Making sense of green hydrogen costs and recent market developments in Europe

Green hydrogen projects going online by 2030 may face costs up to twice as high as anticipated until recently. At the same time, recent auction results have demonstrated surprisingly low support requirements. What are the possible explanations?

Andrea Dertinger, Agustin Roth, Bastian Lotz and Matthias Schimmel are experts with Guidehouse, a global management consultancy advising energy providers, corporations, and the public sector.

In 2022, the global economy experienced rampant inflation, rising interest rates and a consequent increase in the cost of capital. As a result, leveraging debt for capital-intensive renewable energy and hydrogen projects has become increasingly difficult, risky, and expensive. Simultaneously, projects face higher labour costs and raw materials sourcing issues, resulting in upward revisions of costs and, in some cases, even project cancellations.

At the same time, the higher cost of capital has increased electrolyser equipment prices globally. In 2022, capital cost for electrolyses ranged between 1,590€ per kilowatt (kW) for alkaline water electrolysis and 1,758€/kW for proton exchange membrane electrolysis (PEMEL).

This represents a 9% year-on-year increase compared to the costs registered in 2021. Europe also experienced a substantial increase in electricity prices since mid-2021, driven mainly by surging natural gas prices following Russia’s invasion of Ukraine.

This led to increased renewable energy sourcing costs – the single most significant cost component of green hydrogen – especially for electrolysers sourcing renewable electricity via the grid.

Cost increase

As a result, previous estimates projecting global renewable hydrogen production costs in 2030 as low as 1.20 to 4.15€ per kilogram (kg) have now been revised upwards substantially to 5 to 8€/kg for central Europe, given inflation, higher labour costs, higher weighted average cost of capital (WACC) and revised electricity price assumptions.

However, this cost increase is expected to be temporary. The International Energy Agency (IEA) expects mass production and economies of scale to cut electrolyser capital costs by more than half to 673 to 757€/kW by 2030.

Provided the scale-up of manufacturing and the completion of projects currently in the pipeline, costs could fall by around 70% by 2030 compared to today. However, while equipment cost, interest rates and cost of capital can be expected to decline in the future, projects expected to come online by 2030 must make investment decisions in the next two to three years and will most likely not yet fully benefit from declining costs.

Recent auctions highlight low support needs

At the end of October, the Danish government published the results of Europe’s first-ever dedicated hydrogen production auction. With a budget totalling €170 million (1.25 billion Danish Kroner, DKK), more than 280 MW of renewable hydrogen / derivative production capacity would receive support.

The tender was three times oversubscribed and initially produced bid levels as low as an equivalent of 0.14€/kg of hydrogen (9.30 DKK/GJ) for a 10-year fixed premium on top of market revenues, with the highest bid at an equivalent of 1.05€/kg.

However, the Danish Energy Agency had to withdraw its award to the lowest bidder, US-based Plug Power, after it could not provide a bank guarantee for its 100 MW green hydrogen production facility.

The Danish government had set an overarching ceiling price at an equivalent of 2€/kg (120 DKK/GJ), while the actual ceiling price stood even lower at 1.18€/kg (70 DKK/GJ) to maximise the number of projects getting a subsidy. Any bids submitted above the latter would have implied the auction and its budget split into two rounds. Eligible projects included all unsubsidised renewable hydrogen and Power-to-X (PtX) projects regardless of end-use.

Three projects representing 60% of the total capacity were awarded to one company. The two largest projects awarded (totalling 250 MW) remained significantly far below the ceiling price.

Cost realities of green hydrogen

Several possible explanations could be behind the very low bids observed in Denmark.

Half of the awarded projects (among them a 150 MW facility in Southern Denmark) target the production of hydrogen-based fuels. While those are 1.5 to 2 times more expensive to produce than pure hydrogen, off-takers may also have a higher willingness to pay (in certain sectors, e.g., transport up to 6€/kg of hydrogen) to comply with regulatory requirements such as the 1%-RFNBO quota for the transport sector from the revised Renewable Energy Directive.

Consumers might also accept higher prices if they have received previous support for operating or converting assets to RFNBOs or renewable fuels of non-biological origin. These potentially higher prices can translate into lower bids by hydrogen producers.

On the cost side, Denmark also benefits from exceptional offshore and onshore wind resources, making hydrogen production highly competitive. For example, according to IRENA (2023), Denmark had the lowest weighted average levelised cost of electricity (LCOE) for offshore projects commissioned in 2021 globally at around 40 €/MWh.

Given the meagre sub-ceiling price at around 1.18€/kg (70 DKK/GJ), bidders were also incentivised to remain below this threshold not to diminish their chances of being among the winning bids in case the auction got split into two rounds. Three out of six awarded projects bid close to this threshold.

Even undercutting this threshold, the very low bids could also result from optimistic bidding by players with relatively large projects (above 100 MW) seeking to secure market power in the emerging Danish and European hydrogen markets.

Some market players seem willing to take on price risks for relatively small volumes in the early stage of the hydrogen market. Earlier this year, Air Products had committed to a 30-year exclusive offtake contract in Saudi Arabia’s Neom project to secure market access. However, it remains to be seen if off-takers will accept these conditions for larger volumes going forward.

Moreover, some producers may have submitted low bids, using economies of scale by expanding the capacities of existing facilities.

Auctions are there to stay

At the end of November, the first round of the EU-wide European Hydrogen Bank auction for green hydrogen was launched with a budget over four times that of the Danish scheme and a ceiling price of 4.5€/kg.

Other EU countries are launching their own auction schemes to support green hydrogen production domestically, in Germany, Netherlands and Luxembourg, for example. The results of these auctions will give more clarity on how competitive renewable hydrogen across the EU can be.