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The Economics of Hydrogen

Hydrogen is hot news right now, it seems almost everyone is interested in hydrogen, and there is no shortage of opinions on whether hydrogen is a good or bad choice [1]–[4]. There are many opinion pieces, I have written a few myself, but thre is very little in the way of quantitative economic analysis. In this blog, I will set out what I have found out about the economics of hydrogen. The caveat is that I do not know the answer to all the questions, but I can try and put some hard numbers on the economics and encourage debate.

Is hydrogen economic?

The answer is it depends, and part of that answer is not just a fiscal profit-and-loss analysis. There is also the issue of 'public good' and 'how much people are prepared to pay'. I will come onto those issues later. But we will start with some of the basics

What is Hydrogen

The first thing to know about hydrogen is that is manufactured fuel that requires input energy to make. You get out less energy than you put into the manufacturing process. It is perhaps more appropriate to call Hydrogen an energy carrier, a convenient way to move energy around. Unlike oil and gas, hydrogen does not occur in nature (not in large quantities at least) and has to be made. Hydrogen is most commonly produced in one of two ways, from the electrolysis of water, where use electricity to split water into oxygen and hydrogen, or we can use heat (steam) to break up natural gas (methane), called Steam Methane Reformation (SMR) [5], [6][7][8]. It can also be made from heat treatment of other carbon-based fuels, like coal gasification [9]. Producing hydrogen from water is clean, with no production of greenhouse gas (GHG). Reformation of natural gas or gasification of coal produces CO2 and other GHGs and is not clean unless we capture these pollutants and store them as a solid or in underground geological stores, this is Carbon Capture and Storage (CCS) [10]–[12]. Large quantities of hydrogen are already produced as it is an important feedstock in the refining and chemical industry. The current demand for hydrogen is about 70Mt a year. Most of that is made from SMR, with no carbon capture and is dirty hydrogen or black hydrogen [13].

Key takeaway: Hydrogen is an energy carrier that requires a feedstock and large amounts of input energy to make. Feedstocks include water, natural gas and coal. Hydrogen is an energy carrier used to transport energy and is not a primary fuel or energy

What is the efficiency of hydrogen?

The most common applications for hydrogen are chemical processes, for example, to make ammonia or fertilisers. The proposed future for hydrogen is it will be used to power cars using hydrogen fuel cells or heat our homes by replacing natural gas in our gas networks to fuel gas boilers for home heating [14], [15].

So how energy efficient is hydrogen?

David Cebon has published some excellent analysis of hydrogen efficiency [4], [16], [17]. When I talk about efficiency, I mean from the input energy source to the end-user. So, for example, for a hydrogen fuel cell vehicle:

  1. We generate electricity using a wind turbine or a solar panel;

  2. We use electricity to power a hydrogen electrolyser and produce hydrogen;

  3. The hydrogen is compressed, transported and stored;

  4. We use the hydrogen to fill up a hydrogen car;

  5. The hydrogen is converted back to electricity in a hydrogen fuel cell to drive an electric motor, and then the wheels of the car

In summary, for vehicle use, hydrogen is about 30% efficient. If we use hydrogen to heat our homes is about 50% efficient. For cars, for every unit of energy put in, we only get a third of that energy to drive the car's wheels. For home heating for every one unit of energy, only half that energy will heat our home. By comparison, electric vehicles powered by battery are about 75% efficient. If we use electric heat pumps to heat our home, these are around 270% efficient (see David Cebon for explanations).

Key Takeway. There is an efficiency penalty for using hydrogen, and competitor vectors are more energy efficient.

How much does hydrogen cost?

I will quote the cost of hydrogen at the point of production before transport and storage. At Olwg we have reviewed many hydrogen projects globally and run our own economic models, and we have found that hydrogen costs are anywhere between $4/kg and $30/kg depending on technology, location and the cost of the feedstock. The IEA is quoting costs at between $1 and $8 per kg. Natural gas without CCS being the cheapest and renewable from electrolysis being the most expensive [13]. Based on our analysis, we believe the IEA are a bit light on costs and predict cost for SMR with CCS at between $3 and $6 a kg and hydrogen from electrolysis at $5 to $12/kg.

