While green hydrogen has been described as a “Swiss Army knife” that could be used to decarbonise sectors such as transport, heavy industry and heating, the reality is that it will only be utilised if it is profitable for companies to do so.
And this generally means it needs to be a cheaper option than conventional fossil fuel — or else rely on government subsidies — according to a study from Barcelona-based online university OBS.
“It is worth remembering that in the world in which we live, the market economy prevails, far above environmental or sustainability/climate change values, and therefore the main competition of hydrogen is none other than the very fossil fuels it aims to replace,” says the 45-page report, provocatively entitled Green hydrogen, bubble or an energy reality?
The main reason that few major green hydrogen projects have seen final investment decisions to date is because they are proving to be unprofitable without subsidies “in most cases”, writes the author, industrial engineer Marcos Rupérez.
“Hydrogen is in its infancy as a technology in industrialisation, and despite the very high expectations, a new technology is not usually profitable in its beginnings, so it is not a candidate for direct private investment alone,” he explains.
“Much of the expectation is based on investors who, not knowing the technology, believe that it is within profitable ranges, when it is not. And they themselves encounter disappointment when they calculate the numbers for their own projects, realising that there is usually no profitability without subsidy in most cases.
“Therefore, the volume and direction that the sector acquires will be defined by a public entity based on subsidies that, most likely, are not going to be there, due to the limitation of public money, [and] the announced volume of projects.”
The study analysed the expected cost of producing green hydrogen — using Spain, a country with strong wind and solar resources, as a reference — and compared that to the cost of grey hydrogen, diesel and coal in different use cases, such as transport, heating and steel.
It found that while green hydrogen could be produced for €3.00-5.50 ($3.16-5.79) per kg in 2024 (including a 7.7% return on investment)— with €4/kg being “the most likely price” for large projects — this is unlikely to be cost-competitive with fossil fuels at current or expected prices in the near future (see below for details).
The study does not compare renewable H2 with all-electric options such as battery vehicles or heat pumps.
“To conclude… hydrogen is an interesting option to decarbonise many processes. But most likely its cost is, and will be higher in the medium term, than that of its fossil alternatives.
“Therefore, there are only two ways left, either wait for fossils to rise in price and make green hydrogen profitable, or assume as a society that being sustainable will entail a higher cost than expected and finance this [higher] cost through public intervention or an increase in the price of consumer products and services.”
The study’s findings on cost-competitiveness
Green H2 vs diesel for trucks
The most cost-competitive use of green hydrogen (compared to fossil fuels) would be replacing diesel for trucks, mainly due to high taxes on the fossil fuel, the report suggests.
It calculates that renewable H2 would need to be produced for under €5.66/kg to be cost-competitive with diesel at €1.50/litre — the current average pump price in Spain.
If the cost of diesel rises to €2/litre, either through market forces or higher carbon pricing, green hydrogen would be competitive at €7.30/kg. At a diesel price of €1/litre, the H2 would be able to compete at €4.02/kg — still within the expected cost range.
However, these figures do not include the costs of compression, storing and dispensing the hydrogen, which “negatively impacts its competitiveness”.
But the report does add that operators could generate their own green hydrogen “at prices in close competition” with the cost of diesel at the pump.
Green H2 v grey H2 for existing uses
To be cost competitive with grey H2 derived from unabated natural gas —using “the most probable price” of €50/MWh in Spain next year — renewable hydrogen would need to cost €2.90kg in 2024, according to the report.
But as grey hydrogen is mainly used as a chemical, rather than an energy vector, renewable H2 is “the only decarbonisation option, so the push for public subsidies in this case is stronger [than other potential uses]”.
“Green hydrogen as a chemical input replacing grey hydrogen is the firmest and most profitable bet in the entire green hydrogen universe,” the report declares.
Green H2 v natural gas in heating
As natural gas contains about three times as much energy by volume than hydrogen, roughly three times as much hydrogen is required to produce the same amount of heat.
With the expected natural gas price in 2024 to be €50/MWh, on top of carbon pricing of €16.60/MWh, green hydrogen would need to cost €2.20/kg in order to be cost-competitive with gas when directly combusted.
“We would need to see natural gas prices above €100/MWh again in the short term for hydrogen to be competitive, as these prices would make hydrogen competitive at €3.9/kg,” the study explains.
“It is difficult for the combustion of hydrogen to be competitive with the combustion of natural gas in the medium term and in many cases there are alternative technologies to the combustion of gas to generate heat, such as direct electrification or heat pumps, which have better efficiencies and profitability.
“For it to become profitable, sustained increases of more than 50% in the current gas price would be necessary, along with increases of more than 100% in the price of CO2 — unlikely scenarios in the author's opinion.
“The future of heat generation will involve direct electrification (resistors, electric boilers, plasma), solar thermal and heat pumps.”
Green H2 vs coking coal for iron production
Green hydrogen is widely regarded as the only method to decarbonise the extraction of iron from iron-oxide ore — a role mainly carried out by burning carbon-rich coking coal today — as it requires both high temperatures and a chemical reaction to remove the oxygen.
Based on a current coal price in Spain of €134/tonne, achieving cost-competitiveness with green hydrogen would require a production cost of €1.28/kg, the study says, before pointing out that metallurgic coke — produced by heating coal in the absence of air — is more expensive than “common coal”.
But it adds that the coal cost must rise to €450/tonne and for CO2 pricing to double to €160/tonne in order for green hydrogen to be competitive as a reducing agent in iron production.
Green methanol vs bunker fuel for shipping
The report also compares the price of bunker oil used in shipping to green methanol — a so-called “carbon neutral” liquid derived by combining renewable hydrogen with captured carbon dioxide.
Using a price of $600/tonne as its benchmark (roughly the current price of bunker oil in Rotterdam), green hydrogen must reach €2.19/kg to produce cost-competitive green methanol, the report says.
If the cost of bunker fuel were to rise to $1,000/tonne, renewable H2 would need to achieve a price of €3.16/kg for green methanol to compete on cost, just inside its expected price range.
However, this does not include the cost of CO2, which the report puts at an average of €40/tonne.
Due to the difficulties of decarbonising global shipping — which will almost certainly require green hydrogen derivatives such as methanol or ammonia — it may be necessary to live with a situation in which freight shipping costs rise, although this would be complex to achieve “since it would require many countries to agree”, the study says.
The cost of ammonia for shipping is not discussed in the report.