Hydrogen Energy (5): Two Approaches to Hydrogen Production

The authors are analysts of NH Investment & Securities. They can be reached at ys.jung@nhqv.com. -- Ed.

1) Natural gas reform: Steam methane reforming

There are mainly two approaches to hydrogen production: 1) natural gas reforming; and 2) electrolysis. While there are new technologies such as photolysis and biological hydrogen production, the two above-mentioned approaches have only moved beyond the technology development phase and gone to the commercialization phase. In order to reduce carbon emissions, it is crucial to expand production of green hydrogen, which is made through the electrolysis process. However, considering insufficient infrastructure and production costs, production of grey hydrogen via natural gas reforming will likely continue to prevail.

Among natural gas reform approaches, SMR is in commercial use

There are several approaches to natural gas reforming, including partial oxidation (POX), autothermal reforming (ATR), and steam methane reforming (SMR). Among them, SMR is noteworthy as it allows high hydrogen concentration, production efficiency, and operation stability.

SMR incurs the lowest cost among hydrogen production technologies

SMR is a mature production process in which high-temperature steam (700~1,000°C) is used to produce hydrogen from a methane source, such as natural gas. This approach incurs the lowest costs among hydrogen production technologies, and shows roughly 70~85% production yield efficiency.

Unit production cost of reformed hydrogen in Korea: W3,077~4,409 for distributed facilities; W1,841 for centralized

According to the Korea Energy Economics Institute, the domestic production cost of natural gas reformed hydrogen for distributed facilities stood at W3,077~4,409/kg in 2020. Over the mid/long term, we forecast that rising import prices for transportation-purpose natural gas will lead to an increase in unit production cost. It is estimated that production cost could decline to W1,841/kg at large-scale centralized facilities with 40,000Nm3capacity (set to be constructed in Korea). That said, we point out that additional transportation cost is incurred for centralized production facilities, whereas distributed facilities entail limited transportation costs (if not zero costs). Therefore, we believe that both production cost and transportation cost need to be taken into account in assessing the economic feasibility of hydrogen facilities.

SMR equipment manufacturers

Today, Linde, Air Liquide, Bayo Tech, Air Products (global), and JNK Heaters (Korea) are major manufacturers of SMR. Recently, in line with greater demand for on-site HRSs and distributed generation, demand for container-box-shaped modules has been rising.

2) Hydrogen production using water electrolysis

Production of green hydrogen via electrolysis required to reduce carbon emissions

Electrolysis of water is the process of using electricity to separate water into oxygen and hydrogen gas. If the electricity is secured from renewable energy sources, the entire process of electrolysis can be seen as carbon free. Given this backdrop, we believe that the production of green hydrogen through water electrolysis will be the key to carbon emission reduction.

Alkaline and PEM electrolysis have been commercialized

There are mainly four water electrolysis methods—alkaline, PEM (polymer electrolyte membrane), SO (solid oxide), and AEM (anion exchange membrane) electrolysis. Of note, alkaline electrolysis came first, and PEM electrolysis was commercialized in the 2000s. Construction of large-scale PEM electrolysis plants has been increasing of late. Meanwhile, AEM and SO electrolysis are still in development stages.

Pros and cons of alkaline electrolysis

Conducted based on technologies commonly used for chlorine production, alkaline electrolysis is relatively more well-known than other methods. At present, alkaline electrolysis-based hydrogen production is about 20% cheaper than PEM electrolysis.

That said, alkaline electrolysis plants require a larger space than PEM electrolysis plants and tend to show lower responsiveness. As such, their utilization rates and energy efficiency generally fall when powered by renewable energy sources, which usually involve higher output volatility. Of note, Hanwha Solutions, McPhy, and ThyssenKrupp have recently embarked on the construction of facilities for hydrogen production using alkaline electrolysis.

Strengths and weaknesses of PEM electrolysis

Meanwhile, PEM electrolysis is coming under greater usage these days. Showing strong responsiveness, PEM electrolysis outperforms alkaline electrolysis in terms of utilizing spare energy from renewable sources. But, the method requires more technological improvement, particularly in terms of durability, as it now operates only in a high-pressure environment. Furthermore, the fact that precious metals (such as iridium and platinum) have to be used as catalysts poses a significant cost burden. But, with PEM electrolysis technologies that require less precious metal and offer greater durability emerging as of late, the number of PEM electrolysis projects is now on the rise.

Given that PEM electrolysis is a good alternative for generation of hydrogen in conjunction with renewable energy sources, the number of PEM electrolysis projects linked with offshore wind power is climbing. Related players include Cummins, NEL Hydrogen, Siemens Energy, Teledyne, Plug Power, Linde-ITM Power (JV), Elchemtech, and Doosan Fuel Cell.

Renewable power cost and system price key to hydrogen production cost reduction

In our view, production cost for hydrogen generated via water electrolysis could be reduced through: 1) renewable power cost decline; 2) water electrolysis system price decline; 3) improved efficiency of water electrolysis systems; 4) longer system operation hours; or 5) system lifespan expansion via strengthened durability. Our analysis shows that water electrolysis system price and renewable energy price should represent more than 60% of overall production cost cuts.

Offshore wind power to drive down wind power price from 2024

We note that recently, the generation cost decline trend for wind power has been slowing. However, we expect wind power generation cost to resume a downtrend from 2024 thanks to the installation of large-scale offshore farms. In 2024, offshore wind power facilities installed with 15MW-level wind turbines should start operations, which in turn should lead to power generation cost decline through decreased capex and increased utilization rates.

Offshore wind farms supplying power for electrolysis system

According to IRENA, by 2030, power generation cost for offshore wind farms will decline by 58% compared to the 2018 level. Noting the anticipated decline in wind power generation cost, we forecast that over the mid/long term, more wind farms are to supply power to water electrolysis systems.

Water electrolysis system cost reduction

With regard to water electrolysis system price, we believe there exists ample room forfuture price decline for PEM-based systems, through: 1) changes in cathode and anode materials; 2) reduced consumption of precious metals; and 3) system optimization and the achievement of economies of scale via size expansion. Meanwhile, as for alkaline systems, we believe that prices can be reduced by lowering manufacturing costs through BOP system optimization.

Aiming to lower green hydrogen production cost to US$1/kg

Assuming that renewable energy prices decline from US$65/MWh to US$20/MWh, and water electrolysis system prices fall from W1,000/kW to US$130/kW, production costs for green hydrogen could be reduced to US$1/kg. We admit that the two assumptions may be difficult to achieve, but it should be noted that investment to accomplish such goals is underway.