- October 16, 2023 Energy
Can China Make Hydrogen Electrolyzers Cheap as It Did for Solar?
When it comes to clean energy, hydrogen has commanded considerable attention lately. Not only is hydrogen one of the most abundant elements on earth, it is also a potential zero emissions natural gas with wide applications from transport to industrial. Indeed, many net zero energy transition models include “green hydrogen” in their projections.
Yet currently “gray hydrogen” produced from fossil fuels dominates the market because green hydrogen is 3-6x more expensive than gray hydrogen and 6-8x more expensive than methane-based natural gas. For green hydrogen to reach true commercial viability, the cost needs to fall from the current $4-$6/kg to $1/kg to reach parity with gray hydrogen, according to the US Department of Energy.
The high cost is partly due to the limited scale and low volumes of green hydrogen that a typical 5MW alkaline electrolyzer produces—only about 315 metric tons (mt) a year (see box below). In contrast, conservative estimates of natural gas well production run around 1,350 mt/year. While China already can produce green hydrogen at about $2.75/kg, nearly half the cost in the United States, making electrolyzers cheaper will further bend the green hydrogen cost curve.
That appears to be where China is headed as it intends to scale up electrolyzers in coming years—resembling what it did to lower the cost of solar panels a decade ago. We take an initial look at the electrolyzer market and whether China’s role in it could further entrench it as a clean energy technology production node.
Representing ~30% of the cost of producing green hydrogen, electrolyzers are needed for the electrolysis process that separates water molecules into hydrogen and oxygen, leaving zero carbon emissions as byproducts. However, to achieve true “green” hydrogen requires the electrolyzer to be powered by renewables.
Like a battery or fuel cell, an electrolyzer has an anode and a cathode, which charges hydrogen ions as they pass through to trigger a chemical reaction that forms gas.
Types of Electrolyzers
Source: International Renewable Energy Agency (IRENA); Oxford Institute for Energy Studies.
There are four main types of electrolyzers: alkaline, proton exchange membrane (PEM), solid oxide electrolyzers, and anion exchange membrane. Their main differences come down to the type of solution and/or material that ions pass through to produce hydrogen gas. At the moment, alkaline and PEM electrolyzers dominate the green hydrogen market.
Big Head Start on Electrolyzers
Unbeknownst to many, China already makes more than 40% of the world’s electrolyzers. When it comes to alkaline electrolyzers, China is even more dominant with more than 60% of the global manufacturing capacity (see Figure 1).
Figure 1. Global Alkaline Electrolyzer Manufacturing Capacity in 2022
Source: Bloomberg New Energy Finance (BNEF).
One factor behind China’s impressive electrolyzer production capacity is that long before the hype around green hydrogen, China was already using hydrogen extensively to produce polysilicon, a key input for photovoltaic cell manufacturing. It comes as no surprise, then, that some of China’s biggest electrolyzer producers are also major solar companies such as LONGi and Sungrow Power (see Figure 2).
Figure 2. Top Electrolyzer Manufacturers in the World in 2022
Note: Manufacturing capacity does not imply all capacity is utilized, there is likely under-utilization at the moment. Moreover, China’s green hydrogen market got crowded in 2023 as hundreds of players rushed in.
As such, Chinese firms have been climbing the learning curve on electrolyzer technology for at least a decade. Because an electrolyzer has properties and components similar to a battery—an industry that China currently dominates—there were likely knowledge spillovers between the two industries that gave China a leg up on manufacturing electrolyzers.
Will Electrolyzers Follow Solar’s Path?
It is no secret that Chinese scale of solar manufacturing has been responsible for a sharp decline in solar panel prices globally (see Figure 3). The question now is: will that scale and deployment have the same effect on electrolyzers?
Figure 3. Global Solar Costs Fell as Chinese Solar Costs Fell
Source: Our World in Data; IEA National Survey Report.
While there’s considerable uncertainty over projected demand for green hydrogen, it does seem like demand will grow dramatically in China over the next decade as it pursues decarbonization. One estimate from the China Industrial Development Promotion Association, a semi-official organization under the National Development and Reform Commission, projects hydrogen supply at 48 million mt by 2030, of which 11 million mt will be green hydrogen.
If that 11 million mt is taken at face value, back-of-the-envelope estimates suggest that China would need to have a whopping 174GW of electrolyzers by 2030, potentially driving up to $50 billion in investment. About one-third of that capacity (64GW) apparently has been planned for the next few years, which translates into 4.1 million mt of green hydrogen. (Based on a typical 5MW alkaline electrolyzer producing 315 mt/year at a full load of 5,000 hours/year and 70% efficiency.)
Whether those ambitious goals will be realized remains to be seen. But massive deployment certainly matters for cost because electrolyzer production has a learning rate similar to that of solar (see Figure 4). What that means is that every doubling of installed capacity could lead to a 16% to 21% cost decline in electrolyzer manufacturing. So, if assuming China’s installed electrolyzer capacity expands from the current 1GW to the planned 64GW (or six doublings), that implies electrolyzer cost could drop from the current $343/kw to about $100/kw.
Figure 4. Electrolyzer Costs Decline Sharply as Installed Capacity Goes Up
Given Chinese producers’ ability to scale, China seems to have plenty of runway to get green hydrogen’s cost down to $1/kg. In future analysis, we will examine the demand side and government incentives to support green hydrogen, as well as the global ramifications of a China that sprints ahead in the green hydrogen race.
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