How commercial is low-carbon hydrogen?
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Chairman, Chief Analyst and author of The Edge
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Net zero can’t be achieved without low-carbon hydrogen, arguably a silver bullet for hard-to-decarbonise sectors like ammonia, refining and steel. Our team’s global benchmarking model will show which hydrogen technologies and which countries are most competitive on costs. I quizzed Flor De la Cruz, principal analyst, and Bridget van Dorsten, senior research analyst, about the first in a series, the outlook for low-carbon hydrogen supply in Europe.
Why is the new hydrogen analysis important?
The hydrogen landscape is hot, nascent and rapidly evolving. The industry needs to know where in the world the advantaged opportunities are. We aim to deliver the most comprehensive global benchmarking of project economics for low-carbon hydrogen. covers fourteen markets, six generation technologies and four electrolysis technologies and is integrated with the relevant power, gas and carbon analysis. The Americas and Asia Pacific packs to be released in the next few weeks will complete the global picture.
How big could low-carbon hydrogen be? Green hydrogen produced from renewables and blue hydrogen produced from methane paired with carbon capture and storage could together meet 5% of global final energy consumption by 2050 in our base case Energy Transition Outlook, up from zero today. In our AET-1.5 °C scenario, it could be twice that share.
Europe is extremely ambitious aiming for 20 Mt of blue and green hydrogen by 2030 from a standing start. The goal is for half to be produced domestically, and the big challenge for European projects is cost. To compete with fossil fuels in hard-to-decarbonise sectors, low-carbon hydrogen will have to be priced below EUR3/kg. If that’s not possible, Europe will have to rely more on imports.
How close are projects to commerciality?
There’s a lot of work to do. Projects achieving FID today aren’t representative of the future. Most are smaller projects, integrated with offtakers and funded by oil and gas companies or ammonia players that already produce and consume hydrogen. It’s chicken and egg: there isn’t yet a market for new volumes and demand growth awaits commercially priced volumes.
As for green hydrogen, it’s well short of commerciality. Standalone green hydrogen projects have breakeven costs between EUR6/kg and EUR14/kg, depending on renewables feedstock, whether offshore wind, onshore wind, or solar and geographical location.
Blue hydrogen is much closer to the commercial threshold on our assumptions. Future costs range between EUR2.0/kg and EUR3.5/kg for projects FID’d from 2023 onwards and based on our long-term forecasts for gas prices, carbon price and CCUS. However, gas price volatility is one inherent risk. Another is Europe’s stringent criteria on through the value chain, including the source of upstream gas.
What will drive costs down?
Industrialisation is key – we expect scaling up will reduce green hydrogen costs by around one-third by 2030 and by half by 2050. But costs will still be above the EUR3/kg threshold beyond this decade.
Government support is also needed, and likely will be a contracts-for-differences (CfDs) approach in Europe. CfDs or similar constructs can bridge the cost/price gap between sellers and buyers, financing the investment needed to deliver the 2030 targets.
Combining renewables feedstocks could be a game-changer for costs in certain locations. Capacity factors for offshore wind can be over 50% and below 15% for solar, meaning extended periods of electrolyser downtime, which kills the economics of a single-technology standalone project. Projects can counter the variability of wind and solar by buying competitive power off the grid, combining two generation technologies or both. Our analysis suggests a green hydrogen project with a EUR40/MWh PPA supporting at least 70% capacity factor could achieve a breakeven competitive with blue hydrogen.
Which countries are advantaged in low-carbon hydrogen?
Each country will pursue its own strategy aligned with the most advantaged feedstock. In northwest Europe, that will most likely be green hydrogen with onshore or offshore wind. Norway, UK and Netherlands are among those with the access to gas and infrastructure (including CCUS) to produce blue hydrogen.
In southern Europe, blue hydrogen is largely out of the equation, but land availability supports large and burgeoning low-cost solar and wind capacity. These feedstocks may offer the best opportunities for combined renewable portfolios for green hydrogen production anywhere in Europe.
Lastly, the high proportion of renewables and low-carbon intensity in some power markets, Portugal being one, opens the possibility to connect into the grid to complement project feedstock during down times. That option is less likely in Northern Europe where power markets can have higher carbon intensity.