Green hydrogen only profitable if gas prices are high and if a strict climate policy is in place

Many plans for climate policy, including the draft Climate Agreement, focus on green hydrogen as a way of curbing the use of fossil energy and of reducing CO₂ emissions. Machiel Mulder, Jose Luis Moraga and Peter Perey of the University of Groningen investigated the economic conditions under which hydrogen can be produced and traded. They conclude that green hydrogen can only be produced economically if the following conditions are in place. Firstly, if the price of natural gas remains high for a long period of time. Secondly, if companies are required to pay a higher levy on their use of natural gas. Finally, if the electricity required for hydrogen production is largely generated using renewable energy.

According to Prof. Mulder, Prof. Moraga and Mr Perey, these conditions (favouring the use of green hydrogen) will only occur if governments intensify their climate policies and if global gas demand increases. The latter could occur, for example, if countries were to switch their electricity production from coal to natural gas. These three researchers from the Centre for Energy Economics Research published their findings in a report entitled ‘Outlook for a Dutch hydrogen market. Economic conditions and scenarios’.

Blue hydrogen and green hydrogen

Hydrogen has traditionally been produced from natural gas. This is what is known as ‘grey hydrogen’, or – if the CO₂ by-product is captured – ‘blue hydrogen’. ‘Green hydrogen’ is hydrogen that is produced by electrolysis, using renewable energy. It is this green variant that is usually the focus of climate policy. Machiel Mulder and his colleagues calculated that green hydrogen will only be profitable if the expected price of electricity in the coming decades drops below € 20/MWh. In the past ten years, however, prices have never dipped that low. The average price of electricity during the last decade was € 45/MWh.

Falling electricity price?

The development of green hydrogen would benefit from cheaper electricity. It is often claimed that electricity prices will fall in the future, due to the growing supply of renewable energy from wind turbines and solar panels. Machiel Mulder, Professor of Regulation of Energy Markets at the University of Groningen, questions these claims. ‘Investors will only pump money into renewable energy if electricity prices are sufficiently high for them to recoup their investment. Thus, long-term electricity prices will not sink below the level required for investors to recoup those investments. Accordingly, it will be very difficult to create the long-term conditions needed to benefit the growth of green hydrogen while, at the same time, stimulating renewable electricity production. The problem is that the former requires consistently low electricity prices while the latter requires consistently high electricity prices.’

Hydrogen as a means of transport

TenneT (a power grid operator) and Gasunie (a gas transmission grid operator) recently presented a report on the role that hydrogen might play in transporting electricity from offshore wind farms to onshore facilities. The basic idea is that the cheapest way to get offshore electricity onshore is to immediately convert it into hydrogen and then to pump that ashore via existing gas pipelines. It is claimed that this approach could produce enormous savings, as it would avoid the need to expand the power network. Even so, the researchers estimate that the benefits involved would still not be sufficient to make projects of this kind economically viable. Prof. Mulder points out: ‘You can only generate hydrogen offshore when the wind is blowing, so these hydrogen installations would inevitably have a low capacity utilization factor. That is bad news, in terms of economic efficiency. This method would only become profitable if the investment costs involved in both electrolysis and renewable electricity were to drop sharply.’

Blue hydrogen actually very promising at low gas prices

However, if the conditions for green hydrogen are unfavourable, blue hydrogen could be an alternative way of reducing CO₂ emissions. Low gas prices mean that the cost of blue hydrogen is also lower. At a CO₂ price of at least € 30, it also becomes profitable to capture and store any CO₂ released during the production of hydrogen from natural gas. Blue hydrogen would then be cheaper than grey hydrogen – in which the CO₂ by-product is not captured. According to Machiel Mulder ‘In the case of blue hydrogen, too, higher taxes on the use of natural gas by industry are needed to make it an attractive alternative. So blue hydrogen, too, would only really be a promising option if a strict climate policy were to be implemented.’

Further information

• Please contact: Machiel Mulder, Professor of Regulation of Energy Markets
• Download the Centre for Energy Economics Research policy paper: Outlook for a Dutch hydrogen market. Economic conditions and scenarios