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Does blue hydrogen make economic sense?

Updated: Mar 30, 2023

Hydrogen has been proposed as an alternative to decarbonise energy-thirsty industries, but the color of hydrogen matters. Grey hydrogen is produced by steam reformation of natural gas and emits a lot of carbon dioxide. Blue hydrogen is produced the same way but carbon dioxide is captured during production. Green hydrogen is produced by water electrolysis with renewable energy, making it the most climate-friendly solution. Pro-fossil fuel groups have pushed blue hydrogen, but green hydrogen is seeing rapidly plunging costs. Which will win?


Grey hydrogen is clearly the cheapest, clocking in at about $1-1.50/kg in the US, depending on the price of the natural gas feedstock. Capturing the carbon adds cost, with market estimates in the $1.50-2.50/kg range. Green hydrogen today can be produced at about $5/kg, making it by far the most expensive.


However, the feedstocks for green energy are two resources that are very plentiful, and very cheap: Water and renewable electricity. The big cost for hydrogen production today is in the capex required for the electrolyzer, which cost upwards of $1000/kW power. But there are tantalizing hints that up-front prices will decline substantially, with Chinese manufacturers talking about dropping below $500/kW (though reliability is as yet uncertain, of course).


As electrolyzer prices decline, the price of green hydrogen is likely to drop towards $3/kg in the medium term. More interestingly, if the maintenance of these systems remains low, as the capex drops further it becomes interesting to operate electrolyzer part-time, only when electricity is cheapest. This report from McKinsey and the Hydrogen Council calculates that with electrolyzes at $250/kW, it may be possible to produce hydrogen as low as $1/kg in scenarios where renewables are overproduced, and there is excess capacity during the day.


Those targets are not within range right now, or maybe even by 2030. But any new plant that has a depreciation period of over 10 years might be expected to have serious competition at the end of its life. Between this technological uncertainty and the unknowable future pricing and regulation around methane, it's not clear that blue hydrogen investments will pay off. This is not about the cost or difficulty of carbon capture at all. Investing in such a capital-intensive technology in the limited time before electrolyzes scale does not seem to be an economically sustainable solution.

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