the Renewable Hydrogen Coalition” accompanied by (yet another) report on green hydrogen which contained (yet another) price estimate for green hydrogen – €6/kg.
Absent from the above is any explanation as to how these price were derived, a common feature of reports and blogs on the subject.
The EU and green hydrogen
Given recent European Commission publications (e.g. Hydrogen Strategy) and declarations by various EU Member States such as Germany, green hydrogen now has a prominence which contrasts with its position at the start of the year.
However, the starting point for green hydrogen policy development in the EU and Member States has to be a good understanding of how current green hydrogen prices are formed, where they currently stand and their likely future trajectory. What follows provides a true and clear view of green hydrogen price formation with current and future price developments.
Green hydrogen price formation
Green hydrogen is produced by electrolysers that use renewable electricity and water to produce hydrogen and oxygen. There are two main cost elements, capital costs (capex) for the electrolyser installation and operation (and maintenance) costs (opex).
By far the largest operational cost (circa 95%) is the cost of electricity. Electrolyser manufacturers estimate the capex/opex split at roughly 20/80 (at a utilisation rate of 40% of full load over a year). This means that 80% of costs are attributable to opex and thus electricity and 20% to capex.
The other important metric for determining green hydrogen price formation is the amount of electricity needed to convert water into hydrogen. The most commonly used figure is between 55kWh and 60kWh of electricity per kg of hydrogen production. The industry expects this to fall to around 50kWh by 2025/2030 due to technology improvements.
Public presentations by companies such as Hydrogenics and conversations with other electrolyser manufacturers confirm that the assumptions and approaches in the two preceding paragraphs are realistic and valid.
Green hydrogen production using industrial electricity prices
The table shows green hydrogen price estimates by three different organisations. Using information about green hydrogen price formation, it is possible to re-construct the electricity price on which the green hydrogen price was based. The numbers obtained suggest that industrial electricity prices (see Eurostat) were used as a basis for the green hydrogen price.
Green, grey and blue hydrogen: comparing apples and zebras
Grey and blue hydrogen are produced using natural gas which attracts almost zero taxes and levies.
By contrast green hydrogen prices have taxes and levies imposed on the feedstock (electricity) which is double/quadruple the original price of the feedstock (renewable electricity). It is neither rational nor sensible to make such a comparison between a heavily taxed product (green hydrogen) and a zero taxed product (grey or blue hydrogen).
Nevertheless, almost all commentators on the subject think that this is a valid comparison
Green hydrogen: real-world pricing
Iberdrola recently announced a project (to be completed during 2021) to build 100MW of PV and couple this to 20MW of electrolysers to produce green hydrogen that would be piped to be used at an industrial plant producing fertiliser. The cost of producing electricity from PV in Spain (or Portugal) is well understood. Conservatively, the cost is around €25/MWh. Recent projects in Portugal have been priced in the range €12 to €20/MWh.
Using the green hydrogen price formation metrics outlined previously and €25/MWh as the electricity price gives a green hydrogen price of €1.65/kg. This price is based on the assumption that the PV farm is directly coupled to the electrolysers. The approach of direct coupling between a renewable power station and electrolyser facility is becoming common.
Cap Gemini’s statement “green hydrogen is not competitive today with fossil energies (parity at €1/kg equivalent to €25/MWh)” is thus both untrue and true. Given Spanish (and Portuguese) electricity prices from PV, green hydrogen produced using this electricity is cost competitive now with both blue and grey hydrogen.
However, if the electricity system is and industrial electricity prices are used then green hydrogen is hammered by taxes and levies.
Given the above, the prices for green hydrogen proposed by Cap Gemini, BNEF, the Renewable Hydrogen Coalition/Breakthrough Energy and others and the price comparisons they make are highly misleading.
They are quite right that you should not compare electricity prices which includes taxes and levies against natural gas which does not.
However they shoot themselves in the foot by using this table to prove their point:
Now correct me if I am wrong, but I know of nowhere in Europe where retail prices of electricity are as low as 90 euro/MWh. In the UK, we are looking at around £150, which equates to 166 euro.
In other words, it appears that the studies they are complaining about have already excluded taxes and levies. Indeed according to OFGEM, these account for 28%, which would bring our 166 euro down to 120 euro.
The authors of this piece go on to use a solar farm in Spain as an example to show just how cheap green hydrogen really is. However, this solar farm feeds the electrolysis plant direct, thus avoiding all sorts of network costs.
That is fine for a small, local operation feeding a fertiliser plant. But for industrial scale hydrogen, electrolysers will need access to reliable, large scale and regular power from the grid. Like it or not, they will have to pay for all of the various transmission and network costs.
The latest round of offshore wind CfDs are currently priced at about £48/MWh, so adding on network and operating costs would leave us with a price of around £100/MWh. So even the 90 euro figure is probably understated, at least as far as the UK is concerned.
Meanwhile the article also gets the cost of fossil fuels wrong:
“At around €6 per kg, green hydrogen is not competitive today with fossil energies (parity at €1/kg equivalent to €25/MWh)”.
In fact, the wholesale price of natural gas is much less than 25 euro/MWh.
Even before the pandemic, gas has been trading at around 26p/therm, which equates to £9/MWh:
It is clear industrial scale green hydrogen will be hugely expensive in comparison to natural gas, and indeed steam reforming.
Little surprise then that the Committee on Climate Change concluded that the cost of electricity would have to fall to £10/MWh to be competitive with steam reforming, which is itself twice the cost of natural gas.