Policy implications of initial

techno-economic modelling

24th November 2021

Michael Joos, michael.joos@element-energy.co.uk
Policy implications of initial large
scale electrolyser modelling
Context
• Summary of report submitted to FCHJU by project1
Key modelling results
• High impact of levies on electricity and subsequently hydrogen price
• Electrolysis not yet able to compete with reforming of natural gas
• Currently high load factor rather than flexible operation of electrolyser
leads to lowest hydrogen cost
Policy options to promote electrolytic hydrogen
• Support hydrogen as low carbon feedstock for refineries
• Enable hydrogen in high value end uses such as mobility

1) Full report, titled Brief summary report on initial policy implications of the bulk electrolyser model available on REFHYNE project webpage: https://refhyne.eu/ 2
Agenda

Key modelling results

Policy recommendations
Appendix

3
Agenda

Key modelling results

Policy recommendations
Appendix

4
Deployment of large scale electrolyser at refineries could enable
cost reduction of electrolytic hydrogen

Role of hydrogen in future energy systems

• Hydrogen could become a vital carrier of decarbonized
energy
• Key role for hydrogen in sectors where electrification not
an option
• Electrolytic hydrogen can provide flexibility over long
time scales to electricity system with high renewable
penetration (cp. right graph1)
Current challenges
• High CAPEX of electrolysers
• Nascent demand in potential future end uses
Why hydrogen in refineries
• Stable demand allows high electrolyser utilisation
• Large scale deployment can enable cost reduction
• Access to relatively cheap electricity

1) EU Energy System Integration Strategy Factsheet

5
Despite advantageous conditions at the refinery, electrolysis is
not yet competitive with natural gas reforming

-60%
-52%

Hydrogen production cost2 [€/kg]

140 131 9
Wholesale 8.0 CAPEX
electricity price1 [€/MWh]

120 8
Network 7 OPEX
100
Industrial retail

75 Levies 6 Electricity
80 5
7.1 3.8
60 53 4
10 2 5 3
40 2.9 2.5 SMR cost
2 range
20 46 46 1.5
1 0.3 0.3
0 0 0.6 0.6
Without With Without With
reductions reductions reductions reductions
Even with access to cheap electricity, currently electrolysis cannot compete with SMR
• Access to levy exemptions and low grid fees reduces electricity cost by 60% (left) and hydrogen cost by more than 50% (right).
• Including grid fee and levy exemptions, H2 production cost is still higher for electrolysis than for SMR (right).
• Current CO2 prices not sufficient to close the gap between electrolytic and SMR based hydrogen.

1) Note that grid fees and levies differ significantly across countries in Europe, and grid connection cost can be significant component in certain jurisdictions.
2) Assuming a 90% load factor of the electrolyser; compare appendix for further techno economic assumptions.
6
Electrolysers face a trade off between high fixed cost at low
load factors and high electricity cost at high load factors

-72% Low load factor

14.6
15 • Low electricity cost
Electricity
• High fixed cost (CAPEX + fixed OPEX)
H2 production cost [€/kg]

Fixed OPEX
High load factor
CAPEX
10 • High electricity cost
• Low fixed cost
High load factor more economic
• 70%+ cost reduction cp. to low load factor
5 4.2 in this example
• Electricity price volatility, and frequency of
negative price events not sufficient yet to
0 offset higher CAPEX per kg of hydrogen at
6% load 90% load lower load factors.
factor factor

7
Several scenarios have been investigated to identify levers which
could help make green hydrogen viable (1/2)

Nr. Scenario Main implications

Reduced electricity cost per kg H2 at low load factors more than
1 Run only in profitable hours
offset by higher CAPEX and fixed OPEX per kg H2.
Given policy levy and network fee exemptions, electrolysis
Higher H2 prices paid to
2 could become profitable above H2 prices of €4/kg (covering
electrolyser
production cost only, not distribution and retail infrastructure)
Explored wholesale electricity markets in 5 countries (DE, DK,
Impact of price variability NO, FR, ES). Higher variability and negative price periods
3 and negative prices across occurring in DE , DK, leading to marginally better conditions for
Europe electrolysers. Higher future VRE penetrations will improve the
opportunities for flexibly operated electrolysers.
Balancing services could support electrolyser business models
Provision of balancing
4 by providing valuable additional revenues. They are however
services
not expected to be a core pillar of any business model.
8
Several scenarios have been investigated to identify levers which
could help make green hydrogen viable (2/2)