Expressing cost as $/kg is not very tractable. It is more intuitive to express hydrogen cost as a unit of energy. Most people are familiar with electricity and gas bills in kWh; for convenience, we use $/Mwh. $1/kg is equivalent to about $25/MWh. So if we assume what we think is an optimistc price of $2/kg for SMR and $4/kg for electrolysis, that equates to $50 MWh for SMR and $100/MWh for electrolysis. To put that into context, gas costs about $4/MWh and electricity costs $46/MWh. Hydrogen is always going to be more expensive than natural gas and electricity because it uses either gas or electricity as a feedstock. There perhaps some exceptions to this that we will discuss later. These are optimistic prices and in reality, based on projects executed today, we see more like $120/MWh for SMR and $200/MWh for electrolysis. The price for hydrogen at a fuel pump in the UK is around $10/kg, which is $338/MWh

Key Takeway: Hydrogen will always be more expensive than gas or electricity.

Is there a market for hydrogen?

Apart from use in the refining chemical industry, there is currently no existing market for hydrogen. Hydrogen has a niche use for transport, but hydrogen cars are relatively rare. Currently, from a total of 72 Mt of hydrogen produced annually, only 4 Mt is used for a purpose other than chemicals and refining.

We should talk about market and market drivers. All things being equal, assuming a perfectly competitive market, and ignoring the 'climate emergency', consumers will pick the cheapest energy to use in their homes and cars. If costs for a new energy vector are the same, consumers are more likely to stick with what they know and understand. One point of interest is that in the UK, on a cost per km basis, Hydrogen prices competitively against petrol and diesel. According to our calculation, and based on Toyota Mirai's performance figures, at $10.5/kg cost per mile is the same as petrol or diesel (which is about 8 pence km). Here is the caveat, petrol and diesel are heavily taxed in the UK, and if we will all switch our cars to hydrogen, the government will lose a lot of tax revenue. 60% of the cost of petrol in the UK is tax. Without tax from petrol and diesel, the government will need to raise that tax revenue elsewhere, so ultimately, someone somewhere will pay for that lost tax revenue. Also, electric vehicles are currently cheaper to run than either petrol or hydrogen cars on a cost per km basis. At the moment, ignoring electric vehicle's purchase cost about half of what it is to run a petrol or hydrogen car, about 4 pence a km for electric cars compared to about 8 pence a km for petrol or hydrogen [18].

The other thing to consider in our perfect market is supply in the absence of demand. What is the incentive for producing hydrogen? Why does it compete for using renewable energy? At the moment renewable energy makes up about 17% of global total energy consumption, in the UK this about 15%. In the UK, power companies have an obligation to dispatch renewable power before they can dispatch carbon-based energy. So renewable energy is effectively in short supply. The question is, why would the market choose to make hydrogen when they have a guaranteed market for simply dispatching their power directly into the grid at low financial risk? Making hydrogen is a whole load of other stuff to do, extra plant to maintain, additional costs on the business and extra operational costs. So the answer is the energy companies will not make hydrogen unless they know there is a guaranteed market and consumers are prepared to pay a premium. And this is where government comes in.

On the face of it, hydrogen is expensive, there is no market. Yet people seem to be investing. Why?

We have assumed a perfectly competitive market. But there is no such thing as a perfectly free market [19]. National governments choose to intervene where they perceive it is the public interest to do so. The government considers social surplus, moral hazard, and Pareto efficiency and will decide to intervene in the market to avoid market failure in the public's interest [20]. The climate emergency is one such issue. The analogy is the government choose to tax sugar or smoking because they have decided that it is in the public interest to intervene in the market. Hydrogen and renewable energy sit squarely in the realm of government intervention to avoid market failure of green energy. The government can intervene in many ways, feed in tariffs, capital subsidies, obligation and certificates, etc. We can look at one incentive in the UK as an example: The Renewable Transport Fuel Obligation and Certificate scheme.

