How to scale up hydrogen production by driving down costs

RenewableUK and Hydrogen UK have launched a report aimed at accelerating the deployment of green hydrogen by lowering the costs of production.

According to RenewableUK, the price of electricity used in electrolysis currently represents around 70% of the final cost of green hydrogen, which makes cost reduction critical.

The report, Splitting the difference - reducing the cost of green hydrogen to accelerate deployment, highlights the important role of green hydrogen in future proofing and decarbonising the UKs energy system.

The report also shows the importance of creating economies of scale to make hydrogen more affordable.

In 2023, states RenewableUK in a release, the first Hydrogen Allocation Round saw the cost of hydrogen production at £241 ($300) per MWh.

The report aims to reduce this to less than £100/MWh ($124/MWh) by implementing several strategic measures designed to maximise the UKs potential to use renewable energy to produce green hydrogen.

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The recommended measures include:

• Explore alternative options for electrolytic hydrogen developers to index their strike price in a way that better reflects their exposure to electricity supply and prices.
• Government should explore options to fix power prices for electrolytic hydrogen using the CfD process.
• Introduce pre-approved design stage to the Renewable Obligation process to enable investment in retrofitting flexible assets. Enable hybrid sites in the CfD with clear definition of roles on the basis of perceived system benefit. This will require the introduction of a definition of hybrid BMU (HyBMU) in the Balancing and Settlement Code and requirements for performance monitoring and metering. Reform the OFTO regime for an evolving offshore wind sector. It currently does not consider co-location, while there is a need to holistically resolve the issues to mitigate some of the investment risks.
• Review the requirement for half-hourly time matching within the Low Carbon Hydrogen Standard (LCHS) with the view to extending temporal correlation to monthly or annual, in line with wider industry practice and taking account of the impact of grid decarbonisation policies.
• Work with industry to help evolve the funding landscape for renewables and electrolytic hydrogen, maximising the opportunities to co-deploy while delivering Clean Power 2030 and Net Zero at lower cost. Incentivising flexibility and optimal location.
• Implement market arrangements that incentivise the flexible use of electrolysers, particularly for the avoidance of constraints. Change the LCHS rules to allow electrolysers engaged in curtailment reduction to account for their electricity at zero carbon intensity.
• Reflecting regional differences in the Low Carbon Hydrogen Standard - Assess the impact of allowing developers to account for regional carbon intensity when purchasing power from the grid.
• Energy intensive levies — Review generation and demand Transmission Network Use of System (TNUoS) charging methodology and supercharger legislation to reduce the burden of electricity system costs on hydrogen production projects, particularly in areas where the system benefits to the electricity system are the greatest.
• Exempting low carbon electrolytic hydrogen from the Climate Change Levy. Clarify that all electrolytic hydrogen production facilities in receipt of a Low Carbon Hydrogen Agreement (LCHA) are exempt from paying the Climate Change Levy.
• Relaxing the requirement to retire Renewable Energy Guarantees of Origin (REGOs) — As part of a wider review of how electrolytic hydrogen compliance costs can be reduced, government should explore whether a removal or temporary removal of the requirement to retire REGOs to comply with the LCHS would be appropriate.
• Develop a strategic hydrogen transmission network that links Scotland to England and Wales, including timelines for deployment and funding mechanisms. This will enable renewable and hydrogen developers to plan and optimise their projects based on the availability of hydrogen transport and storage infrastructure.

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Dan McGrail, chief executive of RenewableUK commented in a statement: "Green hydrogen generated from renewables will play an important role in helping the Government to achieve its clean power mission. It can add vital flexibility to our energy system, as it can be stored and used whenever it's needed.

"This report shows that to realise this strong potential, the Government will need to work with RenewableUK and Hydrogen UK to establish innovative business models to attract private investment, including strike prices which reflect the fact that this technology is still at an early stage, and incentives for developers to build electrolysers alongside wind and solar farms to cut costs.

"Enacting the key measures set out in this report will enable the UK's nascent green hydrogen industry to build on its global lead in this technology, driving down costs significantly in the long term, creating thousands of new jobs and generating billions of pounds in economic activity before the end of this decade".

Clare Jackson, CEO of Hydrogen UK added: “This report, a combined effort from the trade associations, marks pivotal steps towards achieving our national goals in energy security and clean energy transition by making hydrogen an economically viable option."