Rising capital costs for wind and solar power generation are likely to inflate production costs for green hydrogen, posing a new risk to its ability to compete with fossil fuels, according to US bank JP Morgan’s latest energy outlook report.

Surging costs for metals, freight and engineering services are likely to have raised the capital costs of wind and solar “considerably”, and the increases will ultimately feed through to power costs for consumers such as electrolysers, the report says. 

The costs of green hydrogen production are expected to fall as technology efficiency improves and producers gain economies of scale. But because power accounts for 50-70pc of the levelised costs of green hydrogen production there is an upside risk to the falling cost curve.

“We estimate green hydrogen costs to fall from $3.5-5/kg in 2020 to $1.7-2.8/kg by 2030, making the fuel more competitive compared to blue and grey hydrogen. However, with upside risk to wind/solar levelised costs of energy expected to be passed on to consumers, we see upside risk to this view,” the bank says.

“We expect the vast majority of hydrogen adoption will likely occur post-2030” JP Morgan

Wind and solar costs, which have fallen sharply in recent years, could see reflation of 20-30pc in both capital costs and the levelised cost of electricity, driven by rising costs of key input materials such as copper, according to Rob West, founder and lead analyst of consultancy Thunder Said Energy.

“Renewables are about four times more copper-intensive than conventional energy,” he told the recent FT Commodities Global Summit. West also expects supply chain issues to drive wind and solar inflation over the next 12 months.

Fossil fuel surge

The risk of higher power costs for electrolysers must be weighed against the boost to green hydrogen’s competitiveness from the recent surge in fossil fuel prices, which has significantly raised the price at which hydrogen can compete with fossil fuels in applications such as European trucking, steel and ammonia, the JP Morgan report notes.

But the bank urges realism about the use of hydrogen between now and 2030.

“While hydrogen will play a pivotal role in the energy transition, particularly for several hard-to-abate sectors such as steel, ammonia and heavy-duty road transportation, broad adoption will not take place in the foreseeable future,” it says.

“We expect the vast majority of hydrogen adoption will likely occur post-2030.”

JP Morgan’s base-case forecasts 102GW of installed electrolyser capacity by 2030. This would produce about 10mn t/yr of green hydrogen, equating to around 0.2pc of global energy consumption.

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Author: Stuart Penson