Levelised costs will settle the blue-green debate
Blue hydrogen will be required to support decarbonisation while green hydrogen matures and its costs decrease
It is widely acknowledged that hydrogen has the ability to contribute to the decarbonisation of the energy and industrial markets and therefore assist with global efforts to meet emissions control requirements.
Debate is ongoing whether state/government policies should reflect balanced investment and support, in the short to medium-term, for development of both blue and green hydrogen markets, or whether any focus on blue hydrogen slows the ultimate move to a zero-carbon green hydrogen solution.
Given the market dominance of lower-cost unabated grey hydrogen, some commentators perceive that blue hydrogen facilitates a rapid development of a hydrogen-based economy by providing the required volumes in a cost- and environmentally effective manner, particularly given some of the practical constraints associated with the build-out of renewable energy.
In most situations, renewable power generation is expected to face challenges to replace forecast electricity grid demand, let alone having ‘spare’ renewable capacity to use in green hydrogen production; pragmatism therefore suggests support for short- to medium-term demand for blue hydrogen. Even the Hydrogen Council and the International Renewable Energy Agency, which estimate global potential for 78EJ of hydrogen production in their forecast for 2050, see the majority coming from blue hydrogen.
Debate is ongoing whether state/government policies should reflect balanced investment and support… for development of both blue and green hydrogen markets
Looking at Europe as an example, the EU is targeting carbon-neutrality by 2050 and states hydrogen is a key part of the European Green Deal. The EU recognises, in the short- to medium-term, significant volumes of hydrogen would need to be produced from natural gas with carbon capture and storage (CCS), i.e. blue hydrogen, as a bridging technology.
For context, in terms of green hydrogen, the EU hydrogen strategy phase 1 (2020-24) plans for 6GW of electrolyser capacity, with 40GW in phase 2 (2025-30). The EU currently has the capacity to build a little under 1GW of electrolyser capacity annually.
Blue hydrogen development
Hydrogen production cost is typically quoted in levelised cost of hydrogen (LCOH) terms, which relates to the average cost of hydrogen generation over the lifetime of a project.
Blue hydrogen is primarily produced using a combination of steam methane reformers (SMRs) with the addition of CCS. There are seven blue hydrogen operating projects today producing c.0.4mn t/yr of hydrogen and capturing nearly 6mn t CO2/yr. Of the seven projects, four are at oil refineries and three are at fertiliser plants. A conventional process flow scheme for blue hydrogen is shown in Fig. 1. The current standard carbon capture ‘reference’ method uses amine absorption separation technology; the Shell Quest project in Canada is an example of an operating blue hydrogen plant with conventional amine technology.
SMR technology is mature and there is limited scope for improvements in efficiency. CCS, a key part of the blue hydrogen LCOH, appears at first view to be a novel technology but the component parts—CO2 extraction, compression, transportation and finally injection into an underground geological formations—represent a number of mature industries combined together.
Blue hydrogen pricing
A consolidation of industry views suggests a current blue hydrogen LCOH of between $1.50/kg and $3.50/kg depending on variations such as natural gas prices and cost of labour.
At current natural gas prices, SMR lifecycle costs makes up around 30pc of the blue hydrogen LCOH (in low gas cost locations). Carbon capture lifecycle costs also account for approximately 30pc of LCOH while transportation and storage typically only form up to c.5pc of the LCOH, with feedstock cost comprising the balance.
Recent analysis by GaffneyCline suggests that the focus for cost savings, assuming flat feed gas pricing, will be a reduction in costs for the new carbon capture facilities retrofitted to existing SMRs as well as some limited improvements to the base efficiency of SMRs.
Potential options include physical capture through cryogenic and sorbent technologies, along with membrane separation. Beyond design changes to the SMR process itself, other continuous process and thermal efficiency improvements will likely result in additional minor SMR unit cost reductions.
GaffneyCline analysis to 2030 anticipates that the lifecycle costs of SMRs can be reduced by 10-25pc and that the lifecycle costs of carbon capture can be improved by up to 20pc. This results in an overall improvement in total blue hydrogen unit cost of c.15-20pc, resulting in a 2030 forecast of approximately $1.25/kg to $3.00/kg (based on a range of assumptions) for blue hydrogen.
Green hydrogen production
Green hydrogen, as with all novel technologies, is moving from a predominantly R&D development phase to a mainstream industrial development phase. It will therefore exhibit a unit cost reduction curve, similar to that achieved by solar PV, wind turbines and high-capacity batteries etc. All these technologies showed a significant unit cost reduction over the years of development. Some of this unit cost saving came from economies of scale and/or from a move to a ‘production-line’ type construction. There were also efficiencies in design, construction and installation in addition to actual technology efficiency gains.
The green LCOH comprises three building blocks: electrolyser cost, renewable electricity pricing and other operating cost charges. Typically, electrolyser cost accounts for approximately 20-25pc of the LCOH today, with electricity contributing the lion’s share of approximately 70-75pc of LCOH. Operating cost is relatively small and typically is no more than c.5pc.
Renewable energy pricing—mostly unsubsidised utility solar PV and wind—has fallen remarkably over the last 30 years and is already within similar levelised cost of energy (LCOE) as coal-fired electricity production (c.$30-50/MWh) and will continue to become more cost competitive. However, when looking at the cost decline curves from a range of sources, and recognising a continuation of recent c.10pc/yr cost declines in renewables, there appears to be a potential LCOE trend to about $20/MWh by approximately 2030.
78EJ – Hydrogen production forecast for 2050
Aside from operating cost, which is unlikely to move significantly, we also need to review the trend in electrolyser unit cost. Forecasting electrolyser cost is difficult as with all developing technologies, although GaffneyCline expects that electrolysers will exhibit a new-technology learnings-based cost curve similar to solar PV or wind.
Solar PV was originally developed in the 1970s, but if we consider a more recent history from 2010, solar PV LCOE was at about $500/MWh. Since then LCOE has seen a significant fall and is currently c.$30-50/MWh. A similar percentage reduction in LCOE for solar PV from 2000 to 2010 was also evident. It would be logical that electrolyser technology could follow a similar trajectory in terms of unit cost from 2020 to 2030, given a similar industrial baseline to solar PV cell production. However to allow for uncertainty in such analysis, if we also consider wind power as a second data set, a reduction in wind LCOE is also evident over the last ten years but at a lesser percentage (c.50pc for offshore and c.60pc for onshore).
Current LCOH for green hydrogen is estimated to range between $2.50/kg and $10/kg. Therefore, green hydrogen could easily be priced in 2030 near to half of the current LCOH at a range of c.$1.25/kg to c.$5/kg. Green hydrogen could also see enhanced regulatory support as well as government incentives as carbon reduction demands increase, further strengthening its commerciality.
Expectations of green hydrogen becoming a major player in the energy mix require some careful consideration. Growth requirements from renewable sources to decarbonise the existing power sector are significant, and pragmatic reasoning in the short- to medium-term therefore has an emphasis on blue hydrogen for commercial reasons.
However, the rate of the green LCOH downward curve will dictate the date at which green hydrogen surpasses blue hydrogen on a price basis commercially, and this commercial overtake date could be quite soon, albeit market scale will be limited by availability of renewable energy.
Jane Peatie is a senior adviser and Drew Powell a projects director at GaffneyCline