Green hydrogen price in Europe unlikely to fall below €5/kg by 2030, putting off potential offtakers: analyst
The previous consensus figure of €3/kg will not be reached due to ongoing economic challenges, but policymakers can still do a lot to reduce costs, says BCG
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“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.
“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.”
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.”
“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.
“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.
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 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]”.
'Increase momentum'
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.”
(Copyright)How would a Carbon Contracts for Difference scheme work?
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.