The levelised cost of renewable hydrogen (LCOH) has surged by 30–65% in the last 12 months on the back of higher electrolyser capex, and financing and renewable power costs, according to joint analysis by consultants McKinsey and industry group Hydrogen Council.

Costs have also risen because of the broader inclusion of additional costs such as EPC compared to estimates made a year ago, they said in the 2023 edition of their Global Hydrogen Flows report.

The US is the lowest cost producer of both renewable and gas-based low-carbon hydrogen in 2030, with renewable achieving a unit production cost of well below $1/kg and low-carbon just above $1/kg. The cost projections are based on the report’s Further Acceleration scenario, where the energy transition is accelerated compared to today’s pace but the world still fails to reach below the 1.5°C temperature target.

375mt/yr – Total demand in 2050

Elsewhere on the cost curve, Canada, the Middle East and Norway each achieve costs below $2/kg for both types of hydrogen. Germany, France, Italy and east China are above $3/kg, with Japan the highest cost producer at more than $6/kg. Overall, 50% of global production is costed at below $2.5/kg.

Despite the higher cost outlook, the Hydrogen Flows modelling points to renewable hydrogen “largely maintaining” its market share compared to low-carbon hydrogen from gas. The report’s 2050 scenario puts total clean hydrogen demand at 375mt/yr. Of that, renewable accounts for 265mt/yr and low-carbon 110mt/yr – implying a 70:30 split in favour of renewable.

Several factors point to renewable hydrogen defending its market share despite higher costs. These include regulations mandating the use of products derived from renewables. In addition, new incentives for renewable hydrogen are emerging, while progress in scaling up CCS is also factored into the 2050 projection.

Higher gas prices could cause some reduction in the competitiveness of gas-based, low-carbon hydrogen as the energy transition plays out, with existing exporters looking to monetise gas via pipelines and LNG exports, the report said.

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Author: Stuart Penson