INTERVIEW: Inflation pushes Europe green hydrogen costs up by Eur2/kg

Inflation and rising interest rates in Europe are likely to have inflated green hydrogen production costs by up to Eur2/kg in the last year, Occo Roelofsen, CEO of renewable hydrogen company Power2X, told S&P Global Commodity Insights in an interview.

The company is targeting production at the low end of European hydrogen costs, around Eur3-5/kg ($3.20-$5.30/kg) from the two large-scale projects it is developing in Spain and Portugal, Roelofsen said Sept. 26.

"For both these projects, we hope to be on the lower side of the European cost curve, and we are targeting numbers that are in the range of Eur3-5/kg," he said.

Such figures would be substantially below Platts' grid power-based cost-of-production assessments.

European hydrogen production costs via alkaline electrolysis (including capex) averaged $6.48/kg in August, based on Dutch month-ahead grid power prices, the Platts Hydrogen Price Wall shows. Platts is part of S&P Global Commodity Insights.

Roelofsen pointed to inflationary pressures pushing up green hydrogen production costs, something the IEA identified in its Global Hydrogen Review, published earlier in September.

"I wouldn't be surprised if hydrogen costs have gone up at least Eur1-2/kg in the last year because of the interest rates, inflationary pressures and higher costs of power supply," he said.

Roelofsen noted that customers would have to pay a green premium for renewable hydrogen and its derivatives, particularly now that natural gas prices have fallen significantly from the record highs reached in 2022.

"In general, the projects in Europe are going to have to sell their green hydrogen at a substantial premium over gray. In Europe, green hydrogen is a lot more expensive than gray hydrogen, especially now that gas prices have come back to 'normal levels’ again. So you're going to have to get comfortable with that premium as an offtaker."

A combination of government mandates, corporate environmental, social and governance targets, the broader drive to decarbonization and an ability to pass on a green premium would underpin adoption of green hydrogen, he said.

Island mode, grid mode

Power2X currently favors high-pressure alkaline electrolysis while continuing to engage with alternative technologies, Roelofsen said, using established technology to produce green hydrogen at scale.

The company’s flagship projects are the planned ErasmoPower2X plant in Spain and MadoquaPower2X in Portugal, each with 500 MW of electrolysis capacity.

ErasmoPower2X, close to the Puertollano industrial area, will be backed by 1.2 GW of directly-connected solar power to produce 55,000 mt/year of green hydrogen for the local chemicals industry, displacing conventional fossil fuel-derived gray hydrogen. The hydrogen would be sent via a new pipeline, Roelofsen said.

For MadoquaPower2X in Sines, Portugal, Power2X is looking at grid-connected wind and solar power, linked to power purchase agreements, to produce 50,000 mt/year of green hydrogen for 500,000 mt/year of ammonia.

A final investment decision for Erasmo is expected in late 2025/early 2026, with first operations before end-decade. An FID for Madoqua could come in 2025, for first production from late 2027.

Roelofsen said utilization rates at the Spanish plant would be around 35%, which could rise to 40%-50% with a grid connection, while the Portugal project would have much higher utilization rates.

The company is also exploring projects in Scandinavia and Northwest Europe, he said.

Power supply

Power supply for the two projects was a combination of owned generation assets and grid electricity backed by 10-to-15-year renewable power purchase agreements, giving price stability and certainty, Roelofsen said.

Power offtake for the hydrogen plants could also act as a balancer for the system, he noted.

Securing offtake agreements for the projects was key to taking final investment decisions. The potential offtakers for both projects are existing hydrogen users in the chemical industry, where he said the company has had "promising" discussions.

The planned Spanish hydrogen pipeline network would also act as a storage option, providing some flexibility to production round the clock, while the power supply profile in Portugal was more constant.

Policy gaps

While Europe has taken steps to finalize much of its supply-side policies for green hydrogen production, Roelofsen said more work was needed on the offtake and mandate side.

"The funding is very much focused, for example, on the innovation part, which creates a bit of a strange dynamic because many of these projects are very innovative. Large-scale hydrogen at the sort of scale that we are working on has actually never been done before, so that in itself is an innovation."

He also highlighted a "cumbersome" application process for funding support, and a shortfall in what was needed in funding to balance the market.

On hydrogen derivative imports to Europe, Roelofsen said low-cost end products such as ammonia and methanol made sense.

He highlighted a need for the EU to develop policy on the offtake and mandate side, including potentially penalties for not meeting mandates for end use, to link up with strong policy support for green hydrogen production.

"A system like that in the US is a lot simpler, more straightforward, easy to implement, but also importantly, gives confidence to investors that there is a simple, easy to execute mechanism available for all projects," he said.

Meeting the EU’s targets for 10 million mt/year of domestic green hydrogen supply by 2030 were tight, Roelofsen said, not least because of the time it takes for permitting, and getting the project engineering works and suppliers aligned in a new industry.

Largest green hydrogen projects in Portugal, Spain

Source: S&P Global Commodity Insights, companies