Green Hydrogen will BEAT the competition: Question is When, not IF…

Let’s start with the definitions first:

Most hydrogen produced today is from natural gas based SMR process, and it is widely referred to as Grey hydrogen (in cases BLACK). Production costs for Grey H2 vary based on local natural gas prices and are typically in the $1 — $2/kg range for most current assets.

When carbon capture & sequestration (CCS) is installed on the SMR, the H2 becomes Blue. The blueness depends on the amount of produced CO2 that is captured. There are only a few unique demonstration assets globally producing BLUE H2, because the economics don’t support it yet. The additional cost of CCS infrastructure can range from $0.5 — $1/kg H2 calling for carbon incentives of $50 -$100/ton CO2 to make this a competitive process.

As the name suggests, Green H2 is made from renewable sources, primarily a coupling of renewable power (Solar, Wind or Hybrid) with Electrolysis (splitting water into H2 and O2). Current production costs for Green H2 are about 2–4x that of SMR produced hydrogen. That said, with declining renewable energy prices, decreasing electrolyzer costs and other technological advancements, we assess that green hydrogen production costs can decline to as low as $1/kg (in select locations) in the next 5–10 years. As such, we expect Green H2 to become material in several parts of the world over the next 5–10 years.

The current global market for hydrogen exceeds 56 million tons/year, and Green hydrogen at $1/kg would be a compelling choice for this $75+ Bn existing sector, where H2 is used as a chemical (not fuel). While this may be an easy switch the total addressable market for green H2 can be several trillion $s if H2 becomes a material energy vector.

In the sections below, we take a closer look at the cost curves and highlight some of the technological improvements that are poised to drive the growth of green hydrogen sector.

Renewable Prices have Declined Sharply in Several Regions Worldwide

Solar PV prices continue to decline and PPAs of $20–30/kWh are very common these days in the US, Mexico, Chile and the Middle East. The Maktoum Solar Park in Dubai, for example will produce solar electricity at 2.99c/kWh; 1.2GW Sweihan solar PV project in Abu Dhabi will produce electricity at 2.42c/kWh and the 300MW Sakaka project in Saudi Arabia at 2.34c/kWh. Given the cost trajectory, it is possible that solar PV prices decline to 1–1.5c/kWh in the solar sweet spot locations (Middle East, Australia, North Africa, SE Asia etc.) in the not too distant future.

Solar project economics continue to improve

A key benefit of hydrogen is that it’s a lot more affordable to store than electrons thus most of the time it would make sense to directly convert intermittent renewable power to hydrogen and store (if needed) at that point. Green hydrogen can also be injected into the gas grid to serve as a buffer and provide low carbon heating. This further adds to the value proposition of green hydrogen.

Green Hydrogen Potentially Cost Competitive in Several Parts of the World?

The chart below shows the cost of green hydrogen assuming a higher electricity price of 6.6c/kWh at $400/kW electrolyzer cost. The reality is that today most of the electrolysis projects (excluding China) are being developed using a $800–1,000/KW electrolyzer system and non-renewable base load electricity. The cost of green hydrogen today at $800/KW electrolyzer cost is about $4/kg. Without using storage or CSP and assuming a 40% capacity factor, green hydrogen costs have the potential to decline to $2.25–2.75/kg at $400/KW electrolyzer cost. It also shows that in future at the projected cost of electrolysers and renewable power (at a capacity factor of 40% which is well possible in select locations with single axis tracking solar) hydrogen projection costs can be as low as $1/kg, well below Grey or Blue H2.

Green hydrogen project economics at various electrolysis scenarios (source: US DOE)

There is also a use case of producing H2 at the point of consumption (on-site). This use case mostly fits for smaller volume applications (such as hydrogen refueling station, or small-scale industrial set up) and saves the associated cost of supply & distributions. As shown in the chart below, the cost of producing green hydrogen in such cases can vary between $1.75 and $1.88/kg assuming renewable power is produced at or below 3c/kWh. Electrolyzer costs are continuing to decline and at cost of ~$600K/MW (likely in the next 12–18 months with price projections from several electrolyzer companies), cost of producing green hydrogen can be below that of $2/kg cost from SMR.

Green hydrogen project economics at various electrolysis scenarios

There are several other references pointing to something similar: Renewable hydrogen costs may fall to as low as $1.40/kg by 2030 and 80c/kg by 2050 according to BNEF. Using a “fully optimized” system design, solar and wind can provide power to electrolyzers, for $24/MWh by 2030 and $15/MWh by 2050, according to BNEF.

Several countries are going ahead and announcing projects/plans to develop green hydrogen infrastructure. By the end of 2019, 252MW of green hydrogen electrolysis projects will have been deployed worldwide, but this figure is set to increase by more than 1,200% to 3.2GW by 2025, partly driven by the demand in Japan and South Korea.

In Australia, Siemens announced plans to develop a 5GW combined wind/solar project aimed at producing renewable hydrogen. The UK government also announced plans to invest $15 billion and use 4GW of offshore wind plants to produce renewable hydrogen by 2030s. Vestas is the one of the four partners in a consortium aiming to build the world’s largest renewables project — the 15GW wind/solar Asian Renewable Hub in Western Australia, which would use up to 12GW of its output for green hydrogen production. In China, utility Jilin Electric Power is working with the government of Baicheng city in Jilin province, on a project to produce one million tons of green hydrogen annually through 20GW of wind turbines and 15GW of PV. In Sweden, Vattenfall, the Swedish utility has joined forces with local refiner Preem to jointly build a 20MW green-hydrogen electrolysis plant near Gothenburg, which would be Europe’s largest.

Cumulative installed capacity vs 2020–2025 project pipeline (MW) (source: BNEF)

Timeline of power-to-hydrogen projects by electrolyzer technology and project scale (source: IRENA)

What Does All This Mean?

There is significant momentum driving the green Hydrogen sector — a combination of declining renewable cost curves, technological improvements in the Hydrogen sector and global decarbonatization efforts all give us sufficient confidence that the green Hydrogen economy is poised to take off and turn into a material energy business sector, with several trillion $s TAM potential. Electrolysis is not only the instrumental technology but also the major cost driver for a green hydrogen production, as it accounts for more than 60% of the total costs. Breaking this down into technologies of interests: PEM electrolysers typically require expensive materials to achieve the lifetimes and efficiencies that are comparable to commercially available alkaline technologies. Most R&D activities therefore focus on material and component developments. Chart below shows some of the research areas of focus (for e.g., from Hydrogenics). Next-generation electrolyzers might be able to achieve a near 80% conversion efficiency, bringing green hydrogen’s round-trip efficiency for electricity production to between 45% and 50%.