Hydrogen: Where economies of scale work in the value chain

Hydrogen: Where economies of scale work in the value chain
June 2, 2023 |

Economies of scale could reduce costs in the hydrogen value chain. Central to this are external economies of scale enabled by an institutional framework, experience, technological development, and geographic conditions.

Economies of scale could provide cost reductions for hydrogen in many areas of the value chain. Economies of scale can be divided into two categories: Internal economies of scale describe cost reductions due to the size of a firm and can be controlled by the firm itself. In particular, hydrogen generation and transport costs could be reduced by exploiting internal economies of scale. External economies of scale describe cost reductions due to the size of the entire industry, independent of the size of individual firms. They could also reduce costs, for example, through a sensible institutional framework, technological progress, availability of skilled labor and knowledge spillovers, and good geographic conditions.

Abbildung: Graphical abstract, Source: Own illustration

In the study “The Power of Scale: Economies of Scale and the Hydrogen Value Chain”, the Institute of Energy Economics at the University of Cologne (EWI) has prepared economic principles on economies of scale and applied them to the hydrogen value chain. The analysis was carried out as part of the EWI’s “Hydrogen Research Program” and was funded by the Gesellschaft zur Förderung des Energiewirtschaftlichen Instituts an der Universität zu Köln e. V.

Firms can generate economies of scale themselves and profit through the market

Internal economies of scale are cost reductions that a company achieves for itself as its size increases. External economies of scale are cost reductions for all stakeholders; the cause is the growth of the industry and the structures that go with it. The study shows that internal economies of scale can be expected, especially in the production and transport of hydrogen. External economies of scale, on the other hand, affect the entire value chain.

“Above all, external economies of scale could reduce costs for hydrogen in the coming years. First positive developments are already visible, but currently, the ramp-up of the hydrogen market is still in its early stages,” says Tobias Sprenger, Senior Research Consultant at EWI, who prepared the study with Michael Moritz, Amir Ashour, and Patricia Wild.

Government can promote economies of scale and thus lower the costs of hydrogen

Governments and public authorities can promote external economies of scale via a stable and supportive legal and policy framework. The legal and regulatory framework plays an important supporting role, especially in the hydrogen market ramp-up. Since hydrogen has not yet played a relevant role as an energy carrier, there is little regulation, norms, and standards. However, the existence of a legal and regulatory framework is a necessary condition for the hydrogen market ramp-up.

With public funding and programs for research and development focused on hydrogen technologies, the state can support technological progress and associated cost reductions. This increases hydrogen technologies’ technological maturity (Technology Readiness Level) in the medium to long term. Technical development enables commercialization and large-scale deployment of previously immature technologies.

Government actors can play a role in funding or creating supporting institutions that enable companies to share resources and reduce costs. Supporting institutions such as platforms, organizations, and networks established by public agencies can accelerate formal and informal knowledge sharing, thereby promoting knowledge spillovers.

The state and public institutions also play an important role by providing or funding relevant education and training programs, thus promoting hydrogen skills.

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