The price of carbon would have to exceed $135/t CO₂e by 2030 to ensure the cheapest green hydrogen production is competitive with the cheapest grey hydrogen production in northwest Europe, according to the IEA’s Northwest European Hydrogen Monitor report.

Allowance prices within the EU emissions trading system ranged from €66–81/t CO₂ ($68–84/t CO₂) in November and are expected to rise towards 2030 as the market tightens.  

For European grey hydrogen, natural gas typically accounts for 70pc of the levelised cost of hydrogen production (LCOH) and for about 80pc of the operating expenses. As such, Russia’s invasion of Ukraine and the ensuing spike in gas prices resulted in the LCOH of grey hydrogen rising from $1.7–2.4/kg in 2021 to more than $5/kg throughout the first three quarters of 2022.

“Without the harmonisation of blending thresholds, the divergence of gas qualities in adjacent markets could occur and consequently lead to interoperability issues” IEA

This has resulted in green hydrogen now being able to compete with grey on cost, according to the IEA. The agency estimates that the LCOH of offshore wind-powered electrolysis is already competitive with production from unabated steam methane reforming (SMR), as is electrolysis via onshore wind, assuming a gas price above $20/mn Btu.

Northwest Europe accounts for half of the continent’s hydrogen demand. The ten countries considered in the report—Austria, Belgium, Denmark, France, Germany, Luxembourg, the Netherlands, Norway, Switzerland and the UK—use a combined 4mn t/yr of almost entirely grey hydrogen produced via SMR or autothermal reforming, primarily in the refining and petrochemicals sectors.

“As near-term gas futures indicate that the natural gas market will continue to be tight until at least the mid-2020s, this could provide incentives for industries to replace SMRs with electrolysers,” says the IEA.

The agency’s modelling assumes the cost of renewables and electrolysers will continue to fall, keeping green hydrogen cost-competitive even as gas prices normalise.

“However, the cost evolution of these technologies is uncertain even in the near-term due to the current issues in clean energy technology supply chains and high raw material prices,” the report cautions.

Great ambitions, few FIDs

As well as price, the IEA report modelled deployment. Northwest Europe is expected to play a significant role in both the demand and supply of low-carbon hydrogen. The ten countries analysed by the report target a combined 30–40GW of electrolyser capacity by 2030. And if all announced and planned projects become commercially operational, the region would produce nearly 14mn t/yr of low-carbon hydrogen by the target date—although this falls to 6.2mn t/yr if efficiency and utilisation rates are accounted for.

However, just 2pc of this expected capacity has taken FID or started construction, with the majority of projects in the region still at the conceptual or feasibility study stage, according to IEA data.

$1.7–2.4/kg – Cost of grey hydrogen in 2021

Similarly, although the IEA estimates 12mn t/yr of hydrogen could be traded globally by 2030, only 0.2mn t/yr of export-focused projects have reached advanced stages of development due to a lack of firm offtake agreements and import contracts.

Part of the delay is due to uncertainty around how regulations between different countries in the region will be harmonised. While the European Commission has proposed an emissions threshold of 3.38kg CO₂e/kg of hydrogen, the UK’s standard defines low-carbon hydrogen as having an emissions intensity below 2.4kg CO₂e/kg of hydrogen.

Similarly, even within the EU, blending limits for hydrogen in the gas network differ from country to country. Of the analysed countries, six allow for blending—but the volume of hydrogen that can be blended ranges 0.02–10pc.

“Without the harmonisation of blending thresholds, the divergence of gas qualities in adjacent markets could occur and consequently lead to interoperability issues,” the report warns.

The EU is also progressing a proposed Hydrogen and Decarbonised Gas Market Package, aimed at integrating low-carbon gases into the wider European network, with a tariff exemption up to 2031 and a 5pc cap on hydrogen blends introduced by October 2025. Amendments to the package are being negotiated.

While northwest Europe has 1,600km of dedicated hydrogen pipelines in place, these are primarily connected to industrial consumers. Based on current targets, the region’s hydrogen network could increase by almost eightfold, to more than 12,000km, by 2030. Repurposing gas pipelines for use with hydrogen could cut investment costs by 50–80pc compared with the cost of building new pipelines, the IEA says.

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Author: Polly Martin