Green hydrogen: from a source of hope to a reliable guarantor for the energy transition?

Green hydrogen is seen as a source of hope for the energy transition: It can store renewable energy from solar, wind, and hydropower – and it helps energy-intensive processes become climate-neutral. But for this source of hope to become a reliable element, continued advances in power-to-gas (PtG) technologies, which convert renewable electricity into hydrogen, are needed. Right now, producing green hydrogen is still too costly to compete with fossil fuels. However, a study by Gunther Glenk, Stefan Reichelstein and Philip Holler offers hope: By 2030, the life cycle costs of green hydrogen production are projected to fall in the range of 1.6 and 1.9 US dollars per kilogram. As a result, green hydrogen will likely become widely competitive by the end of this decade.

Russia’s war against Ukraine made green hydrogen return to the big political stage. In Germany, there are new efforts to become less dependent on fossil fuels – and, therefore, on Russian natural gas. For the German Federal Minister for Economic Affairs and Climate Action, Robert Habeck, green hydrogen is one of the desired solutions. Its production and infrastructure will, therefore, receive more financial support. Sizable subsidy programs for the development, manufacturing, and deployment of hydrogen equipment have also been adopted at the EU level and in the US.

Green hydrogen has long been considered a promising alternative to fossil fuels – and an important source of hope for the energy transition. It is produced via water electrolysis using renewable electricity – and is therefore CO2-neutral. Carbon-free hydrogen could supplement the intermittent power supply from wind and solar energy installations – and it could significantly reduce greenhouse gas emissions, especially in energy-intensive industries that are difficult to decarbonize, for example, in heavy goods transport or in industries that require so much heat that electric alternatives would be too expensive.

Green hydrogen is becoming widely competitive by 2030

However, its major breakthrough has yet to happen. The problem: the production of green hydrogen is still too costly. With lifecycle costs of 3 to 5 US dollars per kilogram, it cannot yet compete with conventionally produced hydrogen from methane and coal. For green hydrogen to triumph over fossil fuels, its production would have to become much more efficient and cost-effective.

The new study shows that this goal can be achieved by the end of this decade. Green hydrogen is well on the way to decisively contributing to the energy transition in the upcoming years. The three prevalent technologies currently used to produce green hydrogen will become significantly cheaper and more efficient over the next six years. Due to learning effects and efficiency gains in production – through standardization, automation or technological improvements that, for example, help to reduce production waste.

The study estimated the learning curves of these three technologies (polymer electrolyte membrane, solid oxide cell, and alkaline electrolysis) in terms of the advances in system prices and energy efficiency over the past two decades. Learning curves have already served as a reliable measure of technological progress for solar photovoltaic modules, wind turbines, or lithium-ion batteries. The study shows that with every doubling of cumulative installed production capacity, system prices of water electrolysis decline by 14 to 17 percent, while energy efficiency increases by about two percent. Based on these estimates, the study projects how the lifecycle costs of electrolytic hydrogen production will likely develop up to 2030.

Life cycle costs will likely fall by up to 68 percent

By 2030, the lifecycle costs for green hydrogen will likely fall by up to 68 percent to between 1.6 and 1.9 US dollars per kilogram. This will bring them close to the 1 US dollar per kilogram cost target set by the U.S. Department of Energy. This value is often seen as the threshold at which green hydrogen becomes cost-competitive with hydrogen from fossil fuels, an important sign for investors. They have often been skeptical of the ambitious targets for sustainable energy set by governments and international bodies. However, the new study shows that skepticism is not warranted in this special case. This could boost confidence in green hydrogen, encourage investment – and thus further drive the positive development of lifecycle costs.

Subsidy programs accelerate competitiveness

The new subsidy programs of the EU and US governments might also bring production costs much closer to the 1.0 US Dollar per Kilogram cost target by the end of the decade. Most of the data used for the calculations in the study was collected prior to the recent hydrogen initiatives by the EU and US. Political incentives, in turn, accelerate competitiveness.

In the EU, for example, around 9.6 billion euros are being made available for the expansion of hydrogen technologies and infrastructure through the ‘Hy2Infra’ project. The subsidy program in the US, on the other hand, provides for tax credits of up to 3 US dollars per kilogram of clean hydrogen. This makes the deployment of power-to-gas systems financially more attractive for firms and could lead to more and larger production. In turn, this could also cause system prices to fall further and thus ensure greater use of hydrogen technologies. A positive cycle that will likely give green hydrogen a further boost.

Electricity prices will increasingly determine the life cycle costs of green hydrogen

Hydrogen will become particularly cost-competitive in locations with great resources for renewable power generation. That means windy, sunny, or hydroelectric locations suitable for hydropower. The close proximity to hydrogen customers is also crucial since transportation costs—by truck and ship or via pipelines—are rather expensive and, therefore, a decisive factor in pricing.

With the considerable cost reductions in hydrogen electrolysis, other factors are becoming increasingly important for the composition of lifecycle costs. Electricity prices, in particular, will increasingly determine the lifecycle costs of hydrogen production. Achieving low costs of high green hydrogen production ultimately depends on the availability of inexpensive and clean electricity. In addition to the expansion of hydrogen production and infrastructure, political decision-makers should, therefore, continue to focus on the expansion of renewables. And they ought to take advantage of the inherent synergies between renewable power generation and electrolytic hydrogen.

To cite this blog:

Glenk, G., Holler, P., Reichelstein, S. (2024, July).  Green hydrogen: from a source of hope to a reliable guarantor for the energy transition?, TRR 266 Accounting for Transparency Blog. https://www.accounting-for-transparency.de/green-hydrogen-from-a-source-of-hope-to-a-reliable-guarantor-for-the-energy-transition/