Analysis: Asia's 'H2 at $2' green hydrogen target is a mission not impossible

Some of Asia's biggest potential hydrogen consumers are hopeful that Australia will be able to achieve its aim of sharply reducing production costs to supply green hydrogen at $2/kg in the future, but analysts say the multiple hurdles in its path may take many years to overcome.

The slogan of Australia's policymakers -- "H2 at $2" -- is seen by clean energy analysts as an ambitious target, although not impossible for a country that is potentially positioning itself as the leading exporter of the carbon-free fuel to Asia and beyond.

According to Roman Kramarchuk, head of scenarios, policy and technology analytics at S&P Global Platts, while hydrogen costs below $2/kg may not be unusual for conventional hydrogen produced from natural gas -- even with carbon capture, utilization and storage, and assuming lower gas prices -- a polymer electrolyte membrane or PEM electrolyzer operating at 70% capacity would need input power prices to average below $15/MWh to produce hydrogen for less than $2/kg.

Australia currently has the one of the world's highest volumes of green hydrogen production capacity in the development pipeline, with about 30 GW of projects lined up, with the Pilbara project eventually accounting for up to 26 GW of renewable energy. The Western Australian Government has already granted environmental clearance for the massive wind and solar hybrid renewable energy project in the remote Pilbara region near Port Hedland.

On paper, Australia has many advantages, starting with ample sun and arid land, and a lot of offshore wind potential. However, to be a successful player and achieve the $2/kg target price for green hydrogen sourced from solar and wind, it will have to overcome some big challenges, analysts said.

FOCUS ON SLASHING COSTS

According to Cuneyt Kazokoglu, director of long-term oil service and head of oil demand at Facts Global Energy, the current cost of producing green hydrogen with a PEM electrolyzer is around $4/kg, while the cheapest hydrogen production from coal and gas can be achieved for $1-$1.50/kg.

"Based on these prices, to achieve price competitiveness for green hydrogen at about $2/kg, production costs must at least halve. This means from current electrolyzer costs of about $1.2 million/MW you have to come towards $600k/MW," Kazokoglu said.

"Feedstock costs must halve for solar and offshore wind. In order to achieve the $2/kg, you have to use solar and wind directly and not rely on grid electricity," he added.

The alternative route by which prices could drop is if the Australian government were to penalize hydrogen production involving fossil fuels. "However, I doubt they will opt for this as that would also penalize the recent agreement with Japan involving Japanese and Australian majors to produce blue hydrogen from brown coal in Victoria," Kazokoglu said.

Caroline Still, cross energy analyst at Energy Aspects, said that more defined goal posts -- like setting the "H2 at $2/kg" target -- could help build investor confidence as it would incentivize innovation and help Australia cut costs.

"However, the technical challenges faced by Australia, and others, have not changed; namely, the price of carbon being too low, keeping grey production profitable despite emissions, the significant power draw of electrolysis and the enormous scale up of renewable energy required to power it, the small scale of current electrolyzers, and the difficulty of transportation and storage of hydrogen gas," she said.

She added that significant uncertainty within policy remains, and Australia's $2/kg target must be accompanied by more defined short-term policies.

"There is a need to reduce barriers to entry for hydrogen use, such as updating health and safety regulations with blending limits. Support on the demand side must also be accompanied by clear supply-side strategies, such as those that help address the first-mover risk, especially when the cost of low-carbon hydrogen is still a deterrent," she said.

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ACHIEVABLE TOWARDS 2030

Still said that by 2040, Energy Aspects expects 45% of Australia's production would come from low carbon sources.

"So when can we see genuine price drops to achieve $2/kg? I reckon this will be towards 2030. This is, however, alright from the Pilbara project perspective, as realistically green hydrogen production won't start until the second half of the 2020s. So once you're up and running in the mid-2020s, you may find you start at the $3/kg level and then by 2030 costs fall towards $2/kg," Kazokoglu added.

Analysts said Australia has a big advantage in comparison to Europe, which seeks hydrogen production primarily to decarbonize its own energy system. The recent agreement between Japan and Australia shows a pathway on which Australia can become a major hydrogen exporter in the 2030s due to its proximity to major Asian demand centers.

The cheapest way to transport hydrogen is transforming it to ammonia, and there is growing interest for this in Japan and elsewhere. Recent announcements by Japan's JERA to start using ammonia as direct feedstock in pulverized coal plants in the 2030s, to drop the use of coal in power generation, has strong potential.

"So overall the timeline to achieve the $2/kg target would be around 2030, when production costs halve versus today. By then, Australia can not only start decarbonizing its own economy, but become a major hydrogen exporter to the Asia-Pacific region," Kazokoglu said.