Electrolysis vs. Fossil Fuels with CCUS: A Comparative Analysis for Low Carbon Hydrogen Production

Hydrogen is emerging as a key energy carrier for a sustainable future, with significant potential to decarbonize several industrial sectors. Currently, hydrogen is primarily produced through fossil fuel-based methods, especially from natural gas, which contributes substantially to greenhouse gas emissions. Electrolysis, which uses electricity to split water into hydrogen and oxygen, is a cleaner alternative, especially when powered by renewable energy. However, fossil fuel-based hydrogen production with carbon capture, utilization, and storage (CCUS) offers an option to significantly reduce emissions while utilizing existing infrastructure. This technical write-up provides a detailed comparison of hydrogen production methods via electrolysis and fossil fuels with CCUS, focusing on their current status, cost factors, environmental impacts, and technological maturity.

Current Status and Projected Growth

Unabated Fossil Fuels: The Dominant Hydrogen Source

As of 2022, the global hydrogen production landscape is dominated by fossil fuel-based methods, with unabated natural gas and coal accounting for approximately 83% of the total production. This process, often referred to as "grey hydrogen" when natural gas is used, is associated with high carbon dioxide (CO2) emissions. Coal-based hydrogen production, referred to as "brown hydrogen," is even more emissions-intensive. Despite the environmental implications, these methods remain widespread due to the historically lower cost of natural gas and coal as feedstocks, coupled with established infrastructure.

Electrolysis: A Nascent Technology

In contrast, electrolysis currently represents a small fraction—around 0.1%—of global hydrogen production. Electrolysis can be classified as "green hydrogen" when powered by renewable electricity, such as solar or wind, offering a pathway to near-zero emissions. Despite its environmentally friendly nature, the high capital costs of electrolyzers and the need for low-cost renewable electricity have limited its large-scale adoption so far.

Projected Growth for Both Technologies by 2030

Looking forward, significant growth is projected in both electrolysis and fossil fuel-based hydrogen production with CCUS by 2030. Announced projects suggest that electrolysis could dominate future hydrogen production, accounting for over 70% of planned low-emission hydrogen production. The anticipated expansion of renewable energy capacity, coupled with advancements in electrolyzer technology, supports this optimistic outlook. Meanwhile, fossil fuel-based hydrogen with CCUS is also expected to grow, albeit at a slower pace. This approach offers a transitional solution by leveraging existing fossil fuel resources while aiming for substantial emissions reductions.

Cost Analysis

Historical Cost Advantage of Unabated Fossil Fuels

Historically, hydrogen produced from unabated fossil fuels was the most cost-effective option, with production costs significantly lower than those of electrolysis. The global energy crisis, however, has increased the volatility of fossil fuel prices, undermining this cost advantage. Natural gas price spikes, in particular, have brought attention to the cost variability and supply risks associated with fossil fuel-based hydrogen.

Declining Costs of Renewable Hydrogen

On the other hand, the cost of renewable hydrogen is expected to decline steadily over the next decade. The levelized cost of renewable hydrogen—representing the per-unit production cost—depends primarily on two factors: the price of renewable electricity and the cost of electrolyzers. Falling prices for solar and wind energy, driven by technological advancements and economies of scale, are projected to significantly lower electricity costs. Moreover, ongoing innovation in electrolyzer manufacturing and efficiency improvements is expected to reduce capital expenditures (CAPEX), further driving down costs.

Cost Parity by 2030

By 2030, it is anticipated that renewable hydrogen could reach cost parity with fossil fuel-derived hydrogen, especially in regions abundant in solar and wind resources, such as the Middle East, North Africa, and parts of Australia. In these regions, the levelized cost of electricity (LCOE) from renewable sources is projected to fall below $20/MWh, making electrolysis more competitive.

Cost Components: Electrolysis vs. Fossil Fuels with CCUS

• Electrolysis: The primary cost drivers for electrolysis are electricity (which accounts for 25-45% of total costs) and electrolyzer capital expenditures. The levelized cost of hydrogen from electrolysis is highly sensitive to electricity prices, making regions with cheap renewable electricity particularly favorable for this technology.
• Fossil Fuels with CCUS: For fossil fuel-based hydrogen with CCUS, the primary cost components include natural gas prices, CO2 capture rates, and the cost of capital. While natural gas prices vary significantly by region, the added cost of carbon capture and storage (CCS) technologies—often referred to as "blue hydrogen"—can make this option more expensive than unabated fossil fuel hydrogen. Additionally, the efficiency losses associated with CCUS further add to the total cost.

