Carbon rally narrows blue hydrogen premium to grey

By Jake Stones, Lead Reporter – Hydrogen, ICIS

illustration: ICIS
illustration: ICIS

The 2021 carbon rally has pushed blue hydrogen’s premium to grey hydrogen from a peak of EUR 0.43/kg in mid-January to just EUR 0.28/kg by 14 May, ICIS data shows.

The carbon price is vital to bringing the cost of blue hydrogen in line with grey. This is because producers of blue hydrogen incur the additional capital and operational expenditure associated with the carbon capture and storage (CCS) process.

However, carbon capture rates of around 97% can be achieved with blue hydrogen, meaning a higher carbon price has more of an impact on the overall cost of grey hydrogen, as this process does not capture any carbon during production.

Given the current ICIS Dutch gas TTF 2022 contract and the ICIS Dutch power 2022 baseload contract assessments, blue hydrogen via autothermal reforming (ATR) could be cheaper on a levelised cost of hydrogen (LCOH) basis with a carbon price of EUR 95/tCO2e when compared with a steam methane reformer (SMR) unit without CCS.

Carbon rally narrows blue hydrogen’s premium to grey (source: ICIS)
Carbon rally narrows blue hydrogen’s premium to grey (source: ICIS)

Carbon rally and hydrogen

In January the EUA December 2021 contract was around EUR 33/tCO2e, the benchmark price then rallied through the following two months and had climbed above EUR 40/tCO2e by March.

The contract was propelled higher by an agreement in the European Council to increase the EU’s emission reduction target to 55% by 2030 compared with 1990 levels.

The target was agreed between the European Council, Parliament and the European Commission on 21 April. By early May, the benchmark carbon contract had risen above EUR 50/tCO2e and peaked at EUR 56.90/tCO2e by 14 May, a rise of 75% in just a rise of 75% in five months.

The rise in carbon price has played a direct role in making blue hydrogen more competitive against grey hydrogen. On 18 January, when the spread between the two streams was widest, the levelised cost of grey hydrogen was EUR 1.26/kg, while blue via ATR was EUR 1.68/kg.

By 14 May, grey was up to EUR 1.70/kg, a gain of 35%, while blue via ATR rose to EUR 1.97/kg.

Both streams of hydrogen also rose in price as a result of the surge in natural gas prices – which increased as a result of low European gas storage levels and the carbon rally. However, the jump was highest for grey hydrogen as a result of the carbon price.

Carbon moving forward
The EUA December 2021 rally was brought to a halt at the opening of the new UK Emissions Trading System (ETS) on 19 May, when market participants in the EU ETS sold allowances on expectation that UK utilities would also sell their EUA positions.

The EUA benchmark now seems to have settled above EUR 50/tCO2e. However, the commission is due to publish a policy package on 14 July on its vision for the European carbon market.

This would account for the new carbon emissions target set out in April, an extension to more sectors, such as maritime shipping, as well as transport and heat sectors, and the introduction of a potential Carbon Border Adjustment mechanism, which would tax imported CO2 at Europe’s borders.

Such measures could have a bullish impact on the carbon price depending on whether the ETS would shoulder a larger burden of the emissions reductions target, or whether the free allocation is significantly reduced. Although, this would only give a direction to the market in the mid-term. Fundamental changes in the trading system are unlikely to be made before 2023.

ICIS carbon analysts forecast the EUA price settling at around EUR 50/tCO2e by the end of the year; however, this depends on the final outcome of the commission’s proposals.

Additional reporting by Sebastian Rilling.