Government support needed to make the most of electrolysers


LCP’s Energy Analytics team has published analysis, exploring investment, intervention and the role of green hydrogen in decarbonisation.

Following on from the launch of the hydrogen and net zero strategies recently released by the government, the paper mapped out how there is a place for significant investment in electrolysers, allowing them to provide a raft of system benefits, such as increase utilisation of renewable capacity. This requires less investment to achieve the same level of renewable capacity to replace blue hydrogen production, which means less investment is therefore needed to achieve a similar reduction in overall carbon emissions.

Further benefits include displaced blue hydrogen production, which can avoid residual carbon emissions and fuel costs, and reduced generation and balancing costs, where electrolysers act as flexible demand, lowering volatility. The challenge is to ensure investors can convert these benefits into a viable business case, ensuring an appropriate level of capacity can be incentivised.

With the government targeting 5GW of low carbon hydrogen production capacity by 2030, LCP said 1GW of electrolyser capacity should be targeted. Government will need to provide support of around £9-20/MWh, or £14-30/kW per year to make projects viable. The level of support, therefore, for 1GW of capacity built in 2030 would be around £0.5 to £1bn over the asset’s lifetime.

From 2030 to 2040, around 15GW of electrolysers could be deployed, providing a system benefit by reducing blue hydrogen production costs, using excess renewable generation that would otherwise go to waste. In 2040, it forecast that this will occur in 44% of hours with 57TWh of excess renewable energy over the year. By 2050, electrolyser capacity could reach as high as 26GW to maximise system benefits, with the report forecasting around £13bn of investment would be needed using this deployment figure.

If only 1GW of electrolyser capacity was built, this would achieve load factors of around 20-25% through to 2050. However, as a greater number of electrolysers are built and compete, these opportunities would then become more susceptible to cannibalisation, meaning future projects’ profitability becomes more sensitive to CAPEX assumptions, competition and the level of support.

It further noted that green hydrogen would make up around 16% of total hydrogen supply under the Climate Change Committee’s Further Ambition scenario. This forecasts annual total hydrogen demand of 270TWh by 2050. This means that blue hydrogen will still be required to meet overall hydrogen demand and will set the marginal price for hydrogen in the majority of periods.