Understanding Hydrogen Costs: Why LCOH Isn’t What You Think It Is

Hydrogen is often celebrated as the fuel that will carry us into a low-carbon future — clean, versatile, and scalable. But when we talk about the cost of producing hydrogen, particularly green hydrogen, the conversation quickly becomes confused, imprecise, and in many cases, misleading.

What does it really cost to produce hydrogen? Why do so many estimates vary so widely? And how should we think about these numbers in the context of energy transition strategies?

In my latest publication — Hydrogen Production Costs: Analyzing LCOH, LCOE, and Market Implications — I explore these questions in detail. This post offers a closer look at the underlying principles, not just the numbers.

The Problem with Simplified Comparisons

It has become common practice to compare the Levelized Cost of Hydrogen (LCOH) across countries or projects as though it were a standalone figure — a single, comparable price tag.

But LCOH isn’t a retail price. It’s not a benchmark. It’s not even a reliable proxy across markets unless you understand what drives it.

LCOH is not an absolute metric. It’s a reflection of local energy economics, technical assumptions, and policy structures.

When someone says, “Hydrogen costs $3/kg in Country A but $6/kg in Country B,” the more relevant question should be: Under what assumptions? Powered by what electricity? At what scale? With what incentives?

Until we standardize the way we calculate and interpret these figures, comparing LCOH across regions is like comparing the price of bread without knowing whether it includes the cost of the oven.

Electricity: The Heart of the Hydrogen Economy

Green hydrogen is produced by splitting water through electrolysis, a process that consumes electricity — a lot of it. In practice, electricity is not just an input. It is the principal determinant of cost.

Depending on the system, electricity accounts for between 60% and 80% of total production costs. This is why the Levelized Cost of Energy (LCOE) — particularly from solar and wind — plays such a central role.

If LCOE is high, LCOH will be high. No matter how efficient your electrolyzer is, or how large your plant may be, you cannot outrun expensive power.

What this means is that hydrogen cannot be cost competitive unless clean electricity is both cheap and reliable. That condition is met in very few places today.

A Regional View of What Actually Shapes Hydrogen Cost

There’s value in looking at the broad contours of where hydrogen is (and isn’t) affordable. But again, nuance is everything.

Middle East and Latin America

These regions benefit from some of the world’s lowest renewable electricity costs. Solar in Chile or Saudi Arabia can reach below $20/MWh. This, combined with favorable capacity factors and land availability, enables hydrogen production in the range of $3.2 to $4.0 per kilogram today, with a credible pathway to $2.0 to $2.5/kg by 2035.

United States

The U.S. doesn’t always offer the lowest electricity prices, but it now offers some of the strongest policy support through the Inflation Reduction Act (IRA). Section 45V provides up to $3/kg in production tax credits, bringing net LCOH within striking distance of $2–$3/kg, depending on emissions compliance. In the right circumstances, this support allows green hydrogen to compete directly with grey hydrogen, even when powered by grid electricity.

European Union

Europe’s ambition is unquestionable, but its power prices are among the highest in the OECD. With electricity costs often exceeding $80/MWh, and with more limited land availability for renewables, LCOH figures remain elevated — often $5.5 to $8.0/kg, even for well-designed projects. Unless grid reform or large-scale imports materialize, cost parity remains elusive.

Policy Is Not a Variable — It’s a Framework

Policymakers often ask: “How do we bring down hydrogen costs?”

But cost reductions aren’t just about better electrolyzers or lower CapEx. They’re about shaping the entire system: how electricity is priced, how interconnection is managed, how long permitting takes, and how risk is mitigated.

Policies like the IRA show what’s possible when incentives are aligned with climate goals. Europe’s Hydrogen Bank attempts to follow this path, but faces a slower and more fragmented regulatory landscape.

The point is simple: no project economics are neutral to policy. If LCOH is to come down globally, the enabling conditions — not just the technologies — must be in place.

So What Does This All Mean?

It means we need to stop treating hydrogen cost as a number in isolation. Instead, we must start treating it as an outcome — one that emerges from a carefully balanced set of inputs:

• Electricity cost and availability
• Electrolyzer efficiency and utilization
• Infrastructure readiness
• Policy clarity and stability
• Offtake certainty

In other words: Hydrogen isn’t expensive because of hydrogen. It’s expensive because of everything around it.

For any question, please reach out to me.