Levelised cost of hydrogen Making the application of the LCOH concept more consistent and more useful IMPULSE 301/05-I-2023/EN July 2023 Levelised cost of hydrogen PUBLICATION DETAILS IMPULSE Levelised cost of hydrogen: Making the application of the LCOH concept more consistent and more useful ACKNOWLEDGMENTS We would like to thank Amir Ali Panahi, Kaisa Amaral, Philipp Godron, Leandro Janke, Simon Müller, Frank Peter, Alexandra Steinhardt and Isadora Wang (all Agora Energiewende) for their helpful comments and support. WRITTEN BY Agora Industry Anna-Louisa-Karsch-Straße 2 | 10178 Berlin T +49 (0)30 700 14 35-000 F +49 (0)30 700 14 35-129 www.agora-industry.org info@agora-industrie.de We would also like to thank the Trans4ReaL project team and all those who partici­pated in the expert workshops for their valuable input. Umlaut bears sole responsibility for the findings of this study. The conclusions reflect the views of Agora Energiewende and Agora Industry. PROJECT MANAGEMENT Matthias Deutsch matthias.deutsch@agora-energiewende.de Mauricio Belaunde mauricio.belaunde@agora-energiewende.de Typesetting: Karl Elser Druck GmbH | Theo Becker Proofreading: Ray Cunningham AUTHORS Florian Nigbur, Martin Robinius, Patrick Wienert (all Umlaut); Matthias Deutsch (Agora Energiewende) 301/05-I-2023/EN Version: 1.1, July 2023 This publication is available for download under this scan code. Please cite as: Agora Industry and Umlaut (2023): Levelised cost of hydrogen. Making the application of the LCOH concept more consistent and more useful. This work is licensed under CC BY-NC-SA 4.0. www.agora-industry.org Preface Dear reader, The EU is raising its ambition for renewables-based hydrogen, and the regulatory framework required is taking shape. A long pipeline of green hydrogen pro­jects awaiting final investment decisions can finally be opened. Meanwhile, China keeps increasing its cost advantage in electrolyser manufacturing, and the US Inflation Reduction Act, which includes a highly com­petitive package of incentives for hydrogen production in North America, has significantly increased the pressure on the EU. Against this background, the EU is intensifying efforts to develop production support schemes for renewables-based hydrogen in the context of the new Hydrogen Bank it has announced. Numerous studies are now published every month containing estimates for the levelised cost of hydrogen (LCOH) production. They provide policymakers with the techno-economic basis on which to make their decisions and to design appropriate support schemes. But are the costs calculated consistently across these studies? How are system boundaries drawn? Which cost drivers are important, and which can be omitted? We address these questions in this study, commissioned by Agora Industry and conducted by Umlaut. The study sheds light on why the LCOH differs both between individual studies and between studies and real-world projects and provides recommendations for improving the application of the concept based on sensible simplifications that enable LCOH comparisons. We hope that our report can in this way enhance future studies. Before delving into the technical considerations, we assess the need for public support for renewables-based hydrogen in the first place, highlighting important considerations regarding the integration of renewables-based hydrogen production into the energy system. Yours, Frank Peter Director, Agora Industry Key conclusions: 1 Renewables-based hydrogen produced via electrolysis will be crucial in making several no-regret applications climate-neutral. As long as green hydrogen requires public support to be economically competitive, policymakers need transparent estimates of the levelised cost of hydrogen to guide them in designing support schemes. Key drivers are the assumed electricity costs, the number of full-load hours, the cost of capital and the investment costs for electrolysers. 2 Optimal energy system integration leads to fewer full-load hours, increasing the proportion of capital expenditure in the overall cost of green hydrogen production. For example, most widely-cited German energy scenarios expect electrolysers to run ~3 000 full-load hours in 2030, corresponding to a ~34 percent utilisation rate, which is expected to gradually increase up to 2045. The lower the number of fullload hours, the greater the proportional significance of electrolysis investment costs becomes. 3 High-level guidance