Hydrogen’s Reality Check: Debunking the Delusion of the $1/kg Dream

Ever stumbled upon those headlines promising a dazzling future where hydrogen becomes as cheap as your morning cup of coffee? Reports are flooding in, boldly declaring that hydrogen costs will plummet, with a $1/kg H2 price tag becoming the golden target by 2050. Some even forecast a jaw-dropping 50–60% cost reduction by 2030, a mere six years away.

The optimism is contagious, especially when we recall the solar PV and battery industries’ miraculous cost-cutting journey. But hold on a minute. Can the hydrogen sector really follow suit? Are we on the brink of witnessing a cost revolution, or is this just wishful thinking?

In this article, we’re peeling back the layers of hydrogen cost projections and offering you a more down-to-earth perspective on that coveted $1/kg target. Let’s embark on a journey through four practical steps that reveal the true nature of hydrogen costs. Buckle up — it’s time to inject some realism into the hydrogen hype.

Step 1: Check Today’s Real Price

Before getting swept away by the crystal ball predictions of hydrogen’s future affordability, let’s ground ourselves in the reality of today’s prices. Take a moment to cast aside the forecasts and observe the actual cost of hydrogen in the market right now. Head over to a functioning refueling station and see for yourself — what’s the price tag that greets you?

Sure, some might argue that comparing today’s market price to the coveted $1/kg production cost is like comparing apples to oranges. After all, the station’s price has already factored in the logistics, unlike the pure production cost. But, let’s not get bogged down in the details just yet. The essence is this: to really understand the lay of the land, look at today’s market price.

This stark contrast between grand predictions and the current price should stir a healthy dose of curiosity within you. It’s an invitation to question, to wonder, and to scrutinize the values that countless publications throw around. Today’s price at the pump might just be the reality check we all need in the world of hydrogen projections.

Step 2: Compare Fairly with an Apple-to-Apple Unit

Now, let’s tackle the nitty-gritty of understanding that elusive $1/kg hydrogen cost. Ever wondered how much a kilogram of hydrogen really entails? Can it squeeze into a bottle? How does its energy content stack up against a liter of gasoline?

If we regard hydrogen as an energy form, it’s time to ditch the kilograms and Nm3. Use the proper energy units: Joules, Megajoules, and Gigajoules. To level the playing field and make hydrogen costs comparable with other energy sources like oil, gas, and electricity, I propose we measure it in $/GJ.

In our civilization, fossil fuels offer a pocket-friendly delight at less than $10/GJ. The target of $1/kg hydrogen production cost becomes apparent — it’s equivalent to $8/GJ, a price tag that our society wants for an energy source. Yet, a reality check awaits when we delve into the actual cost of producing green hydrogen using renewable energy via electrolysis — a best-case scenario of $6/kg, equivalent to a hefty $50/GJ. That’s five times the price our society’s willingness to pay.

Above is hydrogen at upstream. Meanwhile, the hydrogen that you can purchase is hydrogen at the refueling station. Now, compare it with other energy forms that is available for consumers like gasoline and electricity.

For transportation, consumers yearn for an energy price around $30/GJ (equivalent to $1/liter of gasoline). For powering home appliances, households typically pay 20 cents per kWh for electricity, equivalent to $55/GJ. Now, compare it with this — today’s hydrogen price at the refueling station is more than double, standing at $130/GJ (refer to $16/kg, average price before Ukraine War).

But wait, there’s a catch. This price tag is for grey hydrogen from natural gas, full of emissions. Any hopes for green hydrogen being cheaper? Unlikely.

Now, let’s engage in some logical reasoning. Green hydrogen, made from electrolysis, needs electricity as its feedstock. Logically speaking, you’ll need to buy electricity to make green hydrogen. It’s a straightforward equation: green hydrogen should cost more than the feedstock price. This brings us to a fascinating exercise — reverse engineering to calculate the electricity price assumptions of those publications claiming very low hydrogen costs.

How close to zero are their assumption of electricity price, and just how real is this scenario? See this at the end of the article

Step 3: Assessing the Entire Hydrogen Value Chain

That promised $1/kg? It’s the production cost in the upstream, far from your reach as a consumer. To bridge this gap, we must consider logistics cost and unveil the delivered hydrogen cost.

Hydrogen is difficult to handle. Handling it requires more resources, especially when it comes to transportation. If you’re curious about the nitty-gritty, I’ve delved deep into this in a previous article — check it out https://dannykusuma.medium.com/hydrogen-hype-a-story-of-energy-loss-f37a592331c8.

Hydrogen is expensive to produce and expensive to transport. It is very different from the fossil fuels that society enjoy today. One of the important characteristics needed for an energy form is that it is easy to store and transport.

Take gasoline — a simple fill-up in a tank or even a plastic bottle. Electricity? Just plug in, and your phone is happily charging. Now, with hydrogen — it’s the extreme version of natural gas — a tough substance to handle. It’s a gas, demanding compression or liquefaction process, which means very high pressure or very low temperature, specialized tank is needed. This complexity is precisely what makes hydrogen more expensive.

If the transportation puzzle of hydrogen remains unsolved, it’s bound to stay close to the production site. Long-distance transportation is less likely for hydrogen.

Hydrogen will be made on-site and consumed on-site.

