Green hydrogen, why costs are not falling and demand is lacking

Shell and Equinor cited too high costs and insufficient demand to justify abandoning a project in Norway in September to produce and export blue hydrogen (from fossil gas but with CO2 capture, ed.). In Denmark, plans to build a pipeline to transport green hydrogen to Germany were postponed from 2028 to 2031.

Even one of the seven winners of the EU subsidies awarded in the first auction of the European Hydrogen Bank, which took place only in August, has backed out: it is Benbros Energy, which was bidding for the El Alamillo H2 plant in Spain, but has now - for reasons that have not been clarified - renounced the project and the funds.

For the second auction, scheduled for 3 December, Brussels has introduced a new mandatory requirement to protect the European hydrogen supply chain: projects may use machinery "made in China" for no more than 25 per cent of capacity. The notice explains that 'Chinese electrolyser production capacity has already exceeded 50 per cent of global production capacity' and there is 'a significant risk of a growing and irreversible dependence of the European Union on imports'.

However, the limitation risks proving to be a boomerang, because without low-cost Chinese products, the higher bill could discourage further projects: for BloombergNEF, the measure risks 'worsening the prospects' for green hydrogen adoption in Europe.

The issue of cost is of vital importance in this sector. And a study by Harvard researchers, just published in the scientific journal Joule, warns against deluding oneself: the optimistic forecasts circulating do not take into account storage and distribution costs, but these account for between a third and a half of the final price, the authors warn, arriving at not very encouraging conclusions.

"At current prices, green hydrogen is a cost-prohibitive strategy" for decarbonisation "in any end-use examined", says the US-focused study, and even if the cost of production were to drop to $2/kg, opportunities would remain limited to sectors already using hydrogen "unless storage and distribution costs decrease".

To summarise: 'The potential of green hydrogen is less than previously thought and this emphasises the need to use a variety of technological options to decarbonise hard-to-abate sectors', i.e. those where it is difficult to reduce emissions, such as the steel industry.

Platts at the end of September quoted a cost of EUR 5.8 (USD 6.5) to produce one kilogram of green hydrogen in Northern Europe with alkaline electrolysis (capex included). With Pem technology this rises to EUR 6.07/kg.

Governments around the world have made available subsidies, incentives and facilities to stimulate the emergence of the clean hydrogen industry. Even Italy has recently allocated 3.64 billion through the NRP. But even with public funds very often the accounts do not add up. One of the problems, according to many experts, is that aid has so far focused mainly on the production side, rather than on the consumption side. And demand is slow to emerge.

Just 12 per cent of projects in the low-emission hydrogen sector have already signed agreements with prospective buyers, BloombergNEF estimates. For all others, the lack of offtakers is a sword of Damocles: the risk is that they will remain on paper forever. 'No sane developer starts producing hydrogen without having a buyer,' comments Martin Tengler, analyst at BNEF, 'and no banker in his right mind lends money to a developer who does not have reasonable confidence that someone will buy his hydrogen.

In a report published in early October the International Energy Agency states that final investment decisions (FIDs) in the sector have doubled globally in the past twelve months, although more than 40% of the projects are concentrated in China. If they were all realised, green and blue hydrogen production could increase fivefold by 2030, to 20 GW. But the IEA is the first to doubt this, pointing out 'uncertain demand signals, obstacles in financing mechanisms, delays in incentives, uncertainties over regulation, licensing and authorisation processes, and operational challenges'. 'Politicians and developers,' urges Fatih Birol, director of the Agency, 'need to carefully consider tools to support demand creation, as well as reducing costs and ensuring a clear regulatory framework.