The estimated cost of producing green hydrogen in the Netherlands has increased significantly over the past few years due to higher electrolyser capital costs, wholesale electricity prices and grid tariffs, according to a study carried out by independent research body the Netherlands Organisation for Applied Scientific Research (TNO).

The levelised cost of hydrogen (LCOH) production estimated by the study was in a range from €9.3–15.9/kg ($10–17/kg).

This is significantly higher than other studies carried out over the past two years, which have estimated costs in a €6–12/kg range (see Fig.1).

Project investment costs have increased in recent years due to higher cost of energy, raw materials and labour.

Another major factor for projects in the Netherlands is grid tariffs, which have more than quadrupled since 2021 and now contribute more than €2/kg to the total LCOH estimates.

“Germany and Belgium have exemptions to grid tariffs for connecting electrolysers, and there are discussions going on about how to limit the grid tariff in the Netherlands as well, but there is no final decision yet,” said Marcel Weeda, hydrogen expert at TNO and one of the authors of the study.

“But the costs are there, and someone has to pay them, and that will always form part of the discussion,” he added.

After grid tariffs, the biggest contributors to the total LCOH costs are the electricity price and the unit capital costs for electrolysers. 

Wholesale electricity prices in Europe have fallen in recent quarters. In 2023, the European Power Benchmark averaged €95/MWh, down from €230/MWh in 2022.

But unit capital costs have escalated dramatically over the same time period and are one of the key differences between the cost estimates of the TNO study and other studies.

“It is a very dynamic field,” said Weeda. “To bring down costs, you need to be able to optimise and gain economies of scale. But first you have to build these installations before you can start learning. So there is an early mover disadvantage.”

The TNO study—which was sponsored Dutch Ministry of Economic Affairs and Climate Policy—took 14 sets of data from 11 green hydrogen projects in the Netherlands. The projects evaluated were all at different stages, from pre-FEED through to one that has taken FID.

But the relative advancement of a project did not correlate to higher or lower cost estimates.

“There was consistency between the numbers they provided, but unfortunately consistency in all being high numbers,” said Weeda.

FIG.1: GREEN LCOH ESTIMATES

Policy prescription

As well as exemptions from grid tariffs, subsidies on investment and operating costs are likely to be needed to help projects bring down costs, according to the study.

In addition, projects that receive subsidies must share knowledge and experience as much as possible, to contribute to the wider acceleration of the hydrogen transition.

Projects that achieve a lower LCOH are more likely to receive subsidy under the European Hydrogen Bank’s auction system.

In the Netherlands, seven projects were submitted for the first round of EHB auctions, with an average bid price of €9.8/kg.

Projects that have higher costs than this may have to explore different revenue streams, such as the sale of oxygen, the provision of supporting services to the electricity grid or the sale of EU emissions trading scheme (ETS) allowances. A further option is to find offtakers who are initially willing to pay a premium.

A separate study carried out by management consultancy Boston Consulting Group (BCG) at the end of last year found that small amounts of demand for green hydrogen may emerge from European refineries in the €6–10/kg price range.

But meaningful demand will emerge only from other industrial sectors such as methanol, steel and ammonia producers at a price point of around €6/kg or lower, according to the report, titled: Turning the European Green Hydrogen Dream into Reality: A Call to Action.

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Author: Tom Young