The Renewable Transport Fuel Obligation (RTFO) is an obligation on suppliers of transport fuels to demonstrate that a proportion of the fuel they supply comes from renewable sources. Suppliers of fuels, both renewable and non-renewable, totalling 450,000 litres or more in an obligation period have a responsibility under the RTFO. They meet their obligation in one of three ways:

  1. By claiming their Renewable Transport Fuel Certificates (RTFCs) for the supply of renewable fuels, or

  2. By paying a fixed sum for each litre of fuel for which they wish to 'buy-out' of their obligation (for the supply of non-renewable fuels), or

  3. By purchasing an RTFC on the open market to meet their obligation

If hydrogen is produced from renewable sources, then hydrogen qualifies for Renewable Transport Fuel Certificates (RTFCs). Under current legislation, hydrogen allows for double RTFCs. So for every kg of hydrogen, a producer can claim 9.16 certificates. These certificates can trade at up to 70 p a certificate or 90 cents a certificate. Therefore for every kg of hydrogen, a producer can claim certificates worth $8 a kg. This subsidy means that hydrogen's effective production cost is reduced by $8 kg, which is a discount of $200/ MWh. We estimate that electrolysis projects are priced at $200/MWh, so now the hydrogen is almost free to produce if it is used for transport. Now you can see why investors are very interested in hydrogen. However, here is the problem, the government only intervene in niche technologies with the idea that eventually, the subsidy will be removed. The hope is that the cost of hydrogen will come down, the subsidy will be removed. Alternatively, hydrocarbons have been eliminated from the market, and the public has no choice but to buy the hydrogen they have become dependent on. Will the costs of hydrogen come down? We will deal that with in the next section.

The other thing to consider in markets is the social surplus, which is the utility people ascribe to a service or good over and above the price charged. The utility is not always straight forward dollar cost. For example, people choose to buy luxury goods for reasons other than cost. Consumers may perceive a moral value for hydrogen in the face of a 'climate emergency'. Consumers may also prefer the convenience of hydrogen quick refuelling over the time taken to charge electric vehicles and the added range that hydrogen gives to a vehicle.

Another factor, some countries like the UK have an extensive gas network, and large companies have invested in skills and resources focused on gas and gas engineering. Private companies resist creating stranded assets or losing their investment in the skills they have built up. There are large gas producing and gas distribution companies that see hydrogen as a way to avoid their stranded assets. Companies like SGN in the UK have a deep interest in promoting and developing hydrogen for use in their preexisting networks [21]. Large oil and gas companies understand and know how to market and distribute gas.

It may be that hydrogen is the only carrier that can do the job in places that are hard to decarbonise with direct use of electricity. Hydrogen has some advantages, it is light, can be stored and is dispatchable, and quick to refuel. So use in heavy haulage, trains, planes and other specific industries, hydrogen may have a clear advantage and be worth the premium over electricity.

Key takeaway: Currently, there is no market for hydrogen as an energy vector, and under a perfectly free market with shortages in renewable energy, there is no real financial incentive to produce hydrogen. Governments have chosen to intervene in the market to avoid market failure and subsidise hydrogen in the hope that the cost of hydrogen will come down in the future. There are vested interests that prefer the hydrogen vector to avoid stranding assets. Hydrogen may be ideally suited to particular applications and is worth a premium price. There could be a market for green hydrogen in the chemical industry, but we have not investigated the economics for chemicals and refining.

Will the cost of hydrogen, come down

We have seen that governments are subsidising Hydrogen in the hope that it will come down in price. However, we have already shown that hydrogen can never be cheaper than the feedstock it uses, gas or electricity. Hydrogen will always be (much) more expensive than electricity or gas. Renewable energy is in short supply and probably will be for decades to come, so no one is going to give away electricity to make hydrogen. For green hydrogen by electrolysis, 80% of the cost is the operational expenditure (OPEX), and mostly in the cost the feedstock. Electrolysis is already 85% efficient, and while there are technologies on the horizon that could take this efficiency to 95%, it is unlikely to make a significant dent in the OPEX. The cost of units and reduction of capital expenditure (CAPEX) can only impact about 20% of the cost of hydrogen.

There is perhaps an exception, David Mackay pointed out that in the UK to meet renewable energy demand the UK will need to import renewable energy [22]. Mackay also pointed out that large parts of the world are sparsely populated with massive renewable energy potential, for example, the Sahara's potential for solar energy. In this case, there is no internal market for renewable electricity. These countries could exploit their wealth in renewables and generate hydrogen for export. The question is, will it be cheaper to export electricity or hydrogen. Hydrogen has a few transport problems. First, at the same temperature and pressure, because of its density, it has one third the energy content of natural gas, so it will require compression. Second, the boiling point of hydrogen is minus 252 deg C, compared to natural gas which is minus 164 deg C. So liquified hydrogen will be much more expensive to transport than liquified gas (LNG) simply down to the amount of extra energy for chilling. Third, hydrogen could be converted to ammonia and transported but requires conversion of hydrogen to ammonia and then extracting hydrogen from ammonia and the point of delivery.

