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Strong carbon closes cost gap between blue and conventional hydrogen

Highlights

CO2 costs narrow blue hydrogen's premium

Premium at 6% versus 17% end-2020

Eur70/mt CO2 needed for parity: Analytics

EU carbon prices over Eur50/mt are closing the cost gap between conventional hydrogen and hydrogen produced with carbon capture, S&P Global Platts data show.

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Prices for blue hydrogen -- produced from natural gas via steam methane reforming with carbon capture and storage -- have risen in recent days, driven by stronger natural gas prices in Europe. But firm carbon allowance prices have driven the cost of producing unabated "grey" hydrogen even higher.

Assuming a carbon price of Eur55/mt, the cost of producing hydrogen from natural gas in the Netherlands via SMR without carbon capture and storage would be around Eur2.05/kg (including capex), while blue hydrogen would be around Eur2.17/kg, using TTF gas prices assessed by S&P Global Platts on May 18, and Platts capex assumptions.

This compares with production costs of Eur1.83/mt for grey hydrogen and Eur2.15/mt for blue hydrogen, with carbon prices around Eur30/mt, where they were in December 2020, using current gas prices.

The cost premium for blue hydrogen over grey hydrogen falls to just 6% with a Eur55/mt carbon price, from around 17% with CO2 around Eur30/mt.

However, carbon prices would have to rise to around Eur70/mt for blue hydrogen to reach parity with unabated fossil-fuel derived hydrogen, data from S&P Global Platts Analytics showed.

The European Commission said in its hydrogen strategy, adopted in July 2020, that "carbon prices in the range of Eur55-90/mt of CO2 would be needed to make fossil-based hydrogen with carbon capture competitive with fossil-based hydrogen today."

Aker Carbon Capture's chief commercial officer, Jon Christopher Knudsen, noted earlier in May that EU carbon prices of over Eur50/mt had spurred commercial interest in carbon capture and storage projects.

Carbon rally

EU Allowance futures prices for December 2021 delivery on the ICE Futures Europe exchange rallied to an all-time closing high of Eur56.65/mt May 14, but have since retreated sharply, falling as low as Eur50.00/mt in intra-day trading May 19 as the UK's ETS launched.

"EUA auction supply will be rising in June-July, and there is a risk of a sell-off of both industrial free allocations when they arrive and any hedges held by UK entities that no longer need them," Platts Analytics said in its latest European Emissions Trading System Market Outlook, published May 14.

"Our natural gas price forecast also remains bearish to market. At the same time, there is no reason to assume that investor buying will stop anytime soon," it said.

Blue H2 projects

While the economic case for CCS has strengthened, blue hydrogen production at scale remains a distant prospect.

Europe hosts just one of these -- Air Liquide's Port Jerome facility in France -- according to S&P Global Platts Analytics Hydrogen Production Database. The facility can capture 100,000 mt/year of CO2, which is then used for a range of industrial carbonic gas applications. The company has a long-term agreement to supply around 50,000 cm m/h of hydrogen to ExxonMobil's Port Jerome refinery.

However, several large-scale blue hydrogen projects with CCS are underway in the UK and Netherlands, and due to come onstream by 2030. The largest of these is BP's H2Teesside project in the UK, which will produce 260,000 mt/year of hydrogen by 2030, with first production by 2027.

The company has a carbon price assumption of $50/mt for 2021 and 2025, rising to $100/mt in 2030.

While SMR hydrogen production with CCS could start displacing unabated natural gas-derived supplies, the use cases for blue hydrogen will likely expand into new markets rather than competing directly with traditional hydrogen supplies to industrial gas consumers, a BP spokesman told Platts May 13.

These could include decarbonized transport fuels, industrial processes such as steel and cement, or green ammonia for transport fuel and industry.

Tightening carbon market

For most of the EU carbon market's 16 years of operation, the system has been oversupplied and the main price anchor for CO2 prices has been the coal-to-gas fuel switching price for electricity generation -- the price of carbon at which coal and gas are equally profitable.

However, as the supply of allowances tightens, this marginal cost of CO2 abatement is eventually likely to move beyond coal-to-gas switching, and some analysts have said switching between fossil and clean hydrogen could become the next major price setter in future.

In a tightening market, carbon prices can be expected to rise until they trigger CO2 reductions. Since the carbon market is forward looking, part of the price surge in 2021 may be attributable to the market's perception of hydrogen becoming the next major marginal CO2 abatement technology.