A sobering look at the economic realities of green hydrogen

The promise of green hydrogen as a cornerstone of the global energy transition faces significant economic hurdles. A new study by my former employer TNO, commissioned by the Dutch government, sheds some more light on the high costs associated with green hydrogen production and the economic challenges that stand in the way of its widespread adoption. With costs far exceeding conventional hydrogen production, green hydrogen may not be the silver bullet for decarbonizing industry—at least not yet!

Introduction

Green hydrogen has long been hailed as a key solution to decarbonizing hard-to-abate sectors like steel, cement, and aviation. As I mention in previous columns these sweet spots are in essence the only places where the application of green and low carbon hydrogen is viable. However, a recent report by TNO has raised concerns about the economic feasibility of green hydrogen production, especially when compared to hydrogen made from methane through steam reforming which is the current standard. With currently staggering costs per kilogram of hydrogen, it’s clear that significant technological advancements and policy interventions are needed to make green hydrogen a competitive option.

The high cost of green hydrogen

According to TNO’s study, the levelized cost of green hydrogen production in the Netherlands currently stands at €13.7/kg, with a range between €9 and €21/kg depending on conditions. In stark contrast, hydrogen produced from methane via steam reforming costs between €1-2/kg, making green hydrogen nearly seven times more expensive. This cost disparity is a major obstacle to the widespread adoption of green hydrogen, especially for industries like steel and aviation, where cost competitiveness is crucial. Overcoming this cost difference is currently not feasible even with a fairly high ETS certificate price of around 70 euro per ton. 

Breaking down the costs

The €13.7/kg price tag for green hydrogen is primarily driven by two factors: capital costs and electricity prices.

1. Capital costs: About €5/kg of the total cost comes from capital expenditures. Interestingly, only 30% of this is attributed to the cost of electrolyzers, with the remaining costs tied to compressors, plant balancing systems, and interest rates. Even if electrolyzer prices were to drop significantly—say by 50%—the total capital cost would only decrease to €4.2/kg, meaning the overall impact on the cost of hydrogen would be limited. It just goes to show a lot of other expensive equipment is needed of which the prices, being established technologies, are not expected to drop significantly. 

2. Electricity costs: The bulk of the remaining €8.7/kg comes from electricity, with €5/kg attributable to the cost of purchasing electricity, and an additional €2 for connection and grid costs. These estimates assume electricity prices of €70-80/MWh, which is in line with current European power purchase agreements (PPAs). Given that green hydrogen production is highly energy-intensive, the high price of renewable electricity is a key barrier to bringing down costs.

It is good to note here that the expectation of many is still that due to intermittency and over capacity of renewables there will be significant periods of time with low or even zero electricity costs. However, personally I highly doubt that will be the case as there will also be massive competition of other technologies and applications which are far easier to implement or connect when needed compared to green hydrogen production. Like flexible battery storage, demand side response mechanisms (charging your car when prices are negative) or producing other goods with electricity when the prices are low. So even if we will have so much extra renewables production this will most likely not help in bringing the overall price of green hydrogen down significantly.  

The incentive challenge

For green hydrogen to compete with hydrogen produced via steam reforming, massive financial support would be required. TNO estimates that incentives in the range of €3300/kW would be necessary, up from earlier projections of €2200/kW. With such high subsidies needed, it’s no wonder industries like aviation (KLM) and steel (Tata Steel) have yet to commit to using green hydrogen on a large scale. The economics simply don’t add up for these sectors to decarbonize using green hydrogen under current conditions.

Where do we go from here?

With green hydrogen far from cost-competitive, the question becomes: where is this heading? As it stands, 99% of the world’s hydrogen is still produced from methane, and given the cost challenges outlined in the TNO report, this isn’t likely to change in the short term. Continuing to push green hydrogen without addressing these economic barriers risks further enriching gas companies rather than leading to meaningful decarbonization. 

Another step that needs to be taken is addressing the polluter costs in terms of higher CO2 ETS prices or other policies to ‘punish’ the continued use of fossil fuels for production of hydrogen or in industrial processes. In tandem with good incentives this can further unlock a market for green hydrogen and other renewable technologies. 

Technological solutions on the horizon

While the economic challenges of green hydrogen are daunting, there are potential pathways forward. The report suggests that new generations of electrolyzers, particularly second- and third-generation models, could significantly reduce costs and improve efficiencies. These next-gen electrolyzers, possibly with radically different designs, hold the potential to make green hydrogen more affordable. However, these technologies are still in the early stages of development, and widespread deployment is likely years away.

In addition to electrolyzer advancements, some proponents of nuclear energy have suggested that Very High-Temperature Reactors (VHTR) could provide a more efficient way to produce hydrogen via thermal processes. These reactors are specifically designed for use in hard-to-abate industries, though their scalability remains limited. Still, exploring alternative hydrogen production methods will be crucial if green hydrogen is to have a meaningful impact on industrial decarbonization.

Conclusion

The TNO report makes one thing clear: green hydrogen is not yet economically viable for large-scale industrial use. While it holds tremendous promise as a clean fuel for the future, significant technological innovations, policy and market interventions will be necessary to bring down costs. Until then, industries like steel, cement, and aviation are unlikely to make the switch, and hydrogen production will remain dominated by methane-based methods. Moving forward, the focus must be designing and implementing smart policies with a combination of the stick (higher CO2 prices) and the carrot (better incentives), on accelerating research into next-generation electrolyzers and exploring alternative production methods to make green hydrogen competitive in the global energy market.