This week is World Hydrogen Week, an opportunity for us to consider the role hydrogen could play in our future energy mix. So much is written about the pros and cons of this nascent fuel - if only there was a simple way to understand the economics of it all...

 

Energy systems can be incredibly complicated – but we don't have to understand every aspect of them to understand how hydrogen might play a role in our future economy.

One interesting way I have recently explored these dynamics is to construct a simplified energy system model based on one of my favourite (and deeply geeky) pastimes as a child: playing the Electronic Arts computer game Sim City.

In this highly addictive game you are cast as the mayor. Success comes from growing the city, whilst continuing to meet the needs of your city's residents for energy and other services – and by ensuring your city stays financially solvent. If you overspend, it's game over.

Imagine if you will that Sim City 2024 has just been released and it includes a new feature. Not only can you build gas power stations, solar and wind farms – you can also produce hydrogen from renewable electricity, by building electrolysis plants that split water into hydrogen and oxygen. Will this new feature make your city's residents richer and greener? 

Step 1: Powering your city on gas

Let's suppose you are playing the game as mayor of a small city in the mid-west of Western Australia – let's called it Geraldineton. You kick things off by building a conventional 100 megawatt (MW) gas-fired power plant, to keep the lights on for the Geraldineton's residents.

We'll assume your power station costs $160m to build (roughly in line with the latest figures from CSIRO's GenCost report), and the natural gas it burns costs $10 per gigajoule (GJ). Using these figures the cost of electricity generation works out to be approximately $107 per megawatt hour (MWh) (I've also made some assumptions on finance rates, asset life and other details to get to this figure – let's just assume the game designers have done the same for now).

The downside of course is that this method of power generation results in significant greenhouse gas (GHG) emissions from burning the gas - approximately 425 kilograms of CO2 equivalent per MWh of electricity generated.

Step 2: Taking advantage of low cost renewables

Fortunately, Geraldineton has alternative sources of electricity generation available to mitigate these emissions. At a click of a button, you introduce a 100-megawatt solar plant at a cost of just under $100m. Although the solar plant plant's capacity factor (the amount of time it is effectively and efficiently producing power – ie the proportion of maximum output, averaged over time) is only around 20%, it still reduces the overall cost of electricity to $104/ MWh. The savings come from cutting down on gas consumption at the gas-fired power plant, which more than offsets the additional capital repayment costs from the new solar farm.

Next we can add a wind farm which further decreases costs to $99/ MWh, and reduces GHG emissions to about one-third of the original levels.

 

So far, so good – but this game is about to get harder. How about you expand the solar and wind farms to 150MW each? Will that remove the gas power station emissions completely from the picture?

Unfortunately, not.

Furthermore – and rather unexpectedly - scaling up these renewable energy sources to further reduce emissions actually reverses the downward trend in electricity prices, increasing the cost of electricity to $115/ MWh, while only generating a moderate further reduction in emissions.

So, what went wrong?

The problem is that while we have plenty of wind and solar capacity most of the time, you have built so much power producing infrastructure that often the power generated can't be consumed by Geraldineton's inhabitants (which drives up the cost of electricity per MWh). The power is not used – it is ‘curtailed' in the language of the industry.

And yet, some of the time, we still don't have enough wind or sunshine to remove the need for gas completely – thus preventing you from removing the remaining emissions from the system.

Step 3: Hydrogen as a consumer of excess electricity

This brings us to the integration of hydrogen production – Sim City's hot new 2024 feature in our hypothetical version of the game.

By investing $120m in a 150-megawatt electrolyser, which uses your locally produced renewable electricity to split water into hydrogen and oxygen, you now have a use for that excess power that was previously curtailed.

But what cost do you have to sell this hydrogen for, to reduce your resident's electricity bills back to the equivalent of $99/ MWh? The answer, in our (very) simplified model of a real energy system, is $6.30 per kg of hydrogen.

You might think that using this approach - where the electrolyser is connected to our city's electricity grid and only runs on the excess electricity that would otherwise be curtailed - the electrolyser is not well utilised. You'd be right – in our model game, the electrolyser runs at only a 24% capacity factor.

An alternative approach is to disconnect the city and the gas-fired power station from the electrolyser completely and direct all the renewable electricity straight to the electrolyser – a fully off-grid system. Once a 150MWh battery is included in this setup, the electrolyser is able to operate nearly 70% of the time, delivering a cost of hydrogen of just over $5/ kg.

Step 4: Selling our hydrogen

$5/kg sounds like a reasonable number – a kg of hydrogen for less than a cup of coffee. There are many costs this simple model doesn't include (distributing electricity and hydrogen, for example) which make these numbers optimistic. But they key question is: if you could make hydrogen at $5/ kg – who would buy it?

In the absence of a significant carbon price, it's unlikely to be existing users of natural gas. Earlier we assumed natural gas costs $10/ GJ (a crude approximation of current prices). To achieve the same energy output from combusting hydrogen at the same price, hydrogen would have to be available for just $1.20/ kg, which we've shown will be very challenging to achieve. At the higher price of $5/kg, hydrogen becomes less like your everyday cup of coffee and more like a vintage champagne, to be consumed sparingly if your city is to avoid bankruptcy.

Of course, other use cases in future may have no alternative to using hydrogen, if we are to decarbonise our economy. Shipping is one potential example, where despite the higher costs of hydrogen-derived fuels such as ammonia or e-methanol, these may be one of the best options available to achieve our net zero goals.

Other use cases though are unlikely to be viable, given the significantly lower costs of alternatives. Domestic heating is one example, where in most (if not all) situations direct electrification of heating - using heat pumps - will be more efficient and lower cost.

The hydrogen ladder: prioritizing use cases

Of course, I'm not the first person to point out the economic challenges for many hydrogen users cases. Michael Liebrich's well-known "hydrogen ladder" concept provides a valuable framework for prioritizing the use cases of hydrogen.  

At the top of the ladder are applications where hydrogen is ideally suited for for decarbonization, such as in the production of fertilizers, which currently rely on hydrogen produced from natural gas and coal.

Conversely, at the bottom of the ladder are applications where there are better alternatives which are very likely to outcompete hydrogen. For many use cases, this is direct electrification. Directly connecting a user of energy to a renewable electricity source, rather than supplying them with hydrogen to burn, is usually a much more efficient way to make electricity or create heat. And in many circumstances, more efficient also means lower cost.

The pathway forward

After re-acquainting myself with the latest version of the real Sim City to help me in writing this column, I stumbled across the method that many others had been using the build spectacular cities – a ‘cheat' that provides infinite money to the city's coffers.

Unfortunately, in the real world, we don't have a ‘cheat' to circumvent unavoidably high costs. As a society, we will need to be very selective about the hydrogen use cases which we financially support and promote, to ensure we continue to ‘balance the books' in the energy transition. Hydrogen has an important role to play in the decarbonisation of our economy – let's not waste this valuable resource.

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Max van Someren is a techno-economic modeller and Director (Australia) for BIVIOS, an engineering, sustainability and strategy consultancy. BIVIOS supports both its parent company, ARIA Capital Management and third parties in identifying, assessing and scaling energy transition projects and investments.