The cost gap between green hydrogen and grey hydrogen remains significant, and it could take years before green hydrogen becomes economically viable. According to Crisil Ratings, the current price difference of $2.0-2.5 per kilogram is expected to narrow but still stay at $1.0-1.5 per kilogram over the next three years. This ongoing cost difference may delay long-term purchase agreements, keeping the overall project risk high for green hydrogen developers.
Green hydrogen is produced through electrolysis, a process that uses electricity from renewable energy sources to split water into hydrogen and oxygen. This method requires two major investments. Nearly two-thirds of the total cost goes into setting up renewable energy plants with storage, while the rest is for electrolyzers, which use this energy to produce hydrogen. Additional costs include water and construction.
To compete with grey hydrogen, which is made from fossil fuels and costs around $2.0-2.5 per kilogram, the cost of producing green hydrogen needs to be reduced by more than half. This means the cost of renewable energy and electrolyzers must come down by 40-50%. However, this kind of cost reduction is unlikely in the next two to three years. In addition, the efficiency of electrolyzers, currently at 60-65%, needs to improve to over 80% to make green hydrogen more affordable.
Government measures have helped reduce costs in some areas. For example, renewable energy units in special economic zones are allowed to use cheaper imported modules instead of costlier domestic ones. Battery prices, a major part of renewable energy storage, have dropped 30-40% in the past two years and may fall further. But even if battery prices drop by 50%, the overall cost of renewable power with storage will reduce by only about 10%, because batteries make up only 20-25% of the total cost.
The cost of electrolyzers has also seen a slower pace of reduction in recent years. Between 2010 and 2020, the cost fell by 42%, but from 2021 to 2024, the drop was only around 20%. As of March 2024, electrolyzers still cost more than $1,000 per kilowatt. Their efficiency has also remained largely unchanged due to technical barriers and the high cost of rare earth materials required for manufacturing.
Industry players expect a 30-35% drop in electrolyzer costs by 2030 and a 5-10 percentage point improvement in efficiency. But as Crisil Ratings Director Ankit Hakhu notes, most global electrolyzer projects are still in planning or feasibility stages. Cost reductions will become more visible only when large-scale capacities become operational.
The price difference continues to make it difficult for green hydrogen producers to secure long-term buyers. Buyers are hesitant to commit at current prices when future costs could be lower. Crisil Ratings Associate Director Ankush Tyagi points out that the sector is still at an early stage and requires regulatory support, including financial incentives and mandatory offtake agreements, to attract investment and reduce risks.
India’s National Green Hydrogen Mission has introduced the SIGHT scheme with a fund of Rs 17,490 crore to support early-stage capacity. It offers incentives of $0.4-0.5 per kilogram for three years. While this covers only a quarter of the cost difference, it is expected to help establish initial production units.
The development of green hydrogen also depends on access to affordable long-term financing, which is necessary due to the high capital investment of $16-18 billion per million tonnes per year of integrated capacity. Despite the current challenges, efforts to reduce carbon emissions and reach global sustainability targets will likely keep green hydrogen a key area of interest.
