Expensive natural gas doesn’t make green hydrogen cheap

Annie Spratt, via Unsplash Public Domain

The price of fossil natural gas in Europe has been shooting up in all directions for the past few days, but on average it is mostly upwards. This makes many forms of sustainability acutely attractive. Green hydrogen is not one of them.

Extreme price hikes

At times this month, the market price for natural gas was more than 10 times higher than just a year ago.

Also in comparison with 2018, when the hydrogen hype started in the Netherlands, the current prices for natural gas are unprecedented. Back then, it was still 4 to 5 times more expensive to produce hydrogen from water, using sustainable electricity (green hydrogen) than to produce the same hydrogen from natural gas without CO2 storage (grey hydrogen).

Natural gas itself is now at least 5 times more expensive than it was back then. A simple conclusion could be that green hydrogen is now cheaper than grey hydrogen. This simple conclusion has been presented to me several times in the past days, but has now also been drawn by Bloomberg New Energy Finance (BNEF). I’d like to share some issues with this analysis.

Green hydrogen is not for sale

Source: BNEF (Paywall).

The first issue is that, despite all the big announcements since 2018, hardly anyone is producing green hydrogen. If green hydrogen is not for sale, it can hardly be cheaper than grey hydrogen.

The report is behind a paywall, but judging from the graph on the right, which has been passed to me several times, BNEF makes the comparison based on market prices for grey hydrogen and theoretical cost prices for green hydrogen, or rather for ammonia produced from both colours of hydrogen.

That is the second issue. Comparing a bare cost estimate with an actual market price gives at best a nice insight, but it should be done with caution. If green hydrogen were actually for sale, its price would be subject to the same market dynamics as natural gas is today.

Green hydrogen and grey hydrogen are chemically exactly the same hydrogen. If they were both for sale, green hydrogen would go for (at least) the same market price as grey hydrogen. At least, because even at this market price there are almost certainly parties in the market today who are willing to pay a premium for hydrogen with a lower CO2 impact.

What if you were to produce green hydrogen yourself?

Suppose you currently buy grey hydrogen for your production process, or buy natural gas to produce grey hydrogen for your production process, would it be a good idea to switch to own production of green hydrogen? After all, then you don’t have to go to market, but you can produce at cost price for your own use.

The same green premium

That too is questionable. To produce green hydrogen you need green electricity. The general market price for electricity nowadays is just as extreme as for natural gas.

Power plants running on natural gas, after all, are responsible for the bulk of our electricity consumption, and natural gas plants also set the market price for electricity most of the time. And just like for green hydrogen, when buying green electricity you have to assume a premium over the market price.

So the investment in a green hydrogen plant will not be earned back easily, even at these energy prices.

What if you were to produce the green electricity yourself as well?

A logical next step could be to also take the production of sustainable electricity under one’s own management. With your own wind or solar park, you can produce green electricity at cost price and you can also produce green hydrogen at cost price for your own consumption. Or sell it at the now very lucrative market prices.

Not cheaper, but important

And that’s where you run into the following drawback. The wind or solar power that you produce in this scenario could also be sold immediately at very lucrative market prices.

The 20-30% of green electricity that is destroyed due to conversion losses in the production and post-processing of green hydrogen provides an additional incentive not to invest in an electrolyser. Bringing the electricity directly to the market is faster, with a smaller and less risky investment. And the electrolyser can always be added later. Comparing an estimated production price with an extreme market price is foolish on several levels. Unfortunately, the fact that BNEF also goes along with it, shows that the attention for green hydrogen has not yet escaped from the hype phase.

We really need emission free hydrogen in the next decades, because of climate and for our energy security. It is time to leave the hype behind and start working on serious production. Even if green hydrogen is not cheaper than grey hydrogen. Because it really won’t be for a while.

Bron: Bloomberg New Energy Finance, via Recharge News / Imagecredit: Annie Spratt, via Unsplash Public Domain

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