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Cold December boosts hydrogen production costs, as market price indications emerge


US, Saudi compete on hydrogen production potential

Victoria, Australia, electrolysis competitive with SMR

Pricing indications emerging in Europe

  • Author
  • James Burgess    Vipul Garg
  • Editor
  • Daniel Lalor
  • Commodity
  • Electric Power Energy Transition Natural Gas Shipping
  • Tags
  • Solar energy United States Wind energy
  • Topic
  • Energy Transition Europe Energy Price Crisis Hydrogen: Beyond the Hype

Hydrogen production costs rocketed in the US in December with exceptionally cold weather pushing up feedstock grid power and gas prices, with smaller gains seen elsewhere globally, the Platts Hydrogen Price Wall from S&P Global Commodity Insights showed.

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The exception was Australia, where a transition to warmer summer weather and increased renewables output pushed feedstock prices down for electrolytic hydrogen.

Victoria alkaline electrolysis averaged $1.74/kg in December, down 43% month on month, with costs below $1/kg on some days, rivaling some of the cheapest CO2-unabated steam methane reforming production pathways, in the US.

Hydrogen production via steam methane reforming without carbon capture and sequestration (CCS) for US Gulf Coast was the cheapest globally for December 2022 at $1.27/kg.

However, the US west coast witnessed freezing temperatures on a deep cold spell, leading to a rise in gas and power demand. Southern California alkaline electrolysis more than doubled over November, averaging $13.79/kg in December.

In Europe, cold weather and low wind generation boosted input power and gas costs, tempered by robust gas storage levels. UK PEM electrolysis remained the most expensive production pathway globally, averaging $32.41/kg, up over 30% on the month.

For the fourth quarter, production costs slipped overall for most locations, coming off third-quarter peaks in feedstock costs as Europe struggled with soaring power and gas prices and a cold winter in Australia led to a surge in prices.

Market price indications

Market-based pricing indications started to emerge, with project developers who can source power directly or secure long-term power purchase agreements tapping into costs well below grid-based market indications.

At the start of January, Portugal announced a tender for 120 GWh/year of renewable hydrogen, with a first auction to take place in the second half of 2023.

Price ceilings in the auctions have been set at Eur127.00/MWh ($135/MWh) for hydrogen, which converts to Eur3.81/kg.

Producers will compete to sell output to a central buyer on 10-year contracts. That will be the last resort gas shipper in Portugal, Galp.

Meanwhile, Octopus Hydrogen is marketing its supplies in the UK at prices starting from GBP5.30/kg ($6.5/kg), delivered.

And in December, Germany launched the first green ammonia tender under its H2Global import scheme, with a first deadline for expressions of interest at the start of February. The tender results should give an early indication of market value for green hydrogen carriers such as ammonia delivered to Europe.

US boost

Policy wrangling in the EU continues to hold up investment decisions for projects in Europe, and the race is on between large-scale project developers elsewhere to produce the lowest cost green hydrogen, with the US Inflation Reduction Act (IRA) giving a boost to investment there.

Indeed, HSBC said in a research note Jan. 16 that the tax credit incentives of the IRA gave the US an advantage over other potential large-scale production centers such as the Middle East.

Air Products and AES are developing a green hydrogen project in Texas backed by 1.4 GW of wind and solar power generation to produce over 200 mt/day of hydrogen, targeting commercial operations from 2027.

HSBC estimated the Air Products/AES project would need a lower hydrogen price to meet a 10% return on capital than the 650 mt/d Neom project in Saudi Arabia powered by 4 GW of renewables -- in which Air Products is also a partner -- despite higher capital costs, because of a combined incentive of around $5/kg from hydrogen tax credits and renewable energy generation credits in the US.