Driving down the cost of green hydrogen

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So if you were to read the headlines over the past year or maybe 18 months, your impression of the state of the green hydrogen market might be kind of dim. After a classic hype cycle played out at hyperspeed, basically, from around 2021 to I would say 2024, reality very much set in for that nascent market. I think that reality check basically came in three forms.

First, and in my mind by far the most importantly, the actual delivered cost of green hydrogen from the first wave of projects that were being developed was far too high. Second, some of the markets that had been targeted, say light duty transportation or building heat, just didn't make much sense in the first place.

And third, as has happened in a number of other sectors over the same period, the durability, scalability, and magnitude of the so-called green premium turned out to be less than advertised. So the result has been a clear removal of hype in that market.

But just as a reminder, the market for hydrogen and the emissions associated with the production of that hydrogen is not going away anytime soon. We already have a$70 billion annual market using hydrogen in industry, predominantly in petrochemicals and in ammonia production. And don't look now, but there is a new wave of technologies entering the market that has the promise to actually deliver on the cost reductions that the market was seeking all along.

Rafi Garabidian, who's my guest today, is the CEO of Electric Hydrogen, one of those companies. He's been on the show before, years ago, but he's back now for an update and a fresh and sober look at where this market heads. after its journey up and back down the hype cycle. As a reminder for disclosure, we at EIP are investors in electric hydrogen, and I'm on the board of the company. Here's Rock. Rafi, welcome back.

So in in late twenty twenty, early twenty twenty one, um I and my my partners here at Electric Hydrogen started to think about how to make green hydrogen cheap. um really uh kind of approaching the problem uh from the context of renewable power where cost reduction, rapid scaling and reduction in cost um help to create a a robust market for for commodity in in in that case electricity. And we thought the same thing should be true in green hydrogen and derivative molecules.

So um, you know, that that was a point in time, early twenty twenty one, when Uh there was the inklings of hype around green hydrogen, but hype hadn't really hit us square in the face yet. Uh I think it was more really in twenty twenty two, late twenty one, early twenty two, when things got really, really active and uh And you know, in in those days green hydrogen was the solution to every problem everywhere in the world. Uh it was going to uh it was gonna change everything.

Um, I mean, even at cocktail parties, people who know nothing about energy would say, Oh, you're in green hydrogen? That's great, which is a sure sign that it's it's overhyped.

Or whether we're starting to come out of it. It feels like we are starting to come out of it now gradually. But those of you know the Gardner Hype Cycle know that the climb out of the trough of disillusionment is slow. and gradual and long and arduous. I think that's where we're where we are uh in this market today.

there was a naive hope that society was willing to pay the difference for deep decarbonization because it had turned into a decarbonization had turned into a a global priority. Right. We had kind of Europe, the US, Asia, everybody had a hydro every country had a hydrogen strategy. The world's changed dramatically since then. And I think that political climate is resulting in a retraction from commitment to retooling critical industries.

at some expense for the purpose of decarbonization. Green hydrogen, it is also true, is expensive and it's been too expensive uh over the last few years. Um and it's been too expensive for a couple of reasons. If you look at the cost of making a kilogram of green hydrogen Um today, let's say in southern Europe it might be unsubsidized, it might be maybe six dollars US a kilo. Uh I think rough numbers, that might be about right.

That can be broken down roughly fifty fifty into CapEx and OpEx. OpEx being the cost of the power. going into the process to make the hydrogen, and CapEx being the the cost of carrying the capital, the cost of building the plant. Right. Now remember um the power that goes into making green hydrogen is carried out chemically. As hydrogen. So it's not lost power. It's power that's being transformed with some inefficiency. It's about 70 to 75% efficient process.

Um so so really it's a combination of those two things. And and if if we look at again what's happened in the last few years um on both of those fronts, we've had bad news. So green power, renewable power prices have gone up in many places in the world. driven by a um an imbalance in s the supply and demand. Right. So so green power is much more expensive and let's now switch to the US and I can give you real numbers. If you look in West Texas um and you were to sign a

uh solar and wind kind of affirmed green power purchase agreement in in Texas in ERCOT territory. Three years ago you might have paid mm thirty five dollars a megawatt hour for that product. Um today you're paying sixty five, maybe more, dollars a megawatt hour. And that's driven by, broadly speaking, increase in electric demand.

driven most notably by AI data center uh demand coming online or planned to be coming online. And we don't just see this in the US, we see this many, many places in the world. We see where there is cheap power, power prices have gone up dramatically, green power prices have gone up dramatically because of new demand from data centers. So that's certainly a headwind for green hydrogen.