Therefore, large industrial complexes with capacity of self-producing and consuming high volume of hydrogen, the likes of petrochemical and steel manufacturing, is where hydrogen finds its niche. Meanwhile, small-scale production with long supply chain like hydrogen refueling stations will be less competitive.

Step 4: Don’t forget the profit margin

We’re not wrapping up just yet! The often-forgotten finale in our hydrogen cost is profit margins. Up until now, our conversation has been around the cos. Let’s not lose sight of a fundamental truth in this capitalistic arena, every private enterprise is seeking for profit.

Now, imagine this: let’s a bit of profit margin at every juncture of the hydrogen value chain. Picture four key players before that hydrogen reaches consumer’s hands — the hydrogen producer, shipping company, terminal/storage company, and the distribution/retail company. Now, let’s say each of these players decides to take a modest 10% profit. At the end of this value chain, you could pay more than 40% higher price to incentivize all of those players to stay in the business.

Setting Realistic Expectations for Innovation

While it’s true that innovation can work wonders, the key lies in managing our expectations regarding cost decline. Do not compare the hydrogen industry to the semiconductors, they are totally different nature. Do not expect for improvements akin to Moore’s Law. A more fitting comparison would be with the gas or chemical industry, where progress in innovation and cost decline unfolds at a slower pace.

Consider this: hydrogen isn’t exactly the new technology. Electrolysis, the process central to hydrogen production, was invented in the 18th century. Fast forward to today, and most hydrogen is manufactured using the Steam Methane Reforming (SMR) process since natural gas today is cheaper than electricity — an efficient but environmentally damaging process.

The petrochemical industry, especially fertilizer has been producing, managing, and using hydrogen since the first synthetic fertilizer was manufactured, almost 100 year ago.

Hydrogen is petrochemical industry’s butter and bread. So, would you expect a dramatic cost decline from a mature industry?

Sure, you might argue that the transportation value chain has room for improvement. True, but don’t get your hopes up too high. Hydrogen piping is standard practice — just think of how it moves around in a fertilizer plant.

And when it comes to shipping, forget about liquid hydrogen. It will be shipped in form of ammonia, serving as a reliable carrier for hydrogen. Ammonia shipping is nothing new, it is a globally traded commodity.

Reality when you breakdown the cost

The last step if you would like to see the real cost of hydrogen is by breaking down its cost components. Hydrogen electrolysis is relatively straightforward process — its production cost is around 50% made of electricity.

IRENA predicts that electrolyzer CAPEX will drop 80% from 770 $/kW into only 130 $/kW. How likely is this? Improving efficiency, scaling up manufacturing to GW scale and eliminating critical materials from the stacks (titanium, platinum, iridium —you know these are expensive) probably could cut down cost to half, but 80% perhaps is too optimistic. However, since electrolyzer is contributing only 30% of the total green hydrogen cost, such siginificant improvement in electrolyzer means that it will cut only 15% of the hydrogen production cost.

Since the bulk share of the production cost is electricity, this factor needs more attention. There are two important points here: electricity price and capacity/load factor.

Wholesale electricity price at 50 $/MWh is already a low assumption. If the plant is run at full capacity all the time, it could result 4 $/kg hydrogen production cost. Meanwhile, realistic electricity price assumption at 100 $/MWh will result 6 $/kg (a figure we have in the beginning). Remember, that’s assuming full capacity at all the time.

Now consider when the plant is supplied by intermittent RE sources, like solar PV and wind. Electrolyzer plant is a CAPEX-heavy facility which means the unit cost of hydrogen production is sensitive to the plant’s running hours. At best scenario, using electricity from solar PV installed in sunny regions (e.g., in the Middle East, it could be as low as 30 $/MWh), having capacity factor of only 25% will result hydrogen production cost of 5 $/kg.

If we go back to the dream of 1 $/kg, that means it must be supplied by clean electricity with high capacity factor for only 10 $/MWh. How likely do you think this scenario is?

Key Takeaways for You

Now that we’ve unraveled the intricacies of the hydrogen landscape, let’s distill it down to three key takeaways that I hope resonate with you:

1) Hydrogen is expensive -> It is second to electrification: Applying hydrogen in every sector will need to think twice. Whenever electrification is possible — EV for transportation, heat pump for residential heating, electric heaters for industrial heat, it will be considered first before hydrogen. Only in sector where electrification is not practical, hydrogen may find a chance.

2) Hydrogen transportation is a pain -> Make and consume it onsite: The economics will follow gas industry: massive infrastructure is needed to enable economics of scale for the expensive transportation. However, the potential consumer will be much less than current gas industry since we will cook and be heated by electricity. Without scale, no one will pay for the massive investment of infrastructure. Hydrogen will be consumed on-site. Or view this another way, large industrial complexes will generate hydrogen onsite for their need.

3) Combining the two above -> Only very specific sectors will use hydrogen: When you merge the cost factor with the transportation hurdles, a clear picture emerges — hydrogen will find its home in a very specific sector. These are industries desperate to achieve Net Zero Emissions but electrification falls short of practicality. Those who in need of hydrogen are the ones need it as a feedstock: fertilizer, petrochemical, and steel industry. Among them, fertilizer production takes center stage as the largest producer and consumer of hydrogen today. But here’s the catch — before fertilizers can produce clean hydrogen for their own use, don’t expect hydrogen to expand into other sectors. Hydrogen will save its own sector first, before becoming a practical and competitive elsewhere.