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Highway system - clean hydrogen

Clean Hydrogen for $1.50/kg Could Promote Significant Decarbonization. What Will It Take to Get There with Renewable Electricity?

April 27, 2021 Work Area: Zero-Carbon Fuels

Hydrogen produced for $1.50/kg could be the most competitive decarbonization option for a significant fraction of global energy demand. What will it take to get to that cost point for clean hydrogen produced from renewable electricity? Likely it will require monumental improvements in technology if we use only surplus renewable electricity that would be curtailed otherwise. And if we want to have large quantities of renewable hydrogen available at that cost, we will need dedicated renewable electricity generation at very low price, not just “surplus” power. Here’s why: fundamentally, renewable hydrogen is an extension of renewable electricity, like solar and wind power, and until those are both very cheap and very plentiful, renewable hydrogen won’t be cheap and plentiful either.

The reason is buried in how renewable hydrogen is made. A device called an electrolyzer uses electricity to split water molecules into hydrogen molecules and oxygen molecules. And it takes around 52 kilowatt-hours of electricity to produce one kilogram of hydrogen this way, give or take. (Actual estimates of efficiency vary and depend in what is included in the system definition among other things).

From this basic efficiency we can do some basic math. If you own an electrolyzer and want to make renewable hydrogen, then if renewable electricity costs you five US cents per kilowatt-hour (5 cents/kWh), just the cost of buying that electricity alone will result in a hydrogen production cost for you of $2.60/kg. The estimated average levelized cost of electricity (LCOE) for new wind farms in the US in 2019 was 3.5 cents/kWh. If you paid that price for electricity, your hydrogen would cost $1.82/kg, before considering any of the other costs of production like actually buying and operating an electrolyzer.

How much does the electrolyzer itself contribute to the renewable hydrogen cost? Opinions on that are all over the map. A recent study in the Netherlands put the cost of a very large project at 1400 Euro per kilowatt (about $1700/kW). Analysts at Bloomberg New Energy Finance assume the cost could drop to $115/kW by 2030. That is, needless to say, an enormous range and the subject of substantial speculation in policy circles. As a convenient reference point, the International Energy Agency indicates that electrolyzers today cost $900/kW and that the cost might drop to $700/kW by 2030.

Let’s look at what those numbers might mean for the cost of renewable hydrogen. If you bought an electrolyzer at the $900/kW price point indicated by IEA today, and you financed it over several decades at some typical commercial debt and equity return rate, it might cost you $85 annually in capital recovery for each kW capacity you bought. (This is a little over a 9% capital recovery factor, which is close to what IEA assumes in their analyses). If you only ran the electrolyzer one day each year, the cost of paying for the electrolyzer would amount to roughly $200 for each kilogram of hydrogen produced. Clearly, no one would do this!

The impact of how often a capital investment like an electrolyzer actually runs is captured in the capacity factor, usually expressed as a percentage of 24/7/365 operation. Recent large wind energy projects in the US have an annual capacity factor of around 40%. Nuclear plants often have an annual capacity factor above 90%. Solar PV projects in California are more like 25%.

This is much better than one day per year, and if you buy renewable electricity from one of these sources you produce a lot more than one day’s worth of renewable hydrogen. At the 40% annual capacity factor of wind, the capital expense of the $900/kW electrolyzer works out to around $1.25/kg hydrogen, or $1.45/kg if a little bit of operation and maintenance costs are included.

The total cost to produce the hydrogen is annual cost to finance and maintain the electrolyzer, plus the purchase of the renewable electricity to run it. If you bought an electrolyzer at today’s price of $900/kW indicated by IEA, paid a little over 9% per year capital recovery plus some O&M, and supplied it from a typical US wind farm producing electricity at 40% capacity factor and paid 3.5 cents/kWh on average for that electricity, then your hydrogen would cost $3.27/kg ($1.82/kg + $1.45/kg). Climate-focused policy needs to support production at this cost level in the near-term, but we need to bring those costs down.

In the figure below the impact of potential electrolyzer improvements on hydrogen production cost are plotted as a function of clean electricity price and capacity factor. The solid line is for today’s IEA electrolyzer, and the combination of renewable electricity price and renewable electricity capacity factor that yield $1.50/kg hydrogen. Above and to the left of the solid line the hydrogen produced by today’s IEA electrolyzer costs more than $1.50/kg to produce. Below and to the right of that line the hydrogen from that electrolyzer costs less than $1.50/kg to produce.

Clean hydrogen

Unfortunately, to produce renewable hydrogen for $1.50/kg, you need to have either free renewable electricity available to run the electrolyzer at a nearly 40% capacity factor, or, if you have to pay for electricity, it needs to be no more than 1.8 cents/kWh if it is available at 100% capacity factor, and even lower cost if it is available less than 100% capacity factor. This combination of high capacity factor and free or very low cost renewable electricity just isn’t available.

Fortunately, that’s not the end of the story. The dashed line in the figure indicates what happens if the cost of the electrolyzer drops to the $700/kW indicated by IEA for 2030. (The line also reflects a modest improvement in electrolyzer efficiencies by that time). With this change, you can afford to pay a little more than 2.2 cents/kWh for renewable electricity, if you buy it at that price 24/7/365. Conversely, you only need renewable electricity available a bit less than 30% capacity factor if it is free.

This is still not a combination of capacity factor and price that is generally available for renewable electricity. But the direction of what is possible with better electrolyzers is clear. And although it is not plotted in the figure, we can calculate what would happen if an electrolyzer were available for the very low cost of $115/kW. At that price point, free renewable electricity would only need to be available at around a 5% annual capacity factor to result in $1.50/kg hydrogen. Free renewable electricity at 5% capacity factor is similar to the renewable curtailment or “surplus” generation conditions experienced in some areas with very high renewable electricity levels. This suggests that if electrolyzer costs can be dramatically reduced, when coupled with surplus extremely low cost electricity, some renewable hydrogen for $1.50/kg could be possible.

The problem with relying on nearly free surplus renewable electricity for large scale hydrogen production (in addition to the need for a very low cost electrolyzer) is that the volumes of hydrogen we can produce from these surpluses are likely to be quite limited. Fundamentally, curtailment is not likely to be a scalable source of cheap energy. Excess renewable generation either represents a cost to the rest of the electric system or markets develop to use the excess generation, with competition for that resource increasing its price. Either way, short of sprawling and costly renewables over-build, the volumes of hydrogen we can produce from curtailed renewable generation seem likely to be modest at best.

At the very optimistic end of the electrolyzer cost spectrum, however, dedicated renewable electricity with prices of as much as 2.4 cents/kWh might lead to $1.50/kg hydrogen, if that electricity is available at around a 30% annual capacity factor. Some utility-scale solar PV projects in the US southwest appear to be approaching that LCOE and capacity factor. Wind energy has made dramatic improvements as well, although perhaps leveling off. In the 5 years following 2009 the LCOE for US wind dropped 47%. In the subsequent 5 years to 2019 the LCOE dropped another 27%.

Monumental development and deployment will likely be required to reach such extremely low electrolyzer costs. The $115/kW cost assumed by some analysts is based on learning curve extrapolations from an already-low base that does not reflect US installations and does not include costs for equipment such as power electronics that alone can be significant for similar projects. We should prepare to pay $250/kW or $500/kW or more to deploy electrolyzers widely over the next couple decades. That can be the topic of another post here. But if we can move substantially towards such low cost electrolyzers we can begin to produce affordable renewable hydrogen using realistically-priced renewable electricity at large scales, and that will be very good for climate protection.

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