Understanding global hydrogen production costs and curve downwards

RENEWABLE H2 COST COULD BE SEEN BREAK EVEN  WITH GRAY H2 BEFORE 2030 IN OPTIMAL REGIONS

Three factors are driving this acceleration. First, capex requirements are dropping. We expect a significant electrolyzer capex decline by 2030 – to about USD 200-250/kW at the system-level (including electrolyzer stack, voltage supply and rectifier, drying/purification and compression to 30 bar). That is 30-50% lower than we anticipated last year, due to accelerated cost roadmaps and a faster scale-up of electrolyzer supply chains. For example, several electrolyzer manufacturers have announced near-term capacity scale-ups for a combined total of over approximately 3 GW per year.

Second, the levelized cost of energy (LCOE) is declining. Ongoing reductions in renewables cost to levels as much as 15% lower than previously expected result from the deployment of at-scale renewables, especially in regions with high solar irradiation (where renewables auctions continue to break record lows). The strongest reductions are expected in locations with optimal resources, including Spain, Chile, and the Middle East.

Third, utilization levels continue to increase. Large-scale, integrated renewable hydrogen projects are achieving higher electrolyzer utilization levels. This performance is driven largely by the centralization of production, a better mix of renewables (e.g., onshore wind and solar PV) and integrated design optimization (e.g., oversizing renewables capacity versus electrolyzer capacity for optimized utilization)

The production of low carbon H2 also continues to gain momentum. Improvements include increased CO2 capture rates for autothermal reforming (ATR) from 95% in last year’s report to 98%, coupled with potential capex reductions from smaller capture installations and lower compression requirements. Conducting ATR at higher temperatures can also increase methane-to-hydrogen conversion rates, resulting in lower methane content in the product gas, further reducing emissions.

Over 60% of reduction in the production cost is projected for renewable hydrogen by 2030 - Hydrogen Council, Mckinsey

INTRODUCING CO2 COSTS CAN BRING THE EARLIEST BREAK EVEN FOR CLEAN HYDROGEN TO 2028-2034

Including carbon costs emissions related to gray and low-carbon hydrogen production greatly influences the breakeven dynamics between gray and renewable hydrogen. Assuming a carbon cost of about USD 50 per ton of CO2e by 2030, USD 150 per ton CO2e by 2040, and USD 300 per ton CO2e by 2050, can bring the earliest breakeven for renewable hydrogen forward to a 2028 to 2034 timeframe. The exact year will depend on the availability of local resources.

In countries with optimal renewables but average cost natural gas (e.g., Chile) breakeven could occur as soon as 2028. In locations with average resources for both pathways (e.g., Germany), breakeven could come by 2032.

At the same time, locations with abundant and optimal resources for both pathways (e.g., selected regions in the US) could see the breakeven of gray and renewable hydrogen by 2034. Low-carbon hydrogen could be seen having breakeven with gray by 2025-2030, subject to at-scale CO2 storage and transport infrastructure, and an expected cost of about USD 35-50 per ton CO2e

Electrolyzer system costs could drop from about USD 1,028/kW in 2020 to an estimated USD 340/ kW in 2050 (in the base case scenario according to Eninrac Electrolyzer cost model). This calculation includes the stack as well as the balance of plant (e.g., transformer and rectifier, drying/purification to 99.9% purity, compression to 30 bar). It excludes transportation of the electrolyzer to the site, installation, and assembly (including grid connection), the cost of the building (for indoor installations), and indirect costs such as project development, field services and “first fills.”

Over 60% of reduction in the production cost is projected for renewable hydrogen by 2030 - Hydrogen Council, Mckinsey

Because electrolyzer system capex should decline sharply, other cost elements (including installation, assembly, and indirect costs) will take a larger share of costs over time. That’s because learning curve effects regarding the engineering, procurement and construction (EPC) part of the value chain will be limited after the deployment of the first few large-scale projects.

The total cost of an electrolyzer project also includes financing costs. A contribution margin in line with the project’s weighted average cost of capital (WACC) requirements should scale with other capex elements. Financing thus becomes an important way to reduce hydrogen production costs. For instance, reducing WACC from 7% to 5% would reduce a project’s overall capex commitment by almost 20%.

EXPECTED ELECTROLYSER CURVES COULD BE TOO CONSERVATIVE

Current learning curve expectations for electrolyzer scale-ups range from 11-12% between 2020 and 2030 for polymer electrolyte membrane (PEM) and alkaline technologies. However, these learning curves appear conservative compared with the early development of other low-carbon technologies like batteries, solar PV or onshore wind, which saw learning rates of approximately 20-40% between 2010 and 2020. Potentially higher learning rates of 15%, 20% or 25% would drive additional cost reductions of 10-20%, 40-50% or 60-70%, respectively, by 2030.