Nr. Scenario Main implications

5 CO2 adjusted electricity price
6 Reduced network fees
7 Reduced policy levies
8 Internal load balancing
Carbon intensity of electrolytic hydrogen can be reduced by
17% compared to average grid mix. Higher VRE penetration
will make grid carbon intensity more volatile.
Network fees per MWh for large industrial consumers are
already comparably low so removal of network fees has
limited impact on the electrolyser business model.
Exemption from renewable energy surcharge in Germany
(€64/MWh) has by far the biggest impact. At high load factor
this can reduce electricity cost by more than 50% and
hydrogen cost by more than 40%.
Helping to reduce grid fees of industrial sites by achieving an
overall higher load factor could be a niche business model
providing early opportunities for electrolysers. 9
Agenda

Key modelling results

Policy recommendations
Appendix

10
Policy recommendations (1/2): green hydrogen as low
carbon feedstock in industry
Policy option 1: Support green hydrogen as a low carbon feedstock for refineries
• If renewable “green” H2 in refineries is accepted under RED II, the economic counterfactual could be
equivalent to penalties of €470/tCO2.
• Grid average carbon intensity is currently too high; electrolysers will need close links with sources of green
electricity.
➢ Clear definitions and rules are required for implementation of REDII; these are to be aligned across Member
States; ensure production of green H2 is more cost-effective than non-compliance with directive.
➢ Rules should not be too restrictive to ensure viability of electrolyser projects and subsequent scale up.
➢ Consider exempting renewable electricity used to produce hydrogen from fees and levies for a limited time to
foster the market uptake of green hydrogen.

11
Policy recommendations (2/2): high value end uses for
hydrogen
Policy option 2: Enabling hydrogen in high value end uses such as mobility
• Given sufficient demand for hydrogen for mobility, production of electrolytic hydrogen @ refineries could
break even at hydrogen selling prices of up to €4/kg (this excludes cost of H2 distribution and retail)
➢ Support for H2 mobility should focus on segments in which electrification is challenging due to requirements
in terms of range, refuelling times, payload, etc. Examples include buses, coaches, taxis, vans, heavy duty
trucks, trains, and ships.
➢ Positive returns on investment in hydrogen refuelling infrastructure require relatively large, well-utilised
stations. Mechanisms to underwrite risks of underutilisation required.
➢ Local governments can play crucial role in catalysing uptake of hydrogen for transport, e.g. by implementing
supportive policies (such as zero emission zones) and adopting fuel cell vehicles in their own fleets, thus
creating anchor demands for refuelling stations.
➢ Capital grants for vehicles likely to be required in the short to medium term but may not bridge total cost of
ownership (TCO) gap with traditional vehicles. Access to subsidies (e.g. arising from the implementation of
RED II) will allow hydrogen refuelling infrastructure operators to sell hydrogen at price providing acceptable
TCO.

12
EU regulation on grid connected
electrolysers to be adopted by end of 2021
Sustainability criteria for renewable H2
• Defining sustainability criteria for renewable hydrogen
a priority of national and EU policy in 2021
• Criteria relatively straight forward in case of
electrolysers with direct connection to renewables, less
so for grid connected electrolysers.
National and EU policy
• EU Commission will adopt regulation on sustainability
criteria for grid connected electrolysers producing
RFNBIO1 for the transport sector by end of 20211.
• German government has adopted regulation in May
2021 with sustainability criteria for green hydrogen but
will align those with those of the EU Commission once
they are adopted

1) Renewable liquid and gaseous transport fuels of non-biological origin (cp. EU Commission 2018, RED II)
2) EU Commission 2018, RED II, Art. 27
13
2) BMWi, 2021
Conclusions

