Carbon prices in the EU are now so high that it would be cheaper to produce blue hydrogen from natural gas with carbon capture and storage (CCS) than grey H2 made with unabated fossil gas using the standard steam methane reformation (SMR) process, according to a new report from analyst ICIS.

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“One of the key developments from a market perspective over the first quarter was that high carbon prices pushed unabated SMR above low-carbon hydrogen on a project-breakeven basis in the first quarter of 2023 for the first time in ICIS assessment history,” the company writes in its latest H2 market update, ICIS Quarterly European Hydrogen Markets: Q1 2023 Update.

“This meant that it was cheaper to invest in a gas-based hydrogen production unit with CCS capacity than paying for the carbon emissions resulting from grey hydrogen.”

The price of EU emission allowances, a market-based mechanism, reached an all-time high of €100.34 per tonne on 21 February, although it has since fallen to under $90. Three years ago, it was priced at under €20/tonne.

ICIS also explains that even blue hydrogen projects using autothermal reformation (ATR) — a more expensive method of producing H2 from natural gas, which requires less methane but more power per kilogram of hydrogen, and allows higher carbon capture rates than SMR — would have produced cheaper hydrogen than from unabated SMR in the first quarter of 2023.

“For the first time in ICIS assessment history, unabated steam methane reforming... became more expensive to produce on a project-breakeven basis in comparison to low-carbon hydrogen from autothermal reforming (ATR) with CCS.”

But the report explains that “while this shows potential for the investment case for low-carbon hydrogen, it is important to note that current hydrogen production plants are already in operation. This means that capital investment may have already been recovered, whereas there are currently no low-carbon units in operation in Europe, meaning all project developers would need to apply capex [capital expenditure] recovery to the final price hydrogen buyers pay.”