Green hydrogen can be produced for €2-2.5/kg in Europe by 2030 in an optimistic scenario—the level it needs to be to be cost-competitive with blue hydrogen production, according to analysis by Aurora Energy Research. 

But this scenario relies heavily on accelerated reductions in installation costs for electrolysers and the siting of production in specific regions—both in terms of low cost renewable generation but also in terms of exemptions from costs such as grid connection.

“The cost of producing hydrogen will fall quickly over the next two decades but reaching €2/kg in Europe will be a challenge,” says Anise Ganbold, global energy markets lead at Aurora Energy Research.

“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.”

“The cost of producing hydrogen will fall quickly over the next two decades,” Ganbold, Aurora

The report identifies four main business models for the production of green hydrogen. Inflexible electrolyser—which is grid connected and runs at a consistent 95pc load factor. Flexible electrolyser—which is grid-connected but can choose to operate at times of low power prices.

Co-located—an electrolyser connected to a dedicated renewable asset. And co-located (grid) which is the same model but with a connection that allows the electrolyser to run from the grid at times of low renewable generation from the dedicated asset.

Co-located projects will produce the cheapest green hydrogen, modelling by the firm shows, with electrolysers paired with onshore wind in Norway the lowest cost option, closely followed by those paired with onshore wind in Iberia.

“Hydrogen produced by a ‘right’ sized electrolyser co-located with renewables is always cheaper than grid-connected electrolysers,” says the firm’s analysis.

Getting the right size of electrolyser for such projects will be key to reducing costs—too large and the electrolyser is under-utilised, too small and excess renewable generation is unused.

The report suggests that the ideal ratio is about 1:3, for example a 30MW electrolyser powered by 100MW of renewable generation.

The co-located (grid) model can in some cases reduce costs even further in some cases, but it is dependent on additional levies and costs in particular regions.

€2.5/kg - Cost of blue hydrogen production in Europe

These costs are one of the reasons why grid-connected electrolysers are more expensive to operate. They can form between 25-50pc of wholesale electricity costs, which in themselves form a large tranche of overall operating costs.

Some countries—for example France, Norway and Sweden—have tax exemptions for electrolysers and these countries tend to be the ones where grid-connected green hydrogen production is the cheapest.

Within the two grid-connected models flexible electrolysers tend to have have significantly lower costs and carbon emissions than inflexible ones, but both will struggle to compete on cost with blue hydrogen production, the report finds.

It is unclear as of yet whether what such production plants powered from the grid would need to do to meet the additionally requirements outlined in the review of the renewable energy directive (RED II).

As it stands the review requires electrolysers to be subject to an additionality assessment—meaning that they are generating hydrogen from additional renewable resources.

The RED II regulations are currently being revised as part of the green new deal and the EU’s increased ambition to have net-zero emissions by 2050.

These requirements should be phased in and their effect evaluated by a proper market assessment, according to lobby group Hydrogen Europe.

The EU’s Hydrogen Strategy aims to produce 1mn t of renewable hydrogen and deploy at least 6GW of installed electrolyser capacity by 2024.

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Author: Tom Young