Climate Change Energy infrastructure social value

The True Cost of Hydrogen: Part One

We need to consider the true cost of producing the hydrogen that is touted to transform our energy usage to one which is more sustainable and low carbon.

Let’s talk about the True Cost of Hydrogen. This is a two part series, in the first part I discuss the costs of producing hydrogen, the so-called hydrogen rainbow, and the potential reductions in cost of green hydrogen. The second part will talk about the impact on the demand side, what happens as a result of introducing the hydrogen economy to transport, domestic and industrial consumption.

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The hydrogen economy

To many, a hydrogen economy looks like it will be an important part of transitioning to sustainable energy, to reduce carbon emissions from heavy energy users such as transport and industry. So we tend to think of hydrogen as a way of meeting some of the climate goals in the near future.

In the UK 10-point plan for a green industrial revolution published in late 2020, the second point indicates that economic growth will be built on low carbon hydrogen. When we look at it, hydrogen has an impact, not only on the output side, but on the production side. If you consider that the UK Climate Change Committee forecast that 80% of hydrogen consumed in 2050 will come from blue hydrogen, there are some questions that we need to be asking. Wait, what is blue hydrogen you ask?

The Hydrogen Rainbow

There is a notional hydrogen rainbow. The International Energy Agency, explain the hydrogen rainbow as follows:

Grey hydrogen is produced industrially from fossil fuel sources, mainly natural gas. These also produce and emit significant amounts carbon.

blue hydrogen is cleaner, where the emitted emitted carbon is captured and stored or reused.

And Green hydrogen is produced from renewable energy sources, so carbon is not emitted at the point of hydrogen production. A study from 2019 shows that over 90% of manufactured hydrogen is produced from fossil fuel feedstocks, so-called grey hydrogen. And this can be more significant on the environment and externalities in general than even I initially thought, when considering just the production side. But on the face of it, is a cheaper way to transition to larger scale hydrogen production.  

Climate Council on Twitter: "Green hydrogen, generated through renewable  energy, is the only type of hydrogen capable of playing a role in our zero  emissions future.…"
Image courtesy of Climate Council via Twitter

How Do We Measure True Cost?

The True Cost doesn’t just consider costs like how much money does it take to build it, or to operate it, but it also includes what are called externalities. How and what externalities you monetise is covered quite nicely by Dr Daniel Dias in a previous post.

When calculating the True Cost, there is a need to assume things like the social cost of carbon in monetary terms, and the costs of other greenhouse gas emissions, from cradle to grave over the lifecycle of that hydrogen production plant. Externalities aren’t just environmental impacts like climate change, but you have indicators like human health. If you are Comparing different types of technologies you need to levelize the costs, essentially turn the costs and revenues into annualized values.

You, of course have different impacts depending on the production route – are you using fossil fuels like coal and natural gas to produce hydrogen, or are you using non-fossil fuels like wind, solar, nuclear and biomass?

Over the lifecycle, the environmental impact goes beyond climate change (which is of course considered, as the global warming potential). You also look at the acidification potential, eutrophication potential, energy consumed to produce the hydrogen

(IEA, Global average levelised cost of hydrogen production by energy source and technology, 2019 and 2050, IEA, Paris)

What is the Cheapest Way to Produce Hydrogen?

So how can we account for these externalities of hydrogen? Well, a recent paper from Imperial College London did just this.

Their study incorporated a Lifecycle Assessment (LCA), a Life Cycle Inventory (LCI) – which tells you the amount of feedstock required, the energy balance and the waste produced based on the production route of the hydrogen and monetises these, presenting the Levelised Cost of Hydrogen.

I should point out that estimating at this level is subject to so many uncertainties, and the addition of externalities makes this even more difficult – how do you account for the actual costs and impacts of fossil fuels from hydrogen production? This cannot be validated accurately over a long period of time as far as I am aware.

Unabated coal gasification shows the highest impact on human health.

For ecosystem quality, biomass gasification shows the highest impact.

Global Warming Potential – This is the total greenhouse gas emissions per 1 kg of hydrogen produced. Biomass gasification with carbon capture and storage shows the lowest global warming potential value, (although looking at the figure in the paper, without carbon capture and storage nuclear has the lowest global warming potential.


For electrolytic routes, the capital cost of production is the most significant cost.

The lowest cost corresponds to the natural-gas blue hydrogen fossil routes despite their higher CO2 emissions compared with electrolytic routes. But there is a 70% resource depletion (a significant environmental cost) because of the use of natural gas.

Electrolysis-based hydrogen production may need capital costs to come down significantly, but they could emerge as potentially attractive options.

I have shared the cost breakdown for renewable-based hydrogen production on the website blog that accompanies this episode. The biggest blocker appears to be the large capital investment required for renewables.

Image from NREL report on Hydrogen Pathways

Policy and Market Impacts with True Cost

Policy and the market impact the cost of producing hydrogen from different sources. The IEA project a rise in natural gas prices due to market forces, and that grey hydrogen will also have an additional emissions tax burden in different regions globally. So you need to account for a potential minimum CO2 price (and that price increasing), as well as the volatility of the gas market in different regions around the world.

Producers of hydrogen, of electricity and Governments can set targets to transition to green hydrogen from grey hydrogen by employing appropriate models with the True Cost. Do these require new business models? Well, yes, but a lot of companies are ahead of the game on this, and the models are there, it’s a case of fostering and implementing them to achieve the targets in the most efficient way.

Key Points

  1. A hydrogen economy is seen as a key part of a sustainable energy future – It is potentially as versatile as natural gas, and it can be produced in a number of different ways.
  2. One of the barriers to the adoption of green hydrogen is cost. If we take only the view of capital costs, clean hydrogen is limited – it will not be widely deployed on this basis, if prices do not come down enough to make the investment case.
  3. But, if we take the True cost, i.e. the external costs of production, there is a case to show that blue and green hydrogen is cheaper than grey hydrogen.
  4. The other side is that of energy policy – with a CO2 price and demand changes for natural gas in the future, the assumption that grey hydrogen will be expected to stay low is a fallacy – the comparative costs of production start to favour green hydrogen.
  5. If we are to transition to a hydrogen economy, we can’t repeat the mistakes of fossil fuels, we need to consider the externalities associated with the production side, as well as the use and end of life costs.

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