EU map of hydrogen production costs

Renewable electricity can already be produced at attractive costs just about everywhere in Europe. Especially low-cost locations for wind turbines are those where they can exceed 3000 full-load hours per year, mostly along, but not limited to, coastal areas of the North and Baltic Seas. Solar PV can already compete with conventional energy sources in a few regions in Europe. With anticipated declining investment costs in the next years, solar PV will rapidly become the lowest-cost option for producing electricity by 2030, especially in mountainous regions and in Southern Europe.

These hotspots will flourish as renewable energy hubs to supply Europe with the electricity needed to decarbonise not only the power sector but also to directly replace fossil fuels in certain industrial and transport applications.

Project developers seeking to produce renewable hydrogen will naturally pursue business models that can secure the electricity needed to operate electrolysers with sufficient operating hours at affordable costs. Therefore, the decision on how to procure electricity will depend on several aspects, including the local availability of renewable energy resources, electricity market conditions and commercial maturity of electrolysers.

During the hydrogen market ramp-up it will be particularly important to operate electrolysers as much as possible to compensate for the higher investments needed. Pioneers in the market benefit most if they procure electricity directly from dedicated renewable energy facilities that have been optimised for the use of electrolysers, making hydrogen production cheaper.

In the longer term, when energy from wind and solar will predominate in electricity mixes, a different way to produce hydrogen will evolve, allowing electrolysers to be operated according to price signals from power markets. This new business model will also allow for low-cost hydrogen production even when operating electrolysers intermittently. Declining prices for electrolysers and a market design that incentivises such a business model will further boost competitiveness. 

The Agora H₂ PyPSA model focuses on describing optimal locations where the first wave of renewable hydrogen production in Europe may emerge by 2030.

Producing hydrogen from renewables will always add additional processing costs compared with electricity generation, driving up investment expenditure and causing efficiency losses. For this reason, whenever possible, the direct use of electricity should be prioritised.

For cases where hydrogen is truly needed, it will be crucial to find low-cost renewable energy alongside suitable locations where hydrogen can be stored to secure supply according to end-users' demand.

As of now, the market for renewable hydrogen is still in its infancy. It is therefore of critical importance to understand the various factors that govern the debate on hydrogen costs and prices. While the levelised cost of hydrogen can serve as a good indicator for broad analyses at the pre-feasibility level, it does not include project implementation costs or profit margins.

Therefore, the actual price for hydrogen on the market will likely be higher than the production costs and depend on supply and demand dynamics.

Due to the high variability in weather conditions across Europe, project developers will design hydrogen production based on different shares of wind power and solar PV for each region.

Together with oversizing the renewables capacity, these measures will allow electrolysers to operate more often (i.e. gaining higher full-load hours) resulting in lower hydrogen production costs. Finding such optimal plant configuration will be even more important for first movers seeking to enter the market during the ramp-up phase of the hydrogen economy when electrolyser investment costs are expected to be higher.

Furthermore, current high investment costs also influence the decision about where to deploy the first hydrogen plants until electrolyser costs come down, since the spread in cost of capital is considerably high among European countries.

Hydrogen will only be produced at a large scale in locations where renewable energy is available at low costs. However, hydrogen demand is not limited to these prime production sites. Two options exist to match supply and demand: either by creating a delivery system to take hydrogen to the demand centres or by attracting off-takers to low-cost hydrogen producing regions.

In the case of hydrogen delivery, the most-discussed options rely on hydrogen transport via pipelines or shipping. While pipelines will be mostly restricted to pure hydrogen, shipping would allow a broad range of renewable molecules to be delivered.

The best-suited mode of delivery depends on both the distance and the final application. In terms of distance, short to medium ranges (0 – 3 500 km) are best served via hydrogen pipelines. In case of longer distances, the final application may play a decisive role since some hydrogen derivatives, such as ammonia and methanol, can be directly used by industrial consumers.

Reconverting a hydrogen carrier to pure hydrogen would come at the expense of the energy efficiency of the supply chain driving up delivery costs. Therefore, this approach is seen as the last resort for transporting hydrogen.

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