How will price of natural gas influence the hydrogen production costs?

European emission allowance prices are reaching record levels, as are natural gas prices. As a result, new calculations show that producing green hydrogen would become cheaper in Europe than grey hydrogen produced from fossil fuels. Hydrogen from renewables could also be cost-competitive with blue hydrogen, i.e. produced from fossil fuels using carbon capture and storage (CCS).

Grey hydrogen production involves a relatively higher cost of purchasing CO2 emission allowances on the European market. The model assumed a carbon EUA price of €60 per tonne, gas prices (TTF) were set at $30/MMBtu (1 MMBtu ≈ 293 kWh) and the green energy price was assumed at €40/MWh. For each technology, the cost of capital (discount rate) was set at 8%. Then, the average cost of producing green hydrogen will be 6.18 EUR/kg, blue - 6.73 EUR/kg and grey - 7.03 EUR/kg.

It should be stressed, however, that these are figures which may vary depending on the assumptions made and on the prices of energy from RES, EUAs and gas prices. Moreover, this model for the production of blue hydrogen assumes a very high CO2 capture rate of 90%. In theory, the use of renewable energy to produce green hydrogen is possible, but at the same time the sense of such production must be called into question when wholesale energy prices on European markets reach EUR 200/MWh.

In fact, gas consumers have long-term contracts and the production of green hydrogen from RES is globally marginal. S&P Global Platts estimated in early October the cost of producing renewable hydrogen in the Netherlands, produced using an alkaline electrolyser, at €12.38/kg. Production using a PEM electrolyser was estimated at €14.76/kg, while production of blue hydrogen by steam gas reforming was €5.99/kg and grey hydrogen at €5.17/kg.

Analysts are trying to predict when green hydrogen production using renewable energy will become competitive with grey hydrogen. BloombergNEF in May 2021 forecast that green hydrogen would be competitive with blue hydrogen by 2030 in the 28 countries it considered in the study. By contrast, grey hydrogen could cost more than green hydrogen by 2030 in 16 markets studied.

In its latest report, the International Energy Agency predicts that by 2030, the cost of producing green hydrogen will fall to $1.3-2.2/kg in regions with exceptionally good conditions for renewable energy generation.

Currently, hydrogen in the world is produced almost exclusively from fossil fuels, mainly by steam reforming of natural gas. This is the cheapest and simplest production method.