Electrolytic hydrogen is often considered too expensive and inefficient. But that is a sweeping generalization. Since the market is still in its infancy, it would be more accurate to say that the production of green hydrogen is currently still too expensive. However, industrial-scale projects such as those in Lingen (RWE), Emden (EWE), or Hamburg-Moorburg (Hamburger Energiewerke, Luxcara) are already under construction.
Renewables as a model for cost decreases
Past experience with solar- and wind energy shows that production costs often appear prohibitively high at the beginning of market ramp-up. However, in the early stages of mass production, they tend to fall disproportionately and then level off as the technology matures. In the case of photovoltaics, the levelized cost of electricity (LCOE) in Germany at the start of the Renewable Energy Sources Act (EEG) in the early 2000s was around 80 cents and has since fallen by about 95 percent (for ground-mounted PV in southern Germany).
Even committed pioneers did not foresee or consider such a massive cost reduction possible, which was mainly driven by economies of scale and efficiency improvements. For onshore wind energy, the LCOE in Germany has dropped from 25 cents per kWh in 1990 to around five cents per kWh today at good wind sites – a reduction of about 80 percent.
Green hydrogen (gH2) produced via electrolysis is considered competitive with fossil fuels at a cost of three to four euros per kilogram – especially in light of future increases in CO2 emission prices. For the first industrial gH2 projects scheduled to go into operation between 2028 and 2030, production costs for green hydrogen are still around ten euros per kilogram (excluding grid fees). Of this, approximately two euros are attributable to cost-driving EU regulations (RED III: additionality, temporal correlation).
A further two euros could be saved through “early optimizations” (see, for example, the “position paper” by RWE from December 2025). This would bring production costs down to around six euros per kilogram for projects commissioned from 2028/2030 onwards, assuming a supportive regulatory environment and no grid fees, and after initial cost optimizations.
Use surplus power
The largest cost component for green hydrogen is, as is well known, green electricity, accounting for around 65 percent. A first step would be to make greater use of surplus green electricity for electrolysis instead of shutting down plants in the event of potential grid congestion. According to the Federal Network Agency of Germany, more than nine TWh of wind and solar power were curtailed in 2024. In addition to using green electricity with negative prices, restructuring the energy system in favor of renewables, combined with battery storage, will also reduce production costs in the future.
Another important factor in cost reduction is the efficiency of the electrolyzer and the overall system. Currently, depending on the technology and manufacturer (PEM, alkaline), an electrolyzer requires about 45 to 55 kWh of electricity to produce one kilogram of hydrogen. However, the theoretical value is around 35 kWh/kg. This means that inefficiencies can be minimized in the future.
As with the examples of PV and wind power, efficiency levels can increase significantly. Considering efficiency improvements alone, with an LCOE of five cents per kWh, a low electricity demand of only 45 kWh/kg, and electricity accounting for 65 percent of total costs, the levelized cost of hydrogen (LCOH) could reach approximately 3.50 euros per kilogram.
Further savings are also expected in capital expenditures (CAPEX). Scaling up production and achieving economies of scale in electrolyzer manufacturing reduce the unit cost per megawatt (MW) of capacity. Standardizing production and modularizing electrolyzers and plants (e.g. using 50 MW modules such as “Alpha 50” from ITM Power) can significantly reduce investment costs per MW and thus the LCOH.
The use of necessary materials (e.g. precious metals) can also be reduced. Production processes for electrolyzers are being further developed, including through innovation. The combination of scaling, standardization, and technological innovation will also reduce the cost of plant equipment (balance of plant, BoP) in the future – that is, all components of a hydrogen production facility apart from the electrolyzer itself (e.g. power supply systems, water management, gas purification, compressors, cooling systems).
Further cost reduction potent
Project development costs (Development Expenses, DEVEX) can also be reduced by standardizing and simplifying project development processes and permitting procedures (e.g. the German Hydrogen Acceleration Act). The FEED phase (Front-End Engineering and Design) also offers potential for savings. Additional cost reductions can be achieved in operations and management (O&M) from the time the plant is commissioned, as well as through higher production volumes. Moreover, certain monitoring tasks can be centralized through remote monitoring.
Finally, project financing costs can also be reduced in the future, including through the following measures:
• Lower interest rates for debt capital (although interest rates are an external factor, they can be leveraged by the hydrogen industry through timing).
• Lower risk and margin premiums required by equity and debt investors, for example due to increasing market maturity, financing standards, and potential guarantees that reduce risk premiums.
• Longer financial model durations of more than 20 years (as is common in projects in the Middle East Region), for example with repowering after 15 years instead of a 20-year term with a residual value.
Conclusion
Assuming production costs of around six euros per kilogram in 2028/2030 in a supportive regulatory environment and without grid fees, I expect that the combination of the levers, measures, and developments outlined above will reduce the LCOH for new plants to at least three to four euros per kilogram by 2038/40. This corresponds to a cost reduction of 33 to 50 percent. As a result, production costs would finally reach parity with fossil fuels.
