Hydrogen is viewed as a critical component in achieving net-zero emissions. The versatile element can be used to decarbonise a diverse set of sectors—from the traditional use cases in industry and refining to novel ones in transportation and electricity generation. However, 99% of hydrogen is currently produced using grey or carbon-intensive methods and leads to more than 900mt/yr of CO₂ emissions, according to the IEA. For context, that is nearly three times the emissions of all of France. For hydrogen to play an effective role in decarbonisation, low-carbon production methods need to be scaled up.
With the recent advances in solar and wind energy, using renewable electricity to electrolyse water has gained immense popularity as a way of producing ‘green’ hydrogen with minimal emissions. Nevertheless, transforming this momentum into actual deployment of green hydrogen facilities continues to be a challenge.
While many countries have announced ambitious green hydrogen targets and conducive policies, the underlying economics still fail to align. In most scenarios, green hydrogen and its derivatives, such as green ammonia and SAF, are prohibitively expensive, costing nearly 2–3 times that of grey alternatives. This article explores what could be done to reduce this ‘green premium’, and address the challenges faced in commercialising green hydrogen facilities.
Expensive energy
Despite the promise of green hydrogen, mobilising capital to build gigawatt-scale facilities remains a distant goal in most scenarios. Producing green hydrogen (which costs $4.5–12/kg, according to BloombergNEF) is much more expensive than producing grey hydrogen (costing $1–3/kg) for three reasons.
Firstly, building an electrolyser train can be exceedingly expensive. The US Department of Energy (DOE) recently published a study suggesting the total capital cost to install electrolysers has increased from the previously estimated range of $1,000–1,600/kW to $2,000–$2,500/kW. A large part of the cost increase is due to a significant rise in installation costs, which forms 50–60% of the total electrolyser costs.
The increase in installation costs has been driven by the uncertainty in executing first-of-a-kind projects. Capital costs, labour requirements, supply chain risks and cost schedules for constructing such facilities are challenging to predict accurately. Moreover, novel technologies may not perform as well at large scale compared to pilot and laboratory tests. As a result, EPC contractors may be reluctant to assume completion and performance risks for unproven technologies, leading to an increased overall risk premium and capex.
Secondly, the substantial capital investment in electrolysers is compounded by operational costs, as renewable energy sources exhibit low-capacity factors. Depending on the renewable energy source and the location of the plant, the cost of the electricity alone could surpass the total cost of all other components in a green hydrogen facility, according to consultancy GEP.
Thirdly, the need for robust infrastructure to support the storage, transportation and distribution of hydrogen adds another layer of complexity. Massive investments are required to develop infrastructure, which is crucial for lowering overall costs and transitioning to a more extensive hydrogen economy.
Limited demand and ineffective policy
The high price of green hydrogen has made it difficult to find buyers willing to pay the green premium. Overall, many businesses tend to prioritise immediate cost-effectiveness over long-term sustainability, making them cautious about committing to a fuel that is significantly more expensive than traditional sources.
The unavailability of long-term offtake agreements impacts these projects’ financeability as banks and equity funds require predictable cash flows to commit capital. Additionally, international energy companies that could potentially finance these projects on their balance sheets also seem to be moving away from renewable power due to lower operational synergies and financial returns, according to BloombergNEF. Consequently, green hydrogen projects end up not getting built, and the price of hydrogen stays high.
To foster a positive change and develop a market, many governments have introduced policies aimed at decarbonising the economy, with a particular focus on supporting renewables and green hydrogen. The Inflation Reduction Act in the US has implemented a production tax credit of up to $3/kg to incentivise green hydrogen.
The UK has proposed a hydrogen business model based on contracts-for-difference (CfD), which aims to provide revenue support to overcome the operating cost gap between low-carbon hydrogen and high-carbon fuels. Similar CfD-based subsidies have also been announced through Japan’s Hydrogen Act and Germany’s H2 Global initiative. The EU has also introduced a host of programmes and policies, such as the Hydrogen Innovation Fund and Fuel EU, which promote low-carbon hydrogen and penalise high-carbon incumbents.
However, these policy initiatives have achieved only limited on-the-ground impact. A case in point is the US Treasury Department’s proposal for additional guidelines for green hydrogen credits, which require projects to adhere to stringent additionality, deliverability and time-matching standards. While these rules ensure the electricity supply remains truly green, they increase capital cost, lower operational efficiency and move production away from demand centres.
As a result, US green hydrogen projects may still not be realised, despite the tax credit being in place. Without effective policy adjustments, which can incentivise both demand and supply while striking the right balance, the green hydrogen sector risks stagnating instead of growing.
Navigating major hurdles
While there are major commercial and regulatory challenges in unlocking large-scale capital deployment, some creative approaches could enable green hydrogen projects to cross the finish line. To begin, developers can pursue applications with a relatively low ‘green’ premium, such as green steel, which is estimated to cost only 40% more than conventional steel, according to BloombergNEF, rather than green shipping and aviation fuels, which could cost 3–5 times more than carbon-intensive options. One of the forerunners, the H2 Green Steel project in Sweden, has secured $6.9b in funding and long-term offtake from Mercedes Benz.
In addition to pursuing low premium use cases, developers could reduce peripheral infrastructure costs by collocating facilities with a renewable source and a customer to develop a ‘hub’. For example, Hy Stor’s project in the US state of Mississippi is co-located with steelmaker SSAB. Hy Stor plans to produce hydrogen using onsite wind and geothermal energy and use an underground salt dome to store it. Additionally, brownfield developments could also lower additional capital costs by reusing existing infrastructure. Fertiglobe, a collaboration between ADNOC and OCI, plans on repurposing an existing ammonia facility in Egypt to supply green ammonia to Europe. This strategy contributed to reducing the overall capex and helped Fertiglobe win the H2 Global auction bid, according to the Ammonia Energy Association.
Developers could also lower the cost of capital by tapping into state-sponsored programmes for grants, subsidies and low-cost financing. For example, a significant part of the debt for the NEOM green ammonia project was covered by the Saudi Arabian state lenders and the German ECA Euler Hermes. In the US, the DOE’s Loan Programs Office has awarded federal loan guarantees of over $2b to foster the development of green hydrogen ecosystems.
Ultimately, partnering with a trusted EPC provider could be an advantage for developers. The comprehensive solutions offered by an integrated EPC—ranging from early-stage permitting and financing assistance to design optimisation and construction—could be invaluable in ensuring a project’s successful completion.
With an endless pipeline of green hydrogen projects and ever-increasing national production targets, it seems expectations have raced far ahead of reality. The high cost of production, coupled with limited demand, has created a complex landscape for developers and investors. More pronounced support from the government bolstered by agile design approaches could help bridge the cost gap between low-carbon hydrogen and conventional fuels. Furthermore, forging key partnerships with end-customers, EPC contractors and long-term investors could help overcome the technical and commercial barriers in deploying capital at scale. Ultimately, economic incentives need to be aligned with environmental goals to achieve a net-zero world.
Rishabh Agarwal is energy transition development manager and Robert Clews is head of UK & Western Europe at Bechtel Enterprises.
This article is taken from Outlook 2025, our annual publication examining the year ahead in energy. Subscribers can click here to read their free copy. The publication can also be bought from our store here.
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