Green hydrogen projects are not seeing final investment decisions 'due to a lack of profitability': study

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.

“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.

“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

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 hydrogen as a chemical input replacing grey hydrogen is the firmest and most profitable bet in the entire green hydrogen universe,” the report declares.

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.

“The future of heat generation will involve direct electrification (resistors, electric boilers, plasma), solar thermal and heat pumps.”

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”.

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.

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.