• High impact of levies on electricity and subsequently hydrogen price

• Electrolysis not yet able to compete with reforming of natural gas on
production cost of hydrogen
• Currently high load factor rather than flexible operation of electrolyser
leads to lowest hydrogen cost
• Supporting hydrogen as low carbon feedstock for refineries through the
Renewable Energy Directive is a key policy option to scale up electrolytic
hydrogen in the short term
• Sustainability criteria for renewable hydrogen from grid connected
electrolysers to be adopted by EU COM by end of 2021; these could have
significant impact on the scale up of electrolytic hydrogen

14
Agenda

Key modelling results

Policy recommendations
Appendix

15
References

• Agora Energiewende, 2019. Agorameter. Available at: https://www.agora-

energiewende.de/service/agorameter/chart/power_generation/26.08.2019/29.08.2019/
• BDEW, 2019. BDEW-Strompreisanalyse Juli 2019. Available at:
https://www.bdew.de/media/documents/190723_BDEW-Strompreisanalyse_Juli-2019.pdf
• Carmo, M., Fritz, D. L., Mergel, J. & Stolten, D., 2013. A comprehensive review on PEM water electrolysis.
International Journal of Hydrogen Energy, pp. 4901-4934.
• ENTSO-E, 2019. Day-ahead Prices. Available at: https://transparency.entsoe.eu/transmission-
domain/r2/dayAheadPrices/show
• Westnetz, 2020. Preisblätter Westnetz Strom 2020.
Available at: https://iam.westnetz.de/ueber-westnetz/unser-netz/netzentgelte-strom

16
Electrolysers face a trade off between high fixed cost at low
load factors and high electricity cost at high load factors

H2 production cost [€/kg] Load factor [%]

15 14.6 100 Scenario: Electrolyser operate when
90 electricity costs are lower than H2
80 price.
H2 sales 70
10
Electricity 60 • This leads to low load factors where
Fixed OPEX 6.8 50 capex related costs dominate and
CAPEX production is uneconomic
40
Load factor 5 4.2 3.8 30 • If revenues exceed 4€/kg this kind
20 of “grid responsive” operation
10 becomes economic.
0 0
2 3 4 5

H2 price paid to electrolyser [€/kg]

17
Higher wholesale price volatility and occurrence of negative
price periods offer an opportunity for electrolysers
Present value [€m] Utilisation [%]
150
60 80
Wholesale electricity price [€/MWh]

125 70
40
100
20 60
75
-1 -2 -5 -6 50
0 -12
50
40
-20
30
25
-40 20
0
-60 10
1801

3201
401

1001
1201
1401
1601

2001
2201
2401
2601
2801
3001

3401
3601
3801
4001
1
201

601
801

-25
-80 0

Germany

France

Spain
Denmark

Norway
-50
Hourly period

Germany Denmark Norway France Spain

H2 sales Fixed OPEX NPV

Electricity CAPEX Load factor 18
Provision of balancing services can improve
the business case @ intermediate load factors

Utilisation factor [%] NPV [€m]

24
100 91 25
20 w/ balancing
77 92
80 w/o balancing
15
9 16
60 10
65
42 5
40 0 -3
w/ balancing -1
19 18 -5 -8
20 w/o balancing
6 -10 -12
-14
0 -15
2 3 4 5 2 3 4 5

H2 price paid to electrolyser [€/kg] H2 price paid to electrolyser [€/kg]

19
Exemption from the renewable energy surcharge has the
biggest impact on electricity cost
Production cost [€/kg]
-65% 9 -59%
140 131 8.0
8
Retail electricity price [€/kg]

120 7
100 6
75
80 5
61 4.2
4 3.7 3.6
60 5 53 51 46 3.3
10 10 2 5 0 5 0 0 3
40
2
20 46 46 46 46 46
1
0 0
No Central Reduced No Wholesale No Central Reduced No Wholesale
exemptions scenario network network price only exemption scenario network network price only
fees fees fees fees
Network + levies Fixed OPEX
Wholesale Network Levies
Wholesale electricity CAPEX
20