The wholesale price of green hydrogen in Europe in 2030 is set to be far higher than previously expected — due to underlying economic issues across the continent and “challenges” in key sectors, according a new report from Boston Consulting Group (BCG).
“Just a few years ago, the consensus view expected green hydrogen production costs below €3/kg [in 2030],” says the whitepaper, Turning the European Green Hydrogen Dream into Reality: A Call to Action.
“Meanwhile, a deteriorated macroeconomic context, higher energy market prices, and structural challenges in the wind power and electrolyzer supply chains prove these costs unrealistic, at least for the coming decade.
“As a result, real hydrogen asset projects currently in development suggest green hydrogen production costs in the range of €5-8/kg [$5.26-8.42/kg] in 2030 for central Europe [including Germany].”
It explains that “even at the lower end of these costs, green hydrogen is not competitive with alternative decarbonization technologies for most potential consumers. At the higher end, green hydrogen producers will struggle to find offtake at all.”
The report points out that the largest contributing factor to the cost of green hydrogen is the price of renewable electricity — and this has been rising, rather than falling.
Unrealistic claims about the cost of green hydrogen, its competitiveness, and time to scale will do the hydrogen industry, its customers, and society at large a disservice
“As a result of a higher cost of capital and structural supply chain challenges of wind power system manufacturers, the levelized cost of power has significantly risen in recent years and is likely to remain above pre-crisis levels during this decade,” it says.
“Also, given that green hydrogen in most European countries has to be produced from additional non-subsidized renewables, electrolyzers are competing for green power with skyrocketing wholesale prices on the captured-power market.”
This is a reference to the EU rule that green hydrogen will only count towards quotas (see below) and be eligible for subsidies if it is made using “additional” renewable energy that would not have otherwise been produced. This is due to concerns that electrolysers could draw green electricity from the grid that will need to be replaced with fossil-fuel-fired power.
The whitepaper adds that electrolyser system costs “have not dropped yet and are not likely to fall as fast as expected a few years ago”.
“Structural supply chain constraints on the part of electrolyzer manufacturers as well as more-complex-than-expected system designs result in persistently high electrolyzer system costs,” it explains.
However, BCG does point out that optimizing electrolyser efficiency can help push down hydrogen production costs, but adds that the most efficient machines may be more expensive to buy upfront.
The paper also adds that project developers “can achieve significant production cost advantages over their competitors [outside the EU] ... by “following an integrated approach to location choice, renewable electricity production, electrolyzer configuration, and power market situation”.
Impact on offtakers
The higher-than-expected green hydrogen prices, and the uncertainty around them, is causing potential offtakers to be “unable to commit to long-term contracts”.
“With the common market expectation of decreasing production costs from new projects over time, offtakers of green hydrogen are [currently] very reluctant to commit to long-term contracts of more than a few years,” the report explains.
“Yet without secure long-term offtake, early hydrogen project developers face the risk of stranded assets, undermining investment prospects. This deadlock perpetuates a chicken-and-egg problem, preventing the hydrogen market from gaining faster momentum.”
BCG also points out that “major offtakers” in Europe, such as chemicals, fertiliser and steel companies, “are themselves at risk”, especially with the new Renewable Energy Directive (RED) requiring 42% of the EU’s total hydrogen consumption to be green by 2030, rising to 60% by 2035.
“Cheaper green end-product imports [from outside the EU] pose a significant threat to [European] offtakers in sectors like ammonia, methanol, and steel,” it explains.
“The European ammonia industry already lost significant market share during last year’s energy crisis [caused by the high price of natural gas, which is used to make almost all NH3 in the EU].
“At domestic green hydrogen prices beyond €4-5/kg, European producers would hardly be able to compete with green ammonia imported from regions with better renewable power conditions [and therefore lower costs].
“And this threat may only intensify over time. As the global hydrogen market matures and regions with better renewable conditions achieve steeper production cost declines, increasing European production volumes of products such as ammonia, methanol, or iron sponge [made when using hydrogen to extract iron from ore] will be at risk — potentially diminishing Europe’s future hydrogen market potential.”
What policymakers can do to reduce cost of green H2
As the report’s title suggests, policymakers can do more to reduce the cost of green hydrogen in Europe, the paper explains.
“Ambitious national implementation of EU regulation is needed now to create incentives throughout the hydrogen value chain,” it says.
“Regulations should help bring green hydrogen costs to offtakers at least below €5/kg, given that higher costs than that would severely threaten the international competitiveness of key offtake industries, particularly chemicals and steel — even compared to green imports.
“To achieve this, double-sided auctioning initiatives like the European Hydrogen Bank and H2Global could be expanded in their financial volume and extended in their scope to also support large-scale domestic projects.
“To increase the competitiveness of domestic projects in these auctions, policymakers should continue granting capex funding (eg, IPCEI [Important Projects of Common European Interest]) for the coming years and consider allowing green hydrogen producers to source power from new renewable generation with state-backed price guarantees like Carbon Contracts for Difference schemes.” (See panel below.)
Regulators also need to “immediately accelerate the deployment of low-carbon power, grid, and storage infrastructure, and to stimulate demand-side flexibility”, the report adds.
In addition, the penalties for not meeting the RED requirements should be “hefty”, at around €450 per tonne of CO2.
“In parallel, Europe should establish frameworks that enable producers of green commodities to sell at a premium,” it states. “For example, green steel or fertilizer quotas would allow key green hydrogen offtakers to pass additional costs on down the value chain.”
Market players can also do their bit to reduce costs
Despite all the concerns raised in the document, it says that first movers in the sector will reap lasting rewards, stating that “the emerging hydrogen market is a rare market opportunity”.
“The question is not whether it will flourish, but rather exactly when in the coming years, where, and how,” the report says.
“Proactivity will empower hydrogen players to seize immense potential and establish a leading position in this transformative market.”
Market players should therefore embrace risk-taking and get projects ready for final investment decisions, it adds.
“This will require risking significant development expenditure — but for the likely reward of faster capability build-up, privileged access to the most promising offtakers, strategic partnerships with equipment manufacturers, and higher credibility with key regulatory bodies.
“In earlier emerging industries like offshore wind and electromobility, early movers have reaped lasting dividends. Hydrogen seems to be the same.”
Producers should also “make sure they understand how upcoming regulations will impact potential offtakers’ hydrogen appetite, their willingness to pay, and their (partial) default or relocation risk” and “push to streamline project development and scale-up collaborations with electrolyser OEMs [original equipment manufacturers] and EPCs [engineering, procurement and construction companies]”.
The report says that because using hydrogen in hard-to-abate sectors is in the public interest, “regulators are increasingly receptive to facts about the key obstacles ahead and to pragmatic solutions to remove them”.
“Unrealistic claims about the cost of green hydrogen, its competitiveness, and time to scale will do the hydrogen industry, its customers, and society at large a disservice.”
The paper concludes: “Europe’s (green) hydrogen market has made major progress in recent years, but without additional funding and a regulatory framework, hydrogen still risks remaining the fuel of the future.
“Ambitious national implementation of EU regulation is needed now.
“Policymakers and market players alike need to increase momentum to make sure this transformative industry reaches its full potential.”
Under a Carbon Contracts for Difference (CCfD) scheme, end users would be paid a guaranteed amount by governments for avoiding CO2 emissions.
This is likely to offer a subsidy representing “the difference between a ‘strike price’ reflecting the cost of producing hydrogen and a ‘reference price’ reflecting the market value of hydrogen”.
Essentially, this would enable green hydrogen to be available to the market at the same price as grey hydrogen produced from unabated methane.