We have not calculated the costs of transport, but it feels expensive.

Key takeaway: While hydrogen will never be cheaper than gas or electricity, some countries are rich in potential renewable energy and have the potential for very cheap excess renewable energy to make hydrogen. The transport of hydrogen is likely to add a significant cost.

Market rationality

Finally, markets are not always rational, given enough interest, hype, news, government hyperbole there will always be speculative investors. There are always have been and always be market bubbles (tulips, dot-com, bitcoins, GameStop etc). Some investors know they are in a bubble and hope to get out before the bubble bursts. Some do not know they are in a bubble. Where there is a growing bubble, there will always be policy entrepreneurs, people with a solution shopping for a problem, that will take advantage of a hot market. Governments will invest in niche technologies to prevent market failure knowing that some niches will fail. The plan is to fail fast and fail cheaply, but in the hottest markets, this does not always happen and sometimes there is a very high cost for failure.

No doubt some people will get rich fast. But is this the sustainable green new deal we are looking for? Only time will tell.


[1] “Hydrogen isn’t the fuel of the future. It’s already here | World Economic Forum.” (accessed Mar. 13, 2021).

[2] Volkswagen, “Electric battery or hydrogen? We explain where the decisive advantages of the electric drive over the fuel cell currently lie. And why there is no alternative to Volkswagen’s decision to consistently promote e-mobility.” means that the hydrogen,to 20 percent overall efficiency.

[3] F. K. and E. G. Belén Balanyá, Gaëtane Charlier and J. O. and P. S. D. by E. S. Edited by Katharine Ainger, “THE HYDROGEN HYPE: GAS INDUSTRY FAIRY TALE OR CLIMATE HORROR STORY?,” 2020. [Online]. Available:

[4] D. Cebon, “Blog: Hydrogen or Electron Economy?,” The Centre for Sustainable Road Freight, 2021.

[5] “Steam reforming - Wikipedia.” (accessed Mar. 13, 2021).

[6] “Methane Steam Reforming - an overview | ScienceDirect Topics.” (accessed Mar. 13, 2021).

[7] R. Rothwell, “Successful industrial innovation: critical factors for the 1990s,” R&D Manag., 1992, doi: 10.1111/j.1467-9310.1992.tb00812.x.

[8] “Electrolysis of water - Wikipedia.” (accessed Mar. 13, 2021).

[9] “Coal gasification - Wikipedia.” (accessed Mar. 13, 2021).

[10] E. S. Rubin, J. E. Davison, and H. J. Herzog, “The cost of CO2 capture and storage,” Int. J. Greenh. Gas Control, 2015, doi: 10.1016/j.ijggc.2015.05.018.

[11] “CCUS projects in Europe Overview of existing and planned CCUS facilities.,” 2020. [Online]. Available:

[12] M. Billson and M. Pourkashanian, “The Evolution of European CCS Policy,” 2017, doi: 10.1016/j.egypro.2017.03.1704.

[13] “The Future of Hydrogen – Analysis - IEA.” (accessed Mar. 13, 2021).

[14] “Aberdeen Vision Project. Final report May 2020,” 2020.

[15] “Toyota Mirai - Wikipedia.” (accessed Mar. 13, 2021).

[16] D. Cebon, “Hydrogen for Heating?”

[17] D. Cebon, “Technologies for Large-Scale Electricity Storage.”

[18] “How Much Does it Cost to Charge & Run an Electric Car?” (accessed Mar. 13, 2021).

[19] T. H. E. Market and F. Of, “The Market Forces of Supply and Demand,” in Principles of microeconomics, 2004, pp. 1–28.

[20] S. May, H. Already, and S. This, “Consumers , Producers , and the Efficiency of Markets,” in Principles of microeconomics, 2014, pp. 77–83.

[21] “Our world-first green hydrogen project wins UK Government funding | SGN Your gas. Our network.” (accessed Mar. 13, 2021).

[22] D. J. MacKay, Sustainable Energy — without the hot air. Cambridge: UIT, 2009.

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