Opinion

Hydrogen costs in 2024: what you need to know

Near-term costs have risen across the board, but opportunities exist to bring costs down in the longer term

5 minute read

Greig Boulstridge

Research Associate, Hydrogen

Greig is responsible for market tracking and ensuring data quality in Wood Mackenzie’s Lens Hydrogen platform.

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The hydrogen market faces a range of challenges, from policy uncertainty to lack of offtake, renewable feedstock sourcing and supply chain challenges. However, hydrogen’s key problem in 2024 is that it’s simply too expensive to produce and transport. So, can costs be brought down in the long term? 

We recently presented a series of webinars based on data and analytics from our Lens Hydrogen platform, looking at ongoing cost trends, specific project economics and the economics of transportation and trade in the hydrogen sector. Fill out the form at the top of the page to download the slide show from the webinars, or read on for a quick summary. 

Current hydrogen cost trends 

Costs have risen for all renewable markets since 2020, and hydrogen is no exception. For one thing, hydrogen projects are capital intensive, and higher risk means higher than average rates for borrowing in what is already a high-rate environment. For another, the levelised cost of electricity (LCOE), a key element of the levelised cost of hydrogen (LCOH), has surged.  

Policy support in the form of production-side incentives and decarbonisation mandates is helping to reduce both price and offtake risk, which in turn is enabling first-mover projects to obtain debt more cheaply. However, aside from electricity costs, a series of other issues remain that continue to impact hydrogen production costs.  

Currently, engineering, procurement and construction firms (EPCs) and original equipment manufacturers (OEMs) have a lack of experience of commercial-scale hydrogen projects. As a result, EPC capacity is constrained, and project cost estimates tend to be high. At the same time, economies of scale are not yet being realised.  

Similarly, project developers and owners themselves often lack experience. They are therefore likely to go back to the drawing board multiple times to reduce costs and potentially change scope in what is a relatively new and unpredictable market. Meanwhile, higher contingency costs and additional supervision add to owner budgets. 

In time, though, capital costs will decrease as OEMs and EPCs develop greater expertise. Standardisation will reduce the amount of engineering required for each project, while OEMs will be able to increase manufacturing and diversify suppliers to reduce risk.  

An effective power sourcing strategy will also be important, particularly in the near term, with geographies needing to play to their strengths in this respect and optimise accordingly.  

Don’t forget to download the presentation, in which you’ll find a comparison of costs for two projects – one with access to low-cost electricity but at a low load factor, the other with higher electricity costs but a higher load factor. 

Improving specific hydrogen project economics  

While it will take time for standardisation and economies of scale to reduce LCOH generally, there are a number of approaches developers can take to gain an economic advantage at the project level.  

Target end-use sector: Higher prices can be achieved by selling into certain sectors like those which are able to pass costs onto consumers, or that benefit from government support. 

Sourcing cheaper technology: Chinese electrolysers are typically much cheaper than Western-made equivalents, if local import rules allow their use; and Chinese offerings are becoming increasingly compelling due to impressive technical performance and attractive warranties. 

Choice of power source: Electricity typically accounts for most of the levelised cost for green hydrogen; using behind-the-meter power sources or co-locating the electrolyser with renewable power generation can therefore significantly improve profitability. 

Locating close to natural gas supply: For blue hydrogen projects, building a plant close to natural gas reserves in areas such as the Middle East or Texas can significantly reduce carbon emissions from gas transport, lowering overall carbon intensity, and potentially accessing higher levels of subsidy support. 

Integrating with off-takers: Locating the electrolyser on the same site as the intended end-user saves on capex costs for a pipeline, as well as minimising losses often incurred when transporting hydrogen. 

Using credible technology suppliers: Reducing technology risk by sourcing technology – particularly electrolysers – from reputable OEMs with a strong track record may improve bankability and thus financing costs for a project. 

Don’t forget to fill out the form at the top of the page to download the presentation, which includes a case study showing the potential impact of various measures on net present value, internal rate of return and payback period for a real (anonymised) example project. 

Hydrogen transportation and trade flows 

As global trade in hydrogen begins to take off, assessing midstream costs will be critical to understanding the benefits of each means of transporting hydrogen. Despite considerable emissions, ammonia is the most promising carrier for seaborne trade, principally for reasons of ease of adoption and cost. 

By converting hydrogen to ammonia, producers can leverage the existing vessel fleet and export/import infrastructure to ship their product to a port close to the final consumer. Once at its destination, the ammonia can either be used directly, for example in the power sector, or cracked back into hydrogen ready for use. However, while ammonia synthesis and shipping result in 5% losses, cracking by itself incurs 24% - overall, almost 30% of the low-carbon hydrogen produced would be lost. Despite these meaningful losses, ammonia cracking can still make sense for markets with a high LCOH. 

What’s more, compared to liquefied hydrogen, ammonia has higher energy density and lower energy requirements for transportation. As a result of these advantages, our intelligence indicates that among low-carbon projects targeting exports, 65% are aiming to produce ammonia as a carrier. 

On the downside, synthesising ammonia is quite carbon intensive, as is cracking it back into hydrogen, and transport vessels run almost exclusively on bunker fuel oil. Exporters will therefore need to focus on ways to reduce emissions from production, transport and processing. The presentation includes an analysis of shipping costs by vessel size and distance for a range of sea routes, demonstrating the significant potential impact on overall LCOH.  

Learn more 

Remember to fill out the form at the top of the page to download the presentation, which has a range of charts and graphics exploring these topics in more detail. 

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