But then on top of that, you have the CapEx component of the levelized cost of hydrogen. And that's the other half of its cost, which um which has been extremely high and actually been going up rather than going down.

Right. So you'd like to think that as an industry get its gets its feet under it and starts to scale, starts to get past demo projects and building real scale projects, costs come down. But actually people were um maybe unrealistic about the costs that could be achieved, the capital costs that could be achieved, particularly by uh large Western suppliers of technology like Siemens and Tyson Group. I'll just mention those two big names. I won't won't mention all the rest.

when built by an EPC into a fully constructed project. So we've seen those capital costs go from, you know, an early promise of something like one thousand five hundred dollars a kilowatt Buck fifty a watt to now even over three dollars a watt of capital cost. So that's also had an escalating effect on the cost of green hydrogen. So bottom line, green hydrogen's gotten more expensive today than it was supposed to be two years ago.

for electrolyzer, for electrolyzer systems, why has it been so high? Can you break it down? Like what is the what is the cost stack of a traditional electrolyzer project? And then you can briefly talk about like what electric hydrogen is doing differently there. But but first I want to start with like what$3 a watt, like what happened here?

You're going to select your technology. Maybe you're gonna I mentioned two names before, so I'll pick one. You're gonna maybe select Siemens. Um that's your technology provider. And you're gonna go through what's called a feed study, which is front end engineering design. That's where the EPC takes all of the requirements from the equipment supplier, the technology supplier. and uh figures out how to build that thing on your site.

Right. The total installed cost is what drives levelized cost of hydrogen. It doesn't matter what the electrolyzer costs per se. It matters what the constructed cost of the plant is. And in a typical project like we're discussing roughly half of the total installed cost goes to the E P C. What are they doing? They're grading the plot. They're managing stormwater. They're building the building that the electrolyzer is going to go into. They're building the substation.

They're sourcing and selecting all of the support equipment, whether it's chillers or air compressors or backup power generators. Um they're sourcing and designing the control system for the plant. The list goes on and on. Okay. So the EPC ha has a substantial scope in the project. The electrolyzer supplier, their price might not have gone up. Their price might have been a thousand dollars a kilowatt, a dollar a watt, um, for their scope. What is their scope? It's the stack.

Often it's what's called the balance of stack, which is some of the plumbing and support equipment around the stack. And it might or might not include the rectifier. which is the power conversion equipment that takes the A C from the grid and converts it down to the D C power that the that drives the stack uh to produce hydrogen. So so the electrolyzer scope is pretty well defined, those prices are pretty well defined. What's really ballooned out of proportion is the EPC or the construction

The the secret to it, it's no secret, is to think at the system level holistically. So what are those all of those costs? I maybe let me back up When we think about um when we think about our product and the scope of our product and how we present it into the market, the um the guiding light for us, the North Star, is levelized cost of hydrogen. So we think about it from the perspective of our customers' project performance.

And when you look at the problem that way, you very quickly have to uh accept that the EPC cost must be in scope for your engineering team to try to address. Right, there's just a big chunk of cost that's being thrown to the wind, left to others to contend with. And you could throw your hands up and say, Well, yeah, but there's nothing that can be done about that. Because construction costs what construction costs. But it turns out that's not really the case.

Now there's a deep technology component to the solution, which is actually, quite simply put, making the electrolyzer as dense as possible. That enables the balance of plant construction to also be quite dense and small and hence amenable to what's called modularization. is just the chemical industry's terminology for moving the construction from the field to a factory where the costs can be well controlled and well managed.

That's that's what we do at electric hydrogen. We build a fully modularized plant which leverages our extremely dense, powerful stack technology. To bring a total solution to market that minimizes the EPC's cost and hence minimizes the total installed cost.

And by the way, there's some other things that are kind of obvious that need to be done. For example, not having a building, uh, because buildings are very expensive, particularly buildings that house um hazardous processes like hydrogen production.

small electrolyzer stacks and then numbering up. And so if you want to build a 100 megawatt project, you're gonna build a hundred one megawatt electrolyzer stacks and then put them all in series basically. That's not what you're talking about though. You're talking about modularizing something that is still basically at the scale of the chemical industry.

