Hydrogen perspectives from Silicon Valley is a series by Karen Baert and Thilo Braun, MBA students at Stanford University, to shed light on trends and innovation in hydrogen. This is the second post in a series surveying the industry.
Humans have been producing hydrogen for hundreds of years. Today, more than 100 million metric tons of hydrogen are produced a year – enough to fill more than 500 million Olympic swimming pools at ambient pressure.
More than 95% of the hydrogen produced today is produced from fossil fuels, emitting almost 10kg of CO2 per kg of hydrogen produced. Why then is hydrogen considered a clean alternative to fossil fuels?
This article is focused on the supply side of hydrogen:
The colours of the hydrogen rainbow
Green: The promise of electrolysers
Green hydrogen cost: Why wind and solar energy change the equation
Green hydrogen cost: Carbon taxes will help favor green but won’t do it on their own
The colours of the hydrogen rainbow
Hydrogen comes in many different colors. You may have come across references to blue, green, turquoise, grey and maybe even gold hydrogen amongst other colors. If this leaves you confused, you are not alone.
The different colours are used to categorise different types of hydrogen production technologies. Hydrogen has been produced for centuries and is essential for our world today. Without it, most of us would not have any food on the table as hydrogen is an essential component in making fertiliser.
However, historically production has been from fossil fuels. The majority of hydrogen today is grey hydrogen, which is produced from natural gas through a process called steam methane reforming (SMR) or through coal gasification. Hydrogen produced through the gasification of coal is called brown or black hydrogen, using bituminous (black) or lignite (brown) coal.
A number of technologies have emerged that enable producing hydrogen with no or little carbon emissions including blue, green and turquoise hydrogen.
Blue hydrogen – a temporary stopgap
Blue means retrofitting existing plants with carbon capture and storage (CCS). This can be done on existing infrastructure with moderate investment costs. Starting at roughly $0.20 per kg hydrogen, CCS only adds a modest cost the output hydrogen.
A major concern with blue hydrogen is what to do with the captured CO2, with many geographies not being amenable to carbon sequestration. Furthermore, while high rates of carbon capture (90-95%) are possible, high throughput incentivises reducing the rate of capture. Nonetheless, there are a number of major blue hydrogen projects including Australia’s project to produce blue hydrogen from coal gasification for export to Japan. As it only leads to a partial GHG emission reduction, we see blue hydrogen primarily as a temporary solution to reduce the carbon impact of existing SMR facilities.
Turquoise – cheap gas
Turquoise is a relatively new process where methane pyrolysis is used to produce hydrogen. The input is methane (or natural gas) which is easy to come by. Rather than CO2, the process creates carbon black as a by-product. Unlike CO2, carbon black is a solid product and hence easy to capture and use or sequester. Carbon black in turn is used to produce the rubber for tires amongst other applications, giving it resale value rather than being a pure waste product.
While the process itself does not emit any greenhouse gas emissions, there is a risk from upstream emissions. Methane leaks in the process can lead to significant lifecycle emissions. As long as this is managed (which we know how to do, verified by companies like Project Canary), turquoise hydrogen is a strong contender for producing clean hydrogen at economically attractive prices in the short term.
Green hydrogen is produced using water electrolysis and electricity. As long as the electricity is renewable, green hydrogen has no associated carbon emissions. The main challenge green hydrogen production faces today is cost – as these fall it will be increasingly broadly adopted. Nevertheless, the prospect of producing hydrogen with only water and green electricity as input and no greenhouse gas emissions is very promising. We believe green hydrogen will be the dominant production path in most regions worldwide and we will focus the remainder of this article on green hydrogen technologies and their economics.
The best of the rest
Before diving into green hydrogen production, a number of other processes are worth mentioning.
Recently, there has been talk of natural reservoirs of hydrogen. The so called ‘gold hydrogen’ can be pumped out of the ground in a fashion similar to natural gas extraction today. To date, little is known about gold hydrogen, and more research is required before we will see it at scale.
Another form of hydrogen production is waste-to-hydrogen. Rather than burning biomass waste or putting it in a landfill, it can be used to produce comparatively cheap clean hydrogen. This is a relatively messy and complex process, but the economics do make it attractive as a part of the solution. We don’t expect waste-to-hydrogen to become dominant, but do see potential for it to take a noticeable share of clean hydrogen production in the next 15-10 years.
Green: The promise of electrolysis
Electrolysis is a decade old technology – dating as far back as 1800. However, to date, it has been too expensive to compete with grey hydrogen. Green hydrogen prices are two to four times as high as those of grey and the amount of grey hydrogen produced today is a rounding error. Then why do we care about green hydrogen?
Green hydrogen is clean – it has no greenhouse gas emissions associated to its production. This doesn’t help much if it is far too expensive, but with the falling cost of renewable electricity, the cost of green hydrogen too is falling rapidly. Furthermore, green hydrogen can be produced anywhere there is a (renewable) electricity source and water, making it flexible geographically. Today, one of the largest cost components of hydrogen is its distribution. If an electrolyser enables producing closer to the site of use, significant cost savings can be had, in part offsetting today’s higher cost of production for distributed off-taker.
Cost curves for green hydrogen have been declining rapidly. Initiatives such as the US Department of Energy’s Hydrogen Shot are accelerating this cost decline, pursuing a target of 111 – $1 per 1 kg of hydrogen in 1 decade (by 2030). We anticipate that green hydrogen will be the preferred path for hydrogen manufacture beyond 2030 when costs approach those of grey hydrogen. A major remaining concern is water sustainability issues given the significant water input requirement for electrolysis.
