Production

High carbon price makes blue hydrogen cost competitive with grey in UK and Netherlands: ICIS

More efficient technology associated with low-carbon H2 production also a factor in driving costs down

A Linde-built steam methane reforming plant in Hungary.
A Linde-built steam methane reforming plant in Hungary.Photo: Getty
High carbon prices over the past six months have driven the break-even cost of producing blue hydrogen — including investment into new CCS technology — to compete with grey in the UK and the Netherlands (the two European countries most likely to develop blue H2 projects) , according to market intelligence firm ICIS.

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In its Quarterly European Hydrogen Markets update for the past quarter, ICIS notes that low-carbon H2 production costs continued to compete with unabated steam methane reforming (SMR) on a project breakeven basis — first seen in the Netherlands in the first quarter of this year and the UK in Q2.

“While production costs for low-carbon hydrogen have been competitive on a variable basis, ie, absent of capital cost recovery, since 2022, the alignment on a project breakeven level means that building and operating a new hydrogen plant would be cheaper with carbon capture and storage (CCS) technology than without,” the market intelligence company explains.

The main driver for this cost competitiveness is a relatively high carbon price in both the EU and the UK over the past six months.

Prices on Europe’s Emissions Trading Scheme have been volatile since the beginning of the year, but has ranged between €77.39-100.34 ($84.73-109.86) per tonne of CO2, according to Intercontinental Exchange data compiled by non-profit Ember.
However, the prices on the UK ETS have steadily decreased from highs of £85.24 ($108.26) per tonne of CO2 in late February to £45.50 at the end of July.

So why did blue hydrogen prices compete with grey in the UK in Q2, with the two prices reaching parity on some days, but not Q1 if the carbon price has gone down?

ICIS notes in the report that another key driver of cost reduction for blue hydrogen projects is the rising popularity of autothermal reforming (ATR) — which processes methane into hydrogen more efficiently than SMR, while also emitting CO2 in a more easily captured high-pressure stream.

“When low-carbon ATR reached parity with unabated SMR there had been a recent bearishness to the forward power prices in the UK, meaning this cost contributed to a smaller fraction of the final cost of production, ultimately lowering the low-carbon ATR assessment,” ICIS hydrogen editor Jake Stones tells Hydrogen Insight.

He adds that forward gas prices were also relatively high as the market is continuing to price in risk around the upcoming winter without Russian pipeline gas.

“This means the gas component of the hydrogen cost for unabated SMR remained relatively high, while the power price component dropped for the low-carbon ATR. At the time of the parity there was also a minor uptick in carbon prices,” he says.

Since power prices are linked to gas, since gas-fired power plants generally set the price of power based on merit order, “thereafter the power market lifted again, pushing the low-carbon ATR back to a slight premium”, Stones adds.

On average, the cost of hydrogen produced via ATR with CCS was only €0.02/kg more expensive than unabated SMR in the Netherlands over the second quarter, and €0.10/kg more expensive in the UK, according to ICIS calculations.

This represents a continued decline from the €0.04/kg and €0.16/kg premiums identified in the Netherlands and UK respectively in the first quarter.

In general, the cost of producing hydrogen from methane bought on front-month contracts fell over the second quarter, since the price of gas bought on these near-term agreements was low due to continued high storage in Europe (meaning less gas supply is needed to replenish stocks).

While this nearly halved calculated grey and blue hydrogen costs during the first two months of Q2 — with low-carbon H2 dropping to nearly €2.00/kg — Norwegian gas production sites underwent maintenance and reduced supply for storage in June, leading to a small spike in prices.

However, as mentioned, gas prices in 2025 are projected to be much higher than in the front-month, due to greater uncertainty around how the next two winters will play out as well as proposed cuts to OPEC+ oil output.

“Consequently, production costs from natural gas based on Year+2 values ended the quarter around €3.50-4.00/kg, remaining above 2022 lows of around €2.00-3.00/kg,” the report notes, although this is still much lower than costs associated with electrolysis.

Green premium

Electrolytic hydrogen breakeven costs based on front-month wholesale power prices have also decreased between Q1 and Q2 amid milder temperatures and less gas used for heating, falling below €5/kg in France and the Netherlands for the first time since 2021.

However, as temperatures continued to climb to heatwave levels in June, greater electricity demand for cooling and the aforementioned Norwegian gas production site maintenance bumped up wholesale power prices and thereby electrolytic H2 costs.

However, ICIS notes that the cost of production stayed below €10/kg, with French, German and Dutch electrolytic production costs nearing the €6.00/kg mark by the end of Q2.

Meanwhile, based on aforementioned gas price uncertainty driving up future power prices, year+2 breakeven costs of production for green hydrogen projects financed over the past quarter are expected to be higher than €7/kg.

Since ICIS' ammonia-to-hydrogen price assessment over Q2 has fallen from a peak of €4.69/kg to a low of €4.03/kg, imports of H2 as ammonia could be cheaper than volumes produced by domestic electrolysers — although this index is based on current grey ammonia market prices.
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EuropeGreen H2Blue H2NetherlandsUK
Published 4 August 2023, 12:17Updated 4 August 2023, 12:17