Chapter 1
Economics of Hydrogen
Chapter 1
ECONOMICS OF HYDROGEN
J. Hord and W. R. Parrish
TABLE OF CONTENTS
1.1. Introduction
1.2. Fundamentals and Terminology of Economics
1.3. Hydrogen Production Costs
1.3.1. Hydrogen Production
1.3.2. Costs of Compressing, Liquefying, and Solidifying Hydrogen
1.3.3. Hydrogen Cost Credits
1.4. Hydrogen Transmission Costs
1.4.1. Gas Pipeline
1.4.2. Compressed Gas by Highway
1.4.3. Compressed Gas by Railway
1.4.4. Compressed Gas by Ship or Barge
1.4.5. Liquid Pipeline
1.4.6. Liquid by Highway
1.4.7. Liquid by Railway
1.4.8. Liquid by Ship or Barge
1.4.9. Metal Hydride by Highway and Railway
1.4.10. Hydrogen by Airline
1.4.11. Summary of Hydrogen Transmission Costs
1.5. Hydrogen Storage Costs
1.5.1. Underground Storage
1.5.2. Aboveground Storage
1.5.3. Metal Hydride Storage
1.5.4. Liquid Hydrogen Storage
1.6. Examples of Hydrogen System Cost Analyses
1.6.1. A Solar-hydrogen Energy System
1.6.1.1. Technical Review
1.6.1.2. Cost Analysis
1.6.2. An Airport H2-fuel Supply System
Appendix: Conversion Factors
References
1.1. INTRODUCTION
Although some familiarity with economic principles is assumed, this chapter is intended to be useful to the reader who has no special training in economics. It is not an exercise in economic analysis; rather, we endeavor to provide the cost data necessary for such analyses and to make possible economic comparisons with competing fuels or feedstocks. Examples of simple economic analyses are given. The major thrust of this chapter will be directed toward determining the cost parameters needed to assess the cost of producing, transmitting, storing, and using hydrogen in hydrogen energy systems. Technical details concerning production, transmission, storage, etc. are treated elsewhere in this series and are only mentioned in this chapter to the extent necessary to specify relevant cost parameters. Where possible (and practical), cost parameters are presented in a manner that permits updating to account for increased costs of energy, materials, labor, etc. In the data presented herein, the heat of combustion of hydrogen is always evaluated at the higher heating value (HHV).
Cost analysis is intimately and inextricably interwoven with energy system design. Using a specific costing procedure, we can design a system to provide minimum capital investment, minimum annual operating charges, or minimum capital investment plus annualized operating charges. Each of these costing options can result in different system designs, as can variations in the costing procedure. Conversely, system characteristics strongly influence the accuracy and validity of the cost analysis — no cost analysis can be assigned credibility unless due consideration has been given to the design of the energy system. Thus, cost analysis and total system design go hand in hand and must be handled simultaneously and with equal skill. The strong dependence of hydrogen product cost on total system analysis will be apparent throughout various sections of this chapter.
1.2. FUNDAMENTALS AND TERMINOLOGY OF ECONOMICS
The economic terms and basic economic principles used in this chapter are described below. It is emphasized that all costs presented herein, unless specifically excepted and identified, are adjusted to September 1975 in accordance with the inflation index curve for chemical process plants.1 This cost inflation index was judged most appropriate for the hydrogen systems under consideration and is shown in Figure 1.
We consider three of the most common economic analyses: rate of return on investment (RRI), discounted cash flow rate of return (DCF), and utility financing method (UFM). For details of the first two methods, along with other analyses, see any process economics text, e.g., Stermole2 and Happel.3 The UFM is described by Siegel et al.4 The RRI method is sometimes called the ROI or ROR method, and the DCF method is sometimes referred to as the DCFROR method of economic analysis.
The simplest method of economic analysis is the annual rate of return method given by
In Equation 1, I is the total plant investment including interest paid during construction, and Iw is the working capital, i.e., the money tied up in raw material, product inventories, and accounts receivable, and other cash required to operate the facility; p represents the annual net profit after taxes and depreciation. We may also write
where e and d are the annual depreciation rates for accounting and tax purposes, respectively, t is the combined federal and state income tax rate, and R is the gross annual profit. The latter is the gross return minus all operating costs; it excludes depreciation and state and federal income taxes, but includes feedstocks, utilities, operating and maintenance (O & M) costs, property taxes and insurance (T & I) costs.
The depreciation terms e and d can be computed in sev...