Green hydrogen is far too expensive for the moment

22-03-2019

We interviewed Professor Machiel Mulder. Under his leadership, a team from the University of Groningen explored the economic potential of blue and green hydrogen.

We hear a lot about hydrogen, usually about technical matters, investment costs and similar topics. We don't hear much about the economic conditions, even though that's what determines whether investors want to put (a lot) of their money into it. A team from the University of Groningen, comprising Machiel Mulder, Peter Perey and Jose Moraga have been exploring the economic potential of this panacea. The conclusions show a mixed picture and we asked Machiel Mulder why. “Hydrogen has great potential, but …”

Machiel Mulder (photo: University of Groningen)

Machiel Mulder (photo: University of Groningen)

Many see hydrogen as a fantastic solution for solving the problems associated with storing sustainable electricity and accelerating the energy transition, but in your report your enthusiasm is restrained.

Machiel Mulder: “First of all, we need to make a clear distinction between the different types of hydrogen. Up to now it has mainly been made from natural gas and intended for the petrochemical industry. Blue hydrogen is the same as grey hydrogen but the CO2 is captured and stored or used. However, what we really want is green hydrogen from electrolysis; if you want to create a market for that, green must be able to compete with grey. Three factors are crucially important for that: the price of natural gas, the price of electricity and the climate policy. What's Brussels doing, what's The Hague doing with CO2 pricing and levies on natural gas and what's happening on the international gas market?”

Those are three uncertain factors.

“Yes, and removing all the uncertainty is not a straightforward task. Hydrogen has great potential: it can wholly or partially replace methane; it can be stored easily and transported through pipelines. But if natural gas becomes a cheap resource, such as would be the case if many new fields were drilled worldwide, you would need large subsidies to enable green to compete with grey. The question is whether we, as a society, are willing to commit to that, certainly where large-scale use is concerned. In short, the market will not pave the way for green hydrogen on its own; investors want to be able to count on making an adequate return. The government must therefore play an active role.”

 According to you, blue hydrogen is cheaper than green hydrogen and yet, thanks to CCS, sustainable; but isn’t CO2 capture and storage very expensive?

“At a COprice of around 30 euros, blue becomes cheaper than grey. If that level is reached, investments will follow naturally; we're almost there. And there is every indication that CO2 prices will rise further meaning that the moment when blue is cheaper than grey is fast approaching. But there's one thing that could spoil everything, which is that society doesn't want it at the moment because people don't trust it or don't find it genuinely sustainable. That seems unnecessary to me; it's never been proved that CCS could be unsafe or harmful and therefore it's mainly a matter of perception. Admittedly, fossil energy is still being used for CCS but CO2 emissions are being removed and that's ultimately why this all began. Another aspect is the feeling that we would prefer to be independent. We would have to import natural gas, mainly from Russia, to make blue hydrogen whereas we can make green hydrogen in our own country. That feels good but then you need to invest a lot of subsidy money in it and who's going to pay for that ultimately? People like me and you.“

“This is therefore about making social choices. In order to make it responsibly you have to compare green hydrogen objectively with other options such as installing electric water pumps. Of course, that also costs a lot of money. Houses have to be insulated; heat pumps are relatively expensive and I don't expect that cost prices will fall quickly due to economies of scale. These are ordinary inverse air conditioners. In this scenario, blue hydrogen can be a cost-effective solution.”

Essentially you're saying that blue hydrogen is indispensable for paving the way for green hydrogen.

“Yes, that's right. I'm convinced that it won't work without CCS, at any rate a market for hydrogen won't get off the ground for the time being without it.”

“Our investigation also looked at the demand for green power. Irrespective of whether the cost price of green hydrogen can compete with that of blue hydrogen, we must also appreciate that green power is a scarce resource. The next few years will see a substantial, growing quantity of sustainable electricity on the market as a result of wind farms being built and solar panels being installed. As is well known, generating electricity in this way is linked to peaks and troughs; sometimes there are surpluses, sometimes there's too little. Sustainable hydrogen production is an attractive solution for buffering the surpluses but this does have an impact on the energy mix. As the electricity required for making green hydrogen has to be extracted from the existing system. In this way, electrolysis required for hydrogen production must compete with other electricity users. Many companies would prefer green power and would prefer that green power to be from the Netherlands or, even better, from the North Netherlands. I've already heard the term 'orange hydrogen' in that connection. Before we can make enough of that, we need a surplus of physical electricity but unfortunately this fact is neglected. When I explain this to people, they're often surprised. Okay, is that how it works? Yes, that's how the market works. When you buy green power, you buy power and certificates, guarantees of origin.“

It's not realistic to produce green hydrogen exclusively from North Netherlands wind

And you can't issue more guarantees of origin than the amount of green power available.

“No, and that's another reason why it will be difficult for orange hydrogen, for the supply of green power in this region is too small compared to demand.”

But can't you also import green power?

Yes, but that's a delicate issue. As I said, people want green power made in the Netherlands. There is an adequate supply in Europe, from Scandinavia, Iceland etc., meaning that the price of European certificates is not as high. That's why I also think it's a shame that people look so closely at the origin of green hydrogen. That drives the price up unnecessarily. It's therefore not realistic to produce green hydrogen exclusively from North Netherlands wind; it's pricing itself out of the market. I've heard from buyers that certificates for solar power produced in the North Netherlands are already moving towards a price of 10 euros. And it's around five euros for wind whereas a certificate for ordinary green power will only cost you one euro. In short, it's not really feasible.”

But we have a European electricity market so why do we have to generate all the electricity in the Netherlands?

“I don't understand that either. Everyone wants to produce it locally but we get everything else from all over. We make it so very difficult for ourselves. I understand that the North Netherlands wants to invest in wind energy; this will provide more sustainable energy which is necessary. But if we then only want to have green power from that source, we will soon reach our limits. If you were the only municipality that wanted green power exclusively from your own region, that might be possible – but that's not the case.”

Why isn't the message getting through?

 “Because many people believe that there will be more than enough wind and solar energy in the future, but I doubt that. In our study about the future of hydrogen, we calculated how low the price of electricity must be, on average, to make electrolysis profitable. We came up with a figure of around 20 euros per MWh. But the price of electricity is currently around 50 euros! To end up at 20 or less you need a lot of times when surplus power is being produced. We looked into how frequently this occurs but it turned out to be a bit disappointing especially since the demand for power is rising sharply; just think about electric cars, for instance.”

“Our study also points out a few dilemmas in the climate policy. In order to stimulate investments in wind and solar power, electricity prices need to be higher over the long term, otherwise the investments are not profitable, but to produce green hydrogen you need precisely the opposite: electricity prices that are lower over the long term or on frequent occasions. For that reason, it will be very difficult to create circumstances where both renewable energy and green hydrogen are promoted. Another problem is that, for an effective climate policy, the CO2 price in the European trading system must rise to stimulate investments in renewable energy, but in the short term that means that electricity prices rise further, making it even tougher economically for green hydrogen.”

There's a whole range of colours: grey, blue, green and orange hydrogen. We would really prefer the latter two, but you say that this isn’t realistic. Yet the majority of people in politics and society want that so how can we give green hydrogen a chance?

“A stringent climate policy. Green hydrogen will only become profitable if households pay more tax on natural gas, CO2 prices rise to around 60 euros as a result of levies and/or intervention in the emissions trading system and electricity prices hover around 20 euros per MWh. This is unlikely to be short-term phenomenon.”