We identified four main types of electrolysers. Without going into the technical details, it is worth being aware of their comparative advantages and disadvantages. Today, alkaline remain the most commonplace but most new projects are PEM. PEM electrolysers have the unique advantage of being able to ramp up and down quickly, making it possible to turn on when there is excess renewable power (the sun is shining or the wind is blowing more than there is demand) and to turn off when there is not.
Green hydrogen cost: Why wind and solar energy change the equation
The extent and speed at which green hydrogen will contribute to decarbonising industry will be driven by the evolution of its production cost. The production cost (also known as levelised cost of green hydrogen production, or LCOH) is dependent on two main factors. One of them is the capital cost of electrolysers discussed above. The second and typically even more important factor is the availability of cheap renewable electricity, which can be broken down into two components: The electricity price and the capacity factor.
The capacity factor represents the percentage of the maximum production capacity of an electrolyser utilized in a given period. The main reason for the capacity factor to be substantially below 100% is the availability and cost of electricity. When connecting an electrolyser to the grid, the capacity factor can be up to 100%, albeit may be lower to avoid buying electricity when it is most expensive. When directly connecting an electrolyser to a renewable power source, the capacity factor can range from ~25% for solar to ~35% for wind to ~100% when using non-intermittent sources of electricity.
To better understand the (different components of) LCOH, we analysed the cost based on three different scenarios (numbers are based on BloombergNEF’s most optimistic estimates):
Solar in United Arab Emirates: ~3ct/kWh at 20% capacity factor
Onshore wind in Brazil: ~2ct/kWh and 40% capacity factor
Hydropower in Iceland: ~4 ct/kWh at 90% capacity factor
The below image represents the hydrogen cost and its breakdown in different cost buckets for each of these scenario’s. As visible in the graph, the opex/capex split is highly dependent on the capacity factor. While capex represents ~60% of the cost in the UAE case with 20% capacity factor, only ~25% of LCOH is related to capex in the Iceland case with 90% capacity factor.
To better understand the impact of capacity factor and renewable electricity cost, we ran the numbers in the three different scenarios for a 100MW PEM electrolyser with a CAPEX cost of $1,000/kW (with 8% WACC, 35% BoP, 1.1 installation factor). The below sensitivity table represents the levelised cost of hydrogen production with electricity cost between $1-8 ct/kwh and a capacity factor between 10 and 100%. This cost only represents production and does not take into account any costs for transportation or storage.
Some key takeaways from the analysis are:
The LCOH is significantly more sensitive to the cost of electricity than the capacity factor (Which is driven by the relative importance of opex versus capex). As electrolysers become cheaper, colocating them with renewable energy assets (with capacity factors of 30-50%) will be an increasingly economically attractive way to produce cheap green hydrogen.
The LCOH of $1.1-6.5/kg of green hydrogen is a wide range though partly overlaps with the $0.7-2.5/kg of grey hydrogen. Electricity prices as low as 3 ct/kWh are needed for green hydrogen to become cost competitive with grey hydrogen. Geographies with cheap renewables will be at the forefront of green hydrogen adoption.
It is important to note that these costs are purely the production cost in isolation. Additional costs from compression, liquefaction, storage and distribution are significant for hydrogen and may change the playing field for green. Cost savings from locating electrolysers closer to where hydrogen is used can reduce delivered costs by as much as 50%. We will explore this more in our next article.
Cost: Carbon taxes will help favour green but won’t do it on their own
Finally, the cost competitiveness of green hydrogen versus grey hydrogen will improve remarkably if significant carbon incentives become widespread. As grey hydrogen production comes with 9kg CO2 emitted per kg hydrogen produced, grey hydrogen will become more expensive when carbon taxes are factored in. The below graphs illustrate the impact of carbon taxes on grey hydrogen prices compared to the green hydrogen production cost in 2022 and 2030, which is independent of carbon prices assuming the usage of 100% renewable electricity. The assumed electrolyser capex is $1,000/kW and $400/kW in 2022 and 2030 respectively. While carbon taxes will help to improve economic viability of green hydrogen, we need progress in electrolyser costs, efficiency, lifetime as well as increased availability of cheap renewable electricity for green hydrogen to disrupt the industry.
In the long term, green hydrogen is the most promising carbon-free hydrogen production method. The jury is still out on how the transition will look and different technologies might win for different applications.
The availability of cheap renewables will drive adoption of green hydrogen. Electrolysers are expected to be operated flexibly to (1) work with direct connection to renewables without the need for electricity storage (avoiding high costs from using the public grid for electricity distribution), or (2) to take advantage of volatility of prices on electricity market when connected to the grid.
Carbon prices will help favour green over grey but will not move the needle on their own. Electrolyser cost reductions and technology improvements and the continued the deployment of renewables are indispensable for the green hydrogen industry to contribute to a net-zero economy.
Finally, in this article we have looked at production cost in isolation. The ability to deploy electrolysers in a distributed fashion, locating them geographically close to the area of demand may reduce distribution costs significantly, with a potential to reduce the cost of delivered hydrogen by as much as 50%. Watch out for our next article where we dive into hydrogen storage and distribution.
（Article reprinted from Hydrogen Fuel Cell Info）