Cost

HYDROGEN COST: EXPLAINED

Hydrogen is the most abundant element in the universe, and has been safely produced, transported and used for decades.

As the world grapples with decarbonizing the economy and deploying more sustainable energy, hydrogen and its derivatives have emerged as promising clean energy solutions across multiple sectors; from transportation and decarbonizing hard-to-abate industrial sectors to supporting a 100% clean electric grid. However, the journey towards making clean hydrogen a cost-competitive alternative to traditional energy sources is not without challenges.

For hydrogen’s decarbonization potential to be fully realized, significant cost reductions will need to be achieved to make it a cost-competitive solution for end-users to adopt in the years ahead. As well, end markets for clean hydrogen need to develop further to help pull demand and create new opportunities for supply growth.

Combined with federal and state incentives, the industry is poised to achieve this by creating economies of scale for key hydrogen production and end-use equipment.

Source: U.S. Department of Energy Hydrogen Activities and Hydrogen Shot Overview

 

Setting the Stage to Achieve Economies of Scale

Clean hydrogen and hydrogen-derived products can contribute to net-zero goals by supporting decarbonization in industries that have traditionally leveraged hydrogen, like fertilizer and chemicals, as well as new applications like steelmaking, cement, on-road transport, shipping and aviation. And the U.S. is setting the stage to deploy vast quantities of clean hydrogen. According to the Department of Energy Clean Hydrogen Strategy and Roadmap, the U.S. will need 10 million metric tons (MMT) of clean hydrogen by 2030, 20 MMT by 2040 and 50 MMT by 2050.

In 2021 the federal government launched its Hydrogen Shot initiative aimed at driving down the price of clean hydrogen by 80 percent to $1 per kilogram in the next decade. Hydrogen production will also benefit from $9.5 billion in federal programs and grants, passed under the Bipartisan Infrastructure Law (BIL).

Source: Department of Energy’s (DOE’s) Energy Earthshots Initiative

The recently announced selectees under the DOE Regional Clean Hydrogen Hubs (H2Hubs) Program will serve as important test cases for reducing costs locally by utilizing varied production pathways. These include hydrogen production facilities from renewables, fossil fuels with carbon capture and storage (CCS), and nuclear using both established and innovative electrolyzer technologies. The adoption and proliferation of these technologies can help reduce costs and drive further technology adoption.

In addition, many companies that are not part of the H2Hubs are making their own investments to help increase supply and address transportation and end-use challenges.

Underpinning these early actions by the federal government is the long anticipated 45V clean hydrogen production tax credit passed under the Inflation Reduction Act (IRA). The 45V credit will provide up to $3 per kilogram of hydrogen if producers achieve defined carbon-intensity thresholds. Hydrogen producers leveraging fossil fuels with CCS will also have the option to leverage the 45Q tax credit for carbon oxide sequestration, which would provide up to $85 per ton of CO2 permanently stored.

 

Scaling technology to reduce cost

Source: Greg Stewart/SLAC National Accelerator Laboratory

Although the costs of renewable power generation have come down in recent years, renewable power remains expensive in many key geographies where hydrogen is or will be produced and the need for non-intermittent power for industrial productions remains an important consideration. As well, the need for greater supply of higher-efficiency  electrolyzers is still a challenge, as is their relatively high costs. Hydrogen producers using fossil fuels with CCS can  achieve cost reductions through efficiency and process improvements to the thermochemical pathways being used.

However, efficiency improvements to clean hydrogen production are one aspect of reducing costs. The delivered cost of hydrogen, meaning what consumers would pay, is also more expensive due to the lack of bulk distribution systems such as pipelines. Building new hydrogen pipeline infrastructure or allowing hydrogen blends in existing gas pipelines will help reduce the delivered cost of clean hydrogen.

Cost reductions are also set to be achieved through advancements in research and innovation— supported by the Department of Energy’s (DOE’s)  $750m hydrogen research and development fund, which aims to overcome technical barriers to cost reduction that cannot be achieved by scale alone.

 

Reducing End Use Costs

The cost-effectiveness of hydrogen also depends on the development of the technologies that will leverage hydrogen. For example, fuel cells that convert hydrogen into electricity to power vehicles, homes and businesses, have come down in cost significantly since the early 2000s, much like the cost of renewable power.

Source: Fact of the Month April 2018: Fuel Cell Cost Decreased by 60% since 2006

And while cost reductions for clean hydrogen and the equipment that will use it is essential, the pathway to scale will be varied across sectors. Clean hydrogen will need to reach cost parity to the fuels and feedstocks already being leveraged by specific end users to be commercially viable. For example, existing hydrogen users, like chemical and fertilizer producers, will need clean hydrogen to achieve near-cost-parity with the unabated hydrogen in use today. Other sectors, like transportation (on-road, marine, aviation, rail), will see a more complex pathway to adoption due to competing incumbent and alternative fuels in the market.

 

The Bottom Line

The path to making hydrogen a cost-competitive energy source is complex but achievable, especially with the support of the federal government as demonstrated in recent legislation.

The hydrogen market, currently in its early stages, is expected to benefit from economies of scale and robust incentives as it grows and matures. Investments like the hydrogen production tax credit and the $7 billion H2Hubs Program will make hydrogen projects more financially viable in the near term and position the industry to be self-sustaining in the years ahead. The significant resources committed by both the private sector and the government, including grants and support for academic and private sector research collaborations, lay the foundation for a more cost-effective hydrogen economy.

The BIL and the Inflation Reduction Act (IRA) represent significant steps towards a fully realized hydrogen economy, where clean hydrogen can play a pivotal role in achieving a sustainable, low-carbon energy future. The hydrogen industry is already seeking to make the necessary investments and do the bulk of the work necessary to realize this vision. A commitment to innovation, safety, and environmental sustainability, underpinned by strategic government support, sets the stage for clean hydrogen to emerge as a key player in the global energy landscape.

 

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