ANALYSIS | Clean hydrogen 'remains too expensive and uncompetitive' – how can costs be reduced?

“Low-carbon hydrogen remains too expensive and uncompetitive compared with hydrogen produced from other sources,” it spells out on its opening page.

The “widespread hype and enthusiasm” seen since 2021 in the clean hydrogen sector “has faded with market and regulatory uncertainties, with very few projects making it to the investment stage”, the report adds.

“It is this stark disparity between expectations and tangible results that led us to dig deeper and commission this report.”

Why are costs so high?

Capgemini identifies several reasons for the high costs, namely: “Difficulties in obtaining supplies of competitive low-carbon electricity, rising interest rates, and difficulties in finding partners — particularly EPC [engineering, procurement and construction] partners.”

The report then explains that the Paris-based company decided to carry out a survey of “nearly 120 companies from the hydrogen sector all over the world” in an attempt to gauge industry opinions on how the high costs could be reduced.

High electricity prices were identified as the biggest problem, with 58% of respondents saying this was a “major difficulty”.

“This is no surprise because the cost of electricity represents around 45-60% of the LCOH [levelised cost of hydrogen],” the consultant points out.

Other “difficulties encountered in offering competitive prices” were identified by respondents:

Potential solutions (from public bodies)

The next question asked by Capgemini was related to how public authorities can help make low-carbon hydrogen more competitive.

Its survey found that 64% of respondents thought that public subsidies or other financial incentives were critical to bringing down costs, while 61% identified higher carbon taxes as an essential cost-reduction lever.

Other options were less enthusiastically supported by respondents, with electricity market reform and power-purchase agreement (PPA) development being box-ticked by 51% of those surveyed, followed by EU regulations such as the Carbon Border Adjust Mechanism (34%); the setting-up of an “organised market” (29%); and incentive/provision of land by local authorities (11%).

Potential solutions (by private sector)

Unsurprisingly, when asked what “internal levers” could be pulled by the private sector to reduce clean hydrogen costs, 75% said “lowering electricity costs”, including long-term power-purchase contracts and diversification of low-carbon electricity sources to increase electrolyser load factor.

“However, in practice, few gains are expected due to technological constraints and economic reasons,” the report says, adding that “improving electrolyser efficiency is the main lever to reduce electricity costs”.

Capgemini explains that alkaline electrolysers will not be able to offer the higher efficiencies needed, and that other technologies are a better bet.

“While alkaline technology is currently the least expensive, it also consumes the most electricity.

“The solution is therefore to promote next generation technologies such as PEM electrolysis as a first step and to then accelerate the industrialisation of high-temperature or other electrolysis type [sic].

“Indeed, for the same maturity level regarding large-capacity systems of over 100MW, PEM [proton exchange membrane] electrolysers consume less electricity than alkaline technology. However, its efficiency deteriorates due to the platinum deposits that obstruct the membranes.

“In this way, high-temperature electrolysis will be the real game-changer with the best yields on the market. For example, SOEC [solid-oxide-electrolyser-cell] technology offers 26% gains over alkaline technology, with an average system efficiency of 40kWh/kg of hydrogen.”

The report fails to mention that waste heat is required for SOEC systems to reach such high efficiencies.

Capgemini adds that improving the flexibility of electrolysers is also key for reducing costs.

“However, PEM and high-temperature technologies are more versatile thanks to their modular design enabling the shutdown of individual modules rather than the total system shutdown required for alkaline electrolysers.

“Nevertheless, the competitiveness of PEM technology still needs to be improved [ie, it is still much more expensive than alkaline on a per-kW basis], and high-temperature electrolysis will not be operational before 2027-28.”

The next popular choices were “improved performance” of electrolysis systems (40%), followed by “increasing the size of facilities” (39%), “innovation” (36%), reducing balance-of-plant costs (26%), and bringing projects closer to demand (also 26%).

Other potential levers were improved storage and transport infrastructure (24%), creating new service or business models (21%), bringing projects closer to renewable energy sources (20%) and implementing EPC partnerships (18%).

“Improving the design of electrolysers systems could reduce LCOH by 26%,” says the report, adding that this would save about $1.92/kg on the final price of hydrogen.

Capgemini also says that it has identified 35 potential improvement in the electrolyser manufacturing process, with “lean production management” able to reduce production costs by 10-15%, providing expected reductions in the price of hydrogen of €0.74-1.10/kg.

The consultant seems surprised that only 26% of respondents thought that lowering financial costs was a big potential lever, “despite the current climate of high interest rates”.

The rise in the weighted average cost of capital (WACC) in recent years has effectively increased LCOH by 6.4-24%, it said, citing 2023 figures from the Organisation for Economic Co-operation and Development (OECD).

But while reduced interest rates would help to bring down costs, “they will not be able to offset the rise in electricity prices and capex (ie, upfront capital expenditure)”.

Outlook is ‘not all gloomy’

Despite the high costs of low-carbon hydrogen production, and the slower-than-expected build-out of projects, “as a whole, the global hydeogen outlook is not all gloomy”, the report concludes.

“Similarly in Europe, the recent reform of the electricity markets is promoting the development of long-term contracts — PPAs in particular — which is a very good thing for securing the necessary volumes of low-carbon electricity for developers. What's more, while it's often said that there's no demand for hydrogen, it should be stressed that there really is – and plenty of it – particularly in the industrial sector.

“This note of optimism — at least in Europe — suggests that we are on the right track for hydrogen to make a relevant contribution to our decarbonisation objectives by 2030 — and especially by 2050.”