Green hydrogen: production costs will fall quickly over the next two decades, but electrolysers will still need policy support to reach maturity

  • Latest insight report from Aurora Energy Research examines several electrolyser business models in search of a method of producing hydrogen for less than €2.5/kg, below the price of blue hydrogen
  • Analysis suggests that electrolysers paired with onshore wind in Norway will produce the cheapest green hydrogen in Europe in the 2020s, closely followed by those paired with onshore wind in Iberia
  • In an optimistic scenario, green hydrogen costs could fall to between €2 and €2.5/kg by 2030. This relies on the accelerated reduction in installation costs of electrolysers and renewables
  • Hydrogen produced using grid electricity will be more costly – largely due to grid fees and environmental levies on electricity bills. Some countries are exempting electrolysers from paying these fees in order to accelerate the uptake of hydrogen
  • Producing hydrogen in this way can be highly carbon intensive in some power systems such as Germany and Poland; although this is not the case in power systems dominated by nuclear or renewables such as in France or the Nordics
  • Both the UK and Europe have set challenging targets for Net Zero emissions by 2050, involving switching energy consumption across the whole economy to zero-carbon sources. Hydrogen will play an important role in reducing emissions particularly in ‘hard to abate’ activities in industry, heating, and heavy-duty transport.

Since defining Net Zero targets, governments around Europe have turned significant attention to the potential of low carbon hydrogen, which can be produced either from electrolysis of water (‘green hydrogen’) or from natural gas with CO2 capture (‘blue hydrogen’). Many governments in Europe are especially promoting electrolysers – providing funding, compensation, or tax exemptions for hydrogen electrolysers.

Despite rapidly falling capital costs for equipment, the major cost driver for hydrogen production via electrolysis remains the cost of electricity, and developers and investors are seeking ways to minimise this potentially prohibitive production cost, particularly where there is a lack of planned incentives.

Aurora has examined four ways of producing hydrogen with electrolysers to find out how costs of producing green hydrogen could come down to compete with blue hydrogen, which has a cost of around €2.5/kg.

Electrolysers paired with onshore wind in Norway will produce the cheapest green hydrogen in Europe in the 2020s, closely followed by onshore wind in Spain

Aurora examined the business model where an electrolyser is paired with an on-site renewable electricity generator. Operated in ‘island mode’ (without a grid connection), this business model avoids the fees faced by a grid-connected electrolyser. The study concludes that electrolysers in Norway paired with onshore wind result in the lowest overall cost of hydrogen due to the region having excellent wind resource, which both reduces the cost of wind power produced, and improves the utilisation and economics of the electrolyser. Outside of Scandinavia, the lowest costs were achieved by electrolysers in Spain paired with onshore wind.

In order to achieve the lowest possible cost of hydrogen, it is crucial to optimise the electrolyser size relative to the renewable asset. By calculating the optimum size, the electrolyser operator can reduce

the cost of hydrogen production by up to 40%, compared to building an electrolyser of the same nameplate capacity as the renewable plant (i.e., a 1 MW electrolyser coupled to a 1 MW wind farm).
Co-located electrolysers not only achieve the lowest LCOH in the study, but also benefit from having no direct carbon emissions. Hydrogen produced via renewables in this way will be considered sustainable by the EU Delegated Act and could also fulfil additionality criteria for its RED-II Renewable Energy Directive – meaning that such schemes are eligible for Government support in a number of European countries.

In an optimistic scenario, green hydrogen costs could fall to between €2 and €2.5/kg

Electrolyser projects will need to achieve significant cost reductions in order to compete with the cost of “blue hydrogen” on economic terms. Aurora’s analysis suggests that further reductions in the capital cost of electrolysers and renewables could lead to a significant reduction in the cost of hydrogen production. By combining multiple factors it is possible to achieve a hydrogen production cost below €2.5/kg.

Hydrogen produced by grid electricity will be more costly, largely due to grid fees and environmental levies on electricity bills. Grid hydrogen will also have carbon emissions attached to it, though analysis suggests that in many countries, the produced hydrogen could still meet carbon thresholds

Electrolysers connected to the electricity grid have to pay charges to access the grid, as well as environmental levies to support renewables subsidy schemes in certain countries. These additional costs make hydrogen from grid-connected electrolysers more expensive. The charges applied vary by country, location, connection size and sometimes the time of day or season – depending upon the structures individual nations use to apply the costs. The three countries across Europe with the highest additional charges are Denmark, Germany, and Great Britain, although Germany and Great Britain are among a few European countries which have put in place exemption schemes to offset these costs for electrolysers and other large scale industrial users of electricity. However, the combination of high charges and no exemptions in Denmark means that producing hydrogen is prohibitively expensive. In such cases, policymakers will need to consider exemptions or incentives if they are to spur investment in this technology.

Grid-connected electrolysers can be operated flexibly in order to avoid times with high electricity prices and charges. Aurora’s analysis show that operating a grid-connected electrolyser in this way can significantly reduce its overall operating cost versus an electrolyser which runs in all hours of the year.
Germany has in place numerous grid fee exemptions for electrolysers built before 2030 that can certify their ‘green’ credentials. The impact of these exemptions is huge – if electrolysers built after 2030 must pay the full EEG levy, the cost of hydrogen production in Germany could increase by as much as 90%.
When electrolysers are connected to the grid, the hydrogen that is produced is the carbon intensity of the grid in the hours the electrolyser is using power. Aurora calculates that the carbon intensity of an electrolyser in Germany, which has a coal and gas heavy power generation mix, is nine times higher than in Spain, which has a very high proportion of renewable power.

Anise Ganbold, Global Energy Markets Lead at Aurora Energy Research commented:

“The cost of producing hydrogen will fall quickly over the next two decades but reaching €2/kg in Europe will be a challenge. In our analysis we found that only in an optimistic scenario, with much lower costs and a higher electrolyser efficiency, can costs fall to that level. In order to encourage costs to fall faster, and help make green hydrogen cost competitive with blue hydrogen, governments can support renewables buildout and exempt electrolysers from paying grid fees and taxes.”

Richard Howard, Research Director at Aurora Energy Research commented:

“The global pipeline of hydrogen electrolyser projects is growing very rapidly as utilities and Governments explore the use of hydrogen as a low carbon fuel. There are almost 200 GW of electrolyser projects in development in Europe alone, with a focus in Germany. A number of business models are emerging for these electrolysers – either connecting to the grid and operating flexibly to minimise their production costs; or connecting directly to on-site renewables. Key to the success of these projects is optimising the business model in order to minimise costs. In certain countries, policy changes to incentivise electrolysers or exempt them from certain grid costs would be required in order to accelerate deployment of this technology.”

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From its Oxford academic roots, Aurora Energy Research has grown to become the largest dedicated power market analytics company in Europe, providing data-driven intelligence for strategic decisions in the global energy transformation. We are a diverse team of more than 170 experts with vast energy, financial and consulting backgrounds, covering power, hydrogen, carbon and fossil commodities. We are active in Europe, Australia and the US, working with world-leading organisations to provide comprehensive market intelligence, bespoke analytic and advisory services, and cutting-edge software solutions.

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