Blue hydrogen is ‘no longer a low-cost solution’

The current gas price crisis and the drive to end imports of Russian gas following its invasion of Ukraine mean blue hydrogen is “no longer a low-cost solution”, according to a new paper from the Institute for Energy Economics and Financial Analysis (IEEFA).

The report said the use of blue hydrogen, produced by reforming methane and capturing the carbon dioxide emissions, will increase the UK’s imports of natural gas due to energy losses in the process, raising the country’s exposure to high and volatile gas prices.

By 2025, IEEFA predicted that green hydrogen, produced by electrolysing water, will already be significantly cheaper than blue hydrogen if the electrolysers are powered using surplus power from renewables that would otherwise be curtailed. It predicted that green hydrogen produced using power from dedicated offshore wind farms will also reach parity with blue hydrogen by 2030.

The institute reached this conclusion by adjusting estimates for the levelised cost of hydrogen from a 2021 study by the Department for Business, Energy and Industrial Strategy (BEIS).

In its baseline case for gas and electricity prices, BEIS estimated the levelised cost of blue hydrogen produced at a 300MW steam methane reformation (SMR) plant with carbon capture and storage (CCS) at £62/MWh for projects commissioning in 2025 and £64/MWh for projects commissioning in 2030. It estimated the fuel costs at £40/MWh and £42/MWh respectively.

These figures assume an industrial gas price starting at 2.2p/kWh and rising to 2.9p/kWh in 2035. They also assume a carbon price of £25.74 per tonne, rising to £43.49 per tonne in 2030 and then linearly thereafter to £378 per tonne by 2050.

However, IEEFA said both gas and carbon prices have risen substantially since the BEIS study was undertaken. It instead assumed a flat gas price of 4p/kWh – the industrial gas price in the fourth quarter of 2021 – and a carbon price of £80 per tonne, rising to £98 per tonne in 2030 and then linearly to £378 per tonne in 2050.

The institute said the assumed carbon capture rate of 90% in the BEIS study is also overly optimistic given that real-world capture rates have been “consistently below industry targets”. It therefore lowered this rate to 80% for its calculations.

On the basis of these updated assumptions, IEEFA estimated the levelised cost of blue hydrogen at £84/MWh in 2025 and £85/MWh in 2030, with the former representing a 36% increase over the equivalent figure from BEIS.

This compares to the department’s cost estimates for green hydrogen produced using proton exchange membrane (PEM) electrolysers powered by dedicated offshore wind of £122/MWh in 2025 and £88/MWh in 2030. Its estimates for green hydrogen produced using curtailed renewable electricity are £58/MWh in 2025 and £48/MWh.

It is worth noting that the case examined by IEEFA of a 300MW SMR plant was not identified as the lowest cost way of producing blue hydrogen in the BEIS study, which found it would be slightly cheaper for larger plants and those using the alternative autothermal reformation (ATR) process.

In the case of a 1000MW ATR plant with a gas heated reformer, the BEIS study estimated the levelised of cost of blue hydrogen at £55/MWh in 2025 and £57/MWh in 2030. The fuel costs were estimated at £34/MWh, indicating the overall costs would also be less sensitive to gas prices than for SMR plants.

One of the first blue hydrogen plants proposed in the UK, Equinor’s Saltend H2H project in the Humber region, intends to make use of autothermal reformation.

BEIS blue hydrogen cost estimates

IEEFA acknowledged that its prediction that green hydrogen will be cheaper blue hydrogen within the current decade could prove wrong if gas prices fall back down or electricity prices rise significantly.

However, the report said there are good reasons to believe this will not happen. The Russian invasion of Ukraine has a led to a “renewed political will and urgency in Europe to shift from cheap Russian gas”. This will require a greater dependence on relatively expensive imports, meaning gas price are likely to “remain elevated for years.”

Meanwhile, most green hydrogen producers are likely to be protected from merchant price risk through power purchase agreements and reforms to electricity markets could bring an end the current “pay-as-clear” arrangements, which pin the electricity price to the marginal generator. This could lead to a “decoupling of gas and electricity prices and, for example, a scenario where gas remains expensive but electricity becomes cheap.”

“If blue hydrogen projects are supported by governments and come into operation, there will be a need to increase gas imports significantly, probably at high prices, which will only lead to higher energy costs for the wider population,” the report concluded.

“The gas market is global and very volatile. Prices can easily fluctuate due to geopolitical issues, weather disruptions, variations in supply and/or demand, etc. Blue hydrogen project economics are tied to this volatility.

“Expected production costs published only a year ago are significantly higher today, raising questions about continued policy support for the technology. Unlike gas, renewables can be more regionally or locally located and are free from annual fuel cost dependency.

“Green hydrogen projects can capitalise on this advantage and offer an alternative route to hydrogen production that generates near-zero emissions, at a cost that is expected to become cheaper than blue no later than 2030.”

“Looking ahead to 2030, the cost curve speaks clear,” said Arjun Flora, report co-author and IEEFA director of energy finance studies in Europe.

“Since both the price of gas and UK emissions allowances have risen, not only is blue hydrogen no longer a low-cost technology, but its green rival will become cheaper to produce this decade and well before the end of blue hydrogen project lifetimes’ – which makes blue hydrogen a bad investment.”