Impact of Financing

Financing plays a crucial role in the economic viability of both electrolysis and CCUS-based hydrogen production. In emerging economies, where higher costs of capital are common, the financial burden of building large-scale hydrogen projects is greater. This challenge is particularly relevant for capital-intensive technologies like electrolysis and CCUS, where upfront investments are high, and long payback periods are often required.

Environmental Impacts

Emissions Intensity: A Key Metric

The environmental performance of hydrogen production methods is largely measured by their emissions intensity, defined as the amount of CO2 emitted per unit of hydrogen produced. The sources emphasize that emissions intensity is a critical metric for evaluating the sustainability of hydrogen production.

• Fossil Fuels without CCUS: Unabated fossil fuel-based hydrogen production has the highest emissions intensity, with significant CO2 emissions released during the reforming process. For natural gas-based production, every ton of hydrogen produced emits approximately 10 tons of CO2.
• Electrolysis: The emissions intensity of hydrogen produced via electrolysis varies significantly depending on the electricity source. If renewable energy is used, the emissions are negligible, resulting in near-zero emissions hydrogen. However, when fossil fuel-based electricity is used, the emissions intensity of electrolysis can be comparable to or even higher than unabated fossil fuel-based hydrogen production. This highlights the importance of coupling electrolysis with clean electricity sources.
• Fossil Fuels with CCUS: Hydrogen production from fossil fuels with CCUS can reduce emissions intensity significantly compared to unabated fossil fuels, with the potential to achieve near-zero emissions depending on the capture rate and storage permanence. Current technologies typically capture around 60-90% of the CO2 emissions, but achieving consistently high capture rates remains a challenge.

Importance of Capture Rates and Upstream Emissions

The overall effectiveness of CCUS in reducing emissions depends on two key factors: the capture rate at the hydrogen production facility and the upstream emissions associated with natural gas extraction and transportation. High capture rates at the plant level are essential to minimize direct emissions, while efforts to reduce methane leakage and other upstream emissions are critical for ensuring that CCUS delivers meaningful climate benefits.

Technological Maturity

Electrolysis: Emerging but Evolving

Electrolysis technologies, particularly alkaline and proton exchange membrane (PEM) electrolyzers, are commercially available and have been deployed at small to medium scales. However, other promising technologies, such as solid oxide electrolyzers (SOEC) and anion exchange membrane (AEM) electrolyzers, are still in the development phase and require further research and innovation before large-scale deployment. Scaling up electrolysis technologies, particularly in regions with abundant renewable energy, is key to realizing the cost reductions needed for widespread adoption.

Fossil Fuels with CCUS: Mature but with Challenges

While CCUS technologies are technically mature and have been deployed in various industrial applications, including hydrogen production, challenges remain in scaling up these solutions for widespread use. Achieving consistently high CO2 capture rates at a large scale is technically demanding and requires significant capital investment. Additionally, long-term storage solutions for captured CO2 must be developed to ensure that emissions reductions are permanent.

Supply Chain Considerations

The hydrogen production supply chain varies significantly between electrolysis and fossil fuel-based methods with CCUS. Electrolyzer manufacturing, for instance, faces several supply chain challenges, including shortages of critical materials like platinum and iridium for PEM electrolyzers. In contrast, CCUS technologies do not face the same level of supply chain constraints but depend on the availability of suitable storage sites for captured CO2 and robust natural gas supply chains.

Policy and Regulatory Frameworks

Both electrolysis and fossil fuel-based hydrogen production with CCUS rely heavily on supportive government policies and regulatory frameworks. Policies that incentivize low-emission hydrogen production, such as carbon pricing, renewable energy mandates, and direct subsidies for electrolysis and CCUS technologies, are critical for creating demand and attracting investment. Regulatory frameworks that set standards for emissions reductions and CO2 storage safety are equally important for ensuring that hydrogen production aligns with climate goals.

Conclusion

In conclusion, hydrogen production via electrolysis and fossil fuels with CCUS offers two distinct pathways toward decarbonizing the global energy system. Electrolysis, particularly when powered by renewable energy, holds the promise of producing near-zero emissions hydrogen at competitive costs by 2030. Meanwhile, fossil fuel-based hydrogen with CCUS provides a transitional solution by leveraging existing infrastructure and achieving significant emissions reductions. Both technologies face challenges, including high capital costs, supply chain constraints, and the need for supportive policy frameworks. Continued innovation and government support are essential for scaling these technologies and driving the transition toward a low-emission hydrogen economy aligned with global climate goals.