In our last edition of the Green Molecule™ Journal we looked at Green Hydrogen, which is hydrogen produced via water electrolysis using only renewable electricity.

A quick summary of the different technologies is here:

Today we are diving deeper into Green Hydrogen cost drivers. Back in 2021, the DOE announced the “Hydrogen Shot” program with the goal of reducing the cost of clean hydrogen by 80% to $1 per 1 kilogram in 1 decade (“111”). Subsequently, the Inflation Reduction Act (IRA) introduced incentives of up to $3/kg of clean hydrogen produced, which can take the cost to the customer down to the target of $1/kg for certain applications but through accounting trickery rather than real cost reductions.

What we really want to see are costs going down to below $1/kg (a cost target that our portfolio company Cemvita can achieve with their gold hydrogen technology, once scaled-up) which is equivalent to ~$7.4/MMBtu or less. For reference, the average cost of natural gas over 2022 was $6.45/MMbtu (Source: EIA), higher than the long term average due primarily to the global natural gas supply disruption provoked by the war in Ukraine, but an energy cost that the economy has demonstrated to bear quite easily. In the scale of the global energy system, a decade is essentially tomorrow and green molecules could soon achieve cost parity with fossil fuels!

Looking at it more closely, the $1/kg goal is referring to the Levelized Cost of Hydrogen (LCOH) which is a cost that assumes all of the variable costs (energy input, O&M, etc) as well as the fixed costs (permits, engineering, capex, cost of capital, etc) that go into building a green hydrogen plant and producing the green molecules from it.

So how will we get to sub $1/kg?

1. Cheap Electricity: Electricity represents 40-70% of the LCOH from electrolyzers of 20+ MW in capacity (source: Lazard). Identifying reliable sources of clean energy that can be offered at high capacity factors (meaning for a large portion of the 8,760 hours of the year) is the #1 driver of LCOH. Depending on location (e.g. look at this graph from Lawrence Berkeley National Laboratory) utility scale solar power PPAs are executed between $20-40 MWh. Identifying cheap sources of clean electricity, such as solar in the West, is the best opportunity to reduce green hydrogen costs - however, green hydrogen needs water, and a lot of it, so accessing energy and water is a more complex problem.
2. Free electricity: what is better than cheap, clean electricity? Free electricity! In several locations of the US grid, renewable energy is often “curtailed” meaning that there is more energy available at a given time that the grid can use or transport (due to congestion issues). By strategically locating electrolyzers in areas prone to curtailment, green hydrogen operators could access essentially free (or in some cases, negative cost!) electricity for at least a portion of the operating hours. This strategy lends itself very well to PEM and AEM technologies that can quickly respond to price signals and start producing hydrogen almost immediately, however free electricity is relatively rare and location specific and building an electrolyzer plant with the expectation of running it for for only a few hundred hours a year is not likely to be cost-effective, so this strategy needs to be supplemented with other sources of clean electricity at costs greater than zero.
3. Making more electrolyzers: one of the best ways to reduce CapEx is simply to make larger quantities of electrolyzers: similar to what happened with renewable energy and energy storage, making more units will lead to cost reductions (a phenomenon known as “learning rate”). The learning rate for electrolyzers is 18% (source), meaning that for every doubling of electrolyzer production we get an 18% reduction in manufacturing costs.
4. Making bigger electrolyzers: another way to reduce the CapEx is to increase electrolyzer capacity, as economies of scale kick-in and the cost per kW installed goes down. This recent study shows that alkaline systems below 5 MW are essentially sub-scale if the goal is to produce cheap hydrogen. Size matters and making larger systems leads to very significant cost reductions on a $/kW installed basis.
5. Reducing expensive catalysts: electrolyzers that work well with clean energy, such as PEM, require Platinum-Group-Metals (PGM) to operate. While catalysts are expensive, the electrolyzer is only about 50% of the CapEx (Source: Lazard) and the catalyst itself is only a fraction of that cost. The main benefit of catalysts is that they improve the efficiency of the system, and therefore reduce the amount of electricity required to generate hydrogen. So while catalysts are expensive, due to the efficiency improvements a recent study on alkaline electrolyzers shows how essentially increasing by 10X the amount of Platinum effectively does not change the LCOH. However, AEM electrolyzers can reach high efficiency without catalysts, so expect to see a 5-20% reduction in CapEx with respect to PEM systems, for the same (or very similar) performance.

Finally, the operating strategy will determine if OpEx or CapEx are dominating the economics of generating clean hydrogen. In the graph below on the left, we can see the impact of going from expensive (red) to cheap (blue) electrolyzers on the LCOH. As operating hours increase, the CapEx doesn’t matter and we could spend double the cost in building the plant while achieving the same cost of hydrogen, since the electricity cost dominate the economics of hydrogen production. On the right, for a given CapEx, electricity costs have a much bigger impact and we can see that at $20/MWh or below, any strategy that ensures utilization of the electrolyzer for more than 2,000 Full Load Hours (FLH) will lead to an LCOH of $2 or less

In conclusion, there are a lot of operating, project development and technological levers to bring the cost of Green Hydrogen to below $1/kg. At ECV, we are big believers in the future of green molecules to decarbonize the natural gas value chain, and we look forward to the near future where clean hydrogen will be abundant and cost-effective.

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