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US green hydrogen costs to reach sub-zero under IRA; longer-term price impacts remain uncertain


Green hydrogen costs to go negative by 2030

'Price shock' could be felt upon credit expiration

  • Author
  • Brandon Mulder
  • Editor
  • Richard Rubin
  • Commodity
  • Electric Power Energy Transition Natural Gas Metals

With the basket of new tax credits for hydrogen and renewables within the US Inflation Reduction Act, analysts are projecting that subsidies could reduce the cost of green hydrogen to under $0/kg by 2030, which would rapidly accelerate the adoption of green hydrogen in the steel, transportation and power generation industries.

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But how green hydrogen costs will behave after the credits' expiration in 2033 is still a source of uncertainty, as post-credit price shocks could return green hydrogen costs above those of conventional grey hydrogen.

The IRA includes tax credits up and down the clean hydrogen value chain and allowing producers to stack subsidies for greater cost savings. The new clean electricity tax credits, for example, allows any project producing zero-emissions power to receive either a 30% investment tax credit or a production tax credit worth 1.5 cents/kWh. Combine those subsidies with the $3/kg credit for clean hydrogen, and hydrogen subsidies could stack up around $4.50/kg, according to Hy24, a hydrogen infrastructure investment venture.

That would bring green hydrogen costs into negative territory even today. As of Sept. 28, Platts' assessed cost of green hydrogen produced using PEM electrolysis was $4.38/kg (including capex) on the US Gulf Coast.

"You can take [electrolysis] projects completely off grid, co-locate them with some sort of hybrid solar or wind power plant, and pair it directly with the electrolyzers in order to achieve these low costs," said Hy24 Investment Director Alejandro Perellon during a Sept. 27 webinar. "That's a trend that we're going to be keeping an eye on over the next several years."

Easier being green

That sub-zero calculation is shared by Platts, part of S&P Global Commodity Insights, and the energy and infrastructure law firm Pillsbury Winthrop Shaw Pittman. According to S&P Global's latest Future Energy Outlooks Quarterly Tracking Report, "renewables-powered electrolysis hydrogen production costs will drop below $3.00/kg H2 before 2030, meaning subsidized costs could become negative if the PTC value remains unchanged."

Under this scenario, producers would offer green hydrogen at prices consistently below those of conventional grey hydrogen throughout the life of the hydrogen tax credit. This would allow producers to profit immensely while "expanding into new demand sectors such as steel production, transportation and power generation," making the credits "an exceptionally strong incentive" expected to stimulate massive private investments in renewables and electrolysis, the report said.

The IRA gives green hydrogen an additional advantage over its blue cousin, the low-carbon hydrogen produced using natural gas with carbon capture technology. While the law increases 45Q carbon capture tax credits from $50/mt of captured CO2 to $85/mt, it prohibits blue hydrogen producers from stacking 45Q credits on top of the hydrogen tax credits.

"That's one of the game changers here," said Mona Dajani, partner at Pillsbury Winthrop Shaw Pittman. "That's why this is so huge."

Platts data shows that adding carbon capture technology to steam methane reforming adds a 30% cost premium to blue hydrogen, or about 30-65 cents/kg depending on gas prices. Most SMR facilities will be unable to reach the IRA's highest emissions threshold, which requires facilities to capture at least 95% of emissions to obtain the maximum $3/kg tax credit. Instead, many of the blue hydrogen facilities are likely to gain the $1/kg credit.

Post-credit uncertainty

While all are in agreement that US green hydrogen is on track to dip below $0/kg by the end of the decade, it's unclear what would happen to costs when the credits expire in 2033. While hydrogen consumers will enjoy generously low prices that are more competitive than cheap grey hydrogen over the next decade, it's possible green hydrogen costs could shoot up past grey hydrogen levels.

"Our projections suggest that low-carbon hydrogen may not be cost-competitive with SMR after the 10-year PTC period expires," said S&P Global hydrogen analyst Brian Murphy. "Producers may need to develop new models for pricing or financing to avoid a price or cost shock upon expiration of the PTC, or risk ceasing operations entirely."

That mid-range uncertainty, Murphy said, could slow green hydrogen uptake, especially if US natural gas prices remain below $10/MMBtu, as they have been even throughout this year's energy crisis. Cash Henry Hub averaged $8.20/MMBtu for July 1-Sept. 1, compared to $4.01/MMBtu for the same period in 2021, according to Platts price assessments.

"It's really hard to undercut a modern world-scale SMR using natural gas less than $10/MMBtu," Murphy said.

What may help, however, is the IRA's methane fees, which will charge producers $900/mt of fugitive methane emissions, which amounts to up to 31 cents/kg of hydrogen, according to Platts data.