Right. But can be but is dense enough that it can be built off site and transported to site. So that is like a key distinction, I think, right?

uh string inverters could could make a lot of sense in large solar arrays. Turns out not so much. The industry kind of went back to large central inverters as a more effective uh cost effective solution. Um not only because uh the construction costs are are lower, but also operation and maintenance complexities are are more manageable.

You can you can s you can see the same thing going on in green hydrogen, but it turns out that uh at least based on our analysis and I think we're seeing it play out in the industry, um the the idea of integrating onto a site hundreds and hundreds of very small containerized electrolysers, it turns out to be quite expensive. And in no small part it's expensive because it's very hard to drive the cost out of those units, but also because the footprint of the entire plant

ends up being quite large and hence EPC integration costs get large again. It turns out it's it's hard to get the power to all of those boxes and aggregate and collect the hydrogen from all of those boxes. And get the water, the clean water, to all of those boxes, etcetera, et cetera.

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Now, of course, that varies from site to site, but that's rough numbers, that's about where we are. That's somewhere between a half and a third of the competitive benchmark. Um really whether you're you're comparing to a Chinese electrolyzer built in Europe by an EPC or a European OEM built in Europe by an EPC. By the way, the the EPC business is pretty local.

cheap electrolyzers like we've gotten cheap solar panels from China. Um And two, like what does that mean if you're not a Chinese player in the market?

Um which makes it much less amenable to low cost manufacturing at scale, kind of putting a low cost product in a box in China and shipping it to some place and letting someone install. So it is true that the global market is flooded with really cheap Chinese electrolysers. These are like two megawatt electrolyzers that are the size of a school bus and weigh more than a school bus.

And they need to sit in a building and have this like chemical plant wrapped around them to support them and operate them. So the um the normal approach that China has used in other industries to drive cost out Um, really kind of only addresses the cost of the electrolyzer stack or stack and power conversion. It doesn't address the EPC component.

of the cost buildup. And so it's a limited there's a limited opportunity for overall total installed cost reduction taking that approach. It's real by the way. You know, we see um integrators building or promising to build using Chinese equipment systems in the European market at a total installed cost, you know, right around maybe a little north of one thousand five hundred dollars a kilowatt. So still more expensive than our stuff.

but um quite a bit cheaper than uh than the name brand European suppliers. So long story short, um I don't think the same game that worked in solar works in Green Hydrogen.

Let's talk about what the market then actually looks like here. I mean, we've talked about it's been too expensive. There's multiple components. There's maybe less willingness to pay the premium, or at least there has been. But in your view, okay, if you can sell at a thousand bucks-ish. today and drive and that's, you know, entering the market at that at a thousand bucks and then and presumably we'll be able to drive costs down from there if you're able to scale.

What what does demand look like? What does it rely upon in terms of policy support? What what's your view? Like what's your thesis of the market here?

E molecules. And these these range from uh hydrogen itself um to things like green methanol and green ammonia for various purposes. Um that policy I think has been geez, I don't know when when red two and three were enacted, but it's been years. Um but the way European policy works, uh the EU law has to be what's called transposed or translated into national level rules, which then drive project decisions. And those rules are being transposed as we speak. It's underway. The process is underway.

Uh I think Romania has transposed uh Red Three now. Uh I think Netherlands are close, Germany's very close, uh Spain is about to to do so um long list. Um And so we are seeing uh in the short term a policy driven market. What do I mean by policy driven market? I mean markets where the green product is more expensive than the gray product.

the European Union stepping up and saying, Yeah, we're gonna foot the bill for uh for some conversion to e-molecules so that we can get this industry going and see where the costs ultimately land. That's the market today. Um that is not a sustainable market in my view in the long term. It's a necessary first step for the for the P to X or green molecule. industry to get going. Um and, you know, I'm incredibly grateful for

Europe's continued seemingly stalwart um support uh for for decarbonization. Um but we do recognize, at least at electric hydrogen, that we've got to collapse costs towards what we call fossil parity. For the molecules that we produce. And it turns out that's a different number for for different products. It's also a different number for uh different regions of the world. Right? So energy's complicated, um ammonia

has a different price in different parts of the world, depending on whether you have natural gas and can produce ammonia locally or not, for example. So We are increasingly turning our attention to markets where we believe in the next few years we can start to approach fossil parity on critical m molecules that can achieve scale.

I can give you a few examples of that as we talk.

