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12 July 2023

Transparency on cost components is key for designing renewable hydrogen support schemes

As part of its efforts to reach climate neutrality, the EU is developing support schemes for renewables-based hydrogen. To guide the design of such schemes, comprehensive and transparent cost estimates that reflect key drivers such as electricity costs are crucial.

Transparency on cost components is key for designing renewable hydrogen support schemes

A significant expansion of renewable hydrogen production will be required to meet national, European, and global climate goals. As long as hydrogen projects require policy support to become economically competitive, policymakers will need transparent estimates of the levelised cost of hydrogen (LCOH) to design appropriate support schemes.

A new analysis by think tank Agora Industry finds that existing high-level guidance for policymakers based on simplified levelised cost calculations tends to underestimate real-world project implementation costs and therefore needs to be clear about its limitations and applicability.  

The total cost of hydrogen strongly depends on the assumed electricity costs, the number of full-load hours (FLHs), the cost of capital and the investment costs for electrolysers. And even though electrolyser prices are projected to fall considerably in the future, they are still generally high in the EU today (significantly above 1 000 Euro/kW). Agora Industry proposes a pragmatic approach to cost calculations that firstly focuses on fundamental cost drivers within generalised system boundaries; and secondly leaves out project- and site-specific considerations and other non-fundamental cost drivers like project financing and tax credits.

Reserving renewable hydrogen for no-regret applications

In most cases, direct electrification is the best and the most cost-effective way to decarbonise, but some applications require renewable hydrogen due to their specific chemical properties, energy density or storability. Examples of such applications include industrial non-energy use of hydrogen in steelmaking and for chemicals, as well as long-haul aviation and shipping. Additionally, renewable hydrogen will have a role backing up renewable energy in the power sector and in district heating. It will be important to reserve the scarce and expensive renewable hydrogen for these no-regret priority applications.

The 33-page publication was commissioned by Agora Industry and conducted by Umlaut. The study and a tool to calculate simple levelised cost of hydrogen are available for free download below.

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