Market Scenario Green Hydrogen: Electrolyzers still Need Policy Support to become Competitive

Author / Editor: Aurora Energy Research / Ahlam Rais

Both Germany and Europe have set the goal of becoming greenhouse gas neutral by 2050 at the latest. This means that energy consumption throughout the economy must be switched to carbon-free sources. Hydrogen will play an important role here, especially in activities that are otherwise impossible or difficult to decarbonize - for example, in the steel and chemical industries, aviation, ships or parts of the transportation sector. One of the crucial factors for rapid conversion is the question of how the production costs for green hydrogen can be reduced to a competitive level.

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In order to be cost competitive with blue hydrogen in Europe, green hydrogen needs to beat a target of ~2.5 Euros/kg H2.
In order to be cost competitive with blue hydrogen in Europe, green hydrogen needs to beat a target of ~2.5 Euros/kg H2.
(Source: Aurora Energy Research)

Aurora Energy Research has analyzed various business models for this purpose. Low-carbon or carbon-free hydrogen can be produced, among other things, by electrolysis of water (green hydrogen) or from natural gas with CO2 capture (blue hydrogen).

The latter is currently much cheaper at a cost of around 2.5 euros per kilogram. Many governments in Europe are therefore promoting electrolyzers with grants, allowances or tax exemptions, and developers and investors are also looking for ways to reduce costs. The pipeline of planned electrolysis projects now includes more than 200 gigawatts of capacity, with a particular focus on Germany (see here).

"The production cost of green hydrogen, and thus its competitiveness with blue hydrogen, depends on a number of factors," says Lisa Langer, commercial manager at Aurora Energy Research. "Investment costs for the plants are already falling rapidly, but the main cost driver for producing hydrogen with electrolyzers in the future will be electricity costs. That's why it is critical to optimize the business model." To find out which concepts offer the best conditions for success, the experts at Aurora Energy Research analyzed different business models and ran through various scenarios.

To encourage a faster decline in costs and help green hydrogen become competitive with blue hydrogen, governments should support renewable energy development and exempt electrolyzers from grid fees and taxes.

Anise Ganbold, Global Energy Markets Lead at Aurora Energy Research

Combination of onshore wind and electrolysis most favorable

The concepts for operating electrolyzers can first be distinguished on the basis of the origin of the electricity used: Either the plant is connected to the grid and uses the electricity mix offered there, or it is coupled directly with a renewable energy source in island operation and uses its electricity generation. The study concludes that in the second case the lowest total costs for hydrogen are incurred, because this business model avoids the fees for grid connection. Electrolyzers in Norway coupled with onshore wind power plants perform most favorably: Very good on-site wind resources ensure that both the costs for the wind power generated fall and the utilization and profitability of the electrolyzer rise. Similar costs can be achieved in Spain, also with the direct combination of electrolyzers and onshore wind turbines.

Operators of such stand-alone solutions can further reduce costs, for example, by optimally matching the size of the electrolyzer to the characteristics of the power generator: "The output of the electrolyzer must be calculated depending on the individual circumstances," says Langer. "Ideally, the cost per kilo of hydrogen is then up to 40 percent lower than if the electrolyzer simply has the same rated power as the renewable power plant, for example, if a 1-megawatt electrolyzer is coupled with a 1-megawatt wind turbine."

In addition to low hydrogen costs, direct coupling of the renewable plant and electrolyzer also benefits from the fact that no direct carbon emissions are produced in the process. Therefore, hydrogen produced in this way is considered sustainable in the EU. As such, such systems are also likely to meet other criteria of the RED II (Renewable Energy Directive) and be eligible for government support in a number of European countries.

In the best case, costs of 2 to 2.5 euros per kilogram of green hydrogen are achievable

To compete with ‘blue hydrogen,’ however, electrolyzer projects will need to achieve significant cost reductions. "Our analysis shows that green hydrogen production costs will drop rapidly over the next two decades," says Anise Ganbold, Global Energy Markets Lead at Aurora Energy Research. "Still, it will be difficult to reach 2 euros per kilo of hydrogen in Europe. This can only be achieved in an optimistic scenario with much lower costs and higher electrolyzer efficiency. To encourage a faster decline in costs and help green hydrogen become competitive with blue hydrogen, governments should support renewable energy development and exempt electrolyzers from grid fees and taxes."

This would especially help grid-connected electrolyzers, whose costs are higher because they must also pay fees for access to the electricity grid as well as other charges. These costs vary by country, location, connection size, and sometimes by time of day or year. Compared with other European countries, they are highest in Germany, the United Kingdom, and Denmark, although the first two have exemptions for electrolyzers and other large industrial users.

"Denmark lacks such regulations, making the production of hydrogen from grid electricity virtually prohibitive there at present," Ganbold says. "In such cases, policymakers need to think about exemptions or other incentives if they want to spur investment in this technology." In Germany, for example, grid-connected electrolyzers built before 2030 and certified for ‘green’ hydrogen are exempt from the EEG (Renewable Energy Sources Act) surcharge – currently, electricity costs would be about twice as high without this exemption.

But operators also have other ways to reduce costs, as the analysis shows. For example, grid-connected plants should run flexibly to take advantage of periods with low electricity prices or avoid periods with high charges. As the study shows, this can reduce total operating costs by more than 50 percent compared with permanently running electrolyzers, depending on the country.

One disadvantage remains with grid-connected plants: the greenhouse gas load of hydrogen is the same as that of the electricity mix during operating hours. Aurora has calculated that an electrolyzer in Germany produces nine times more CO2 than a plant in Spain, where the share of renewables is very high, due to the coal- and gas-heavy electricity generation mix. However, emissions from the power sector are capped by European emissions trading, which may prevent any increase in emissions.