Um, whereas if you buy fossil power, your your price for that power kind of floats with the fuel price. Um so there's there's various values that can be derived from from conversion to renewables that are independent of the carbon footprint of the renewables. And we're starting to see the same kind of si more sophisticated point of view on the market emerging in e molecules. Um, I'll talk for a little bit about a market that I'm

really interested in and it's not a market we're incredibly active in. We've we've we've just dipped a toe in the water over there, but uh but the market is Brazil. And uh give you let let's like a few facts about Brazil. So um Brazil is a huge agriculture exporter. Um I think agricultural exports uh are about twenty percent of Brazil's GDP. uh represent about fifty percent of Brazil's exports, with most of the rest being uh being minerals, I believe.

to nitrates or urea or other molecules that are easier to distribute. Brazil, it turns out, imports over ninety percent of its um its nitrogen. Uh, its biggest import partner for fertilizer is actually Russia. So alarm bells can start to go off in your mind about like the geopolitics. of all this, right, the risks that Brazil's economy faces faces as a result of importing a critical feedstock for its primary industry.

uh to the country, but also think about it in terms of the the money that Brazil is spending effectively abroad to support its agriculture industry. If you put all that together, you have an interesting proposition for um conversion of the Brazilian economy to local production of nitrogen fertilizer. But there's more. Um Because uh because Brazil imports all of its nitrogen and the and the reason for that is simple. Brazil doesn't have natural gas.

So they they can't produce fertilizer the old fashioned way, uh by cracking natural gas and and running it through the Haber Bosch process. Um because Brazil imports all of its fertilizer. Uh the price of that fertilizer is relatively high due to the logistics costs of moving ammonia. Um now today fertilizer coming into Brazil might be four hundred and fifty or four hundred and seventy-five dollars a ton. Um but if you look back ten years, the ten year average is around six hundred dollars.

A ton. And that you can go twenty years back, it's about the same number. Right. It it's a it's a very volatile commodity that's not typically bought on long term contracts. It's traded in the market and it goes up and down and up and down. So if we use that six hundred dollar a ton uh benchmark as the the bogey for what I'll call fossil parity ammonia in Brazil. Um the the billion dollar question is can we achieve that?

using electric hydrogens kit, green hydrogen production, um to produce e ammonia? And the answer turns out to be yeah, we think we can. So we've done a lot of analysis on this particular market case. Um there's there's another uh uh really kind of positive fact pattern about Brazil, it has a great deal of hydropower and is increasingly installing more and more solar and wind. The result of this is Brazil's grid is around ninety percent green already.

And power prices at least away from the coastal uh economic centers are quite low, thirty to thirty five dollars a megawatt hour. That in and of itself allows us to make on the order of seven to seven hundred and fifty dollar a ton ammonia today with our equipment. Which is not quite fossil parity, but not a huge stretch from it. And with the other benefits to Brazil's economy and resiliency.

on from o onshoring the production of fertilizer, we think there's a strong business case for Brazil as a country to start to build out local ammonia production. Now if you take our technology roadmap a little further out and you think about scale and also improvements we have in our coming in our technology, along with what we expect to see in terms of continued cost reduction in wind and solar. We think we can get to uh actually cheaper than fossil hydrogen.

Around the beginning of next decade, the next decade, so in the early twenty thirties. That's a pretty compelling case. That's a market where we think we can be cheaper than the fossil alternative for a critical, critical piece of Brazil's economy. That's the kind of market I get really excited about because, you know, now we're not talking about a solution that's better because it's green. We're talking about uh a solution where green is the icing on the cake. Uh not the whole cake.

is to replicate a version of what we've already seen in solar, which is get it to scale, get it down the cost curve, get it so that it is cost competitive. And so you're painting the picture of like where it actually can be cost competitive. straight up without a premium and carry all these side benefits.

What does it look like to get from here to there? Is my final question for you. So, like paint paint, you know, we started with the picture of the last five years. What is the next five or ten years? have to look like.

That process will get us to to scale where we can start to deploy in markets like I described around Brazil, but there are other similar markets. India is a great example of another very similar market with similar fact patterns. where we think we can actually solve not just an economic problem, but uh a host of other problems that are geopolitical in nature.

So that gets me very excited. And the other thing that gets me excited is is my kids. Honestly, again, you know, I I have uh kids in their twenties and uh I know how they think about the problem of climate and energy. And they give me optimism that uh the the situation we're in right now it's a cycle. But if I look out, you know, five years out and think on a ten year horizon, we are as a society going to going to implement innovations to fix the problem.