When the cost per kilogram and the cost of the system disagree

Why a costlier kilogram of hydrogen can come with a cheaper system, and which number answers which question

Case file CF2 of Energy Systems, Step by Step: why a costlier kilogram of hydrogen can come with a cheaper system, and which number answers which question.
  • Analyst · L2
  • Case file
  • 10 min
  • After lesson 7

1 · The puzzle

An electrolyzer next to a wind farm turns spare wind into hydrogen. A bigger one makes each kilogram cost more. Can the bigger one still be the better choice?

2 · The question in one sentence

How do electrolyzers, hydrogen storage and fuel cells change the cost, curtailment and firm output of a grid-connected wind farm?

Question type: prescriptive (what should be built, and how should it run?).

3 · Scale and boundary

  • Inside: one planned 253 MW wind farm in West Texas, with a battery and hydrogen equipment, hour by hour for a year (8,760 hours).
  • Left out: the rest of the grid, which enters only through ERCOT wholesale prices, and final federal hydrogen credit rules; costs date from 2020 to 2023.

4 · Decisions, goal and rules, in words

  • Decisions: the sizes of the battery, electrolyzer, hydrogen tank and fuel cell, and how each runs every hour.
  • Goal: the lowest life-cycle cost of the whole system, net of what it earns from electricity and hydrogen.
  • Rules: deliver the largest steady output it can in every hour; no machine runs above its size.

5 · Data and method

  • A mixed-integer linear program, an extension of NREL's REopt model, sizes and runs the equipment over a year of hours with ERCOT wholesale prices.
  • Sensitivity runs vary the hydrogen price, the wind profile (four regions) and projected equipment costs to 2050.

6 · What came out, and where it holds

As the hydrogen price rose, the optimizer built a larger electrolyzer to use more surplus wind.

The larger unit ran at lower utilization, so each kilogram carried more capital and the levelized cost of hydrogen rose, while hydrogen revenue lowered total system cost.

Compared with wind and a battery alone, adding an electrolyzer reduced total system cost by about 7%, and using hydrogen as the storage medium for fuel cells reduced it by about 26%.

Battery, hydrogen and hybrid storage were compared, each set to deliver the largest stabilized output in every hour at the lowest life-cycle cost.

Hybrid hydrogen and battery storage delivered the highest stabilized output of the four configurations.

Holds when: one planned West Texas wind farm, ERCOT prices, costs from 2020 to 2023. Leaves out: final federal hydrogen credit rules.

Related study · solar and hydrogen

Among the cases studied, concentrated solar power with thermal storage running a high-temperature electrolyzer at variable power gave the lowest levelized cost of hydrogen; constant-power operation was the most expensive.

Approved excerpt of: Li et al. (2023), EEM 2023.

Yardstick here: the cost per kilogram across designs. Holds for: one West Texas site, cost projections from NREL's Annual Technology Baseline, a conference-length study.

Related study · maintenance offshore

Prognostics-based maintenance lowered wind operation-and-maintenance cost by about 10% and downtime by about 11%.

The saving applies to the turbines alone, so its effect on the whole system was smaller: the levelized cost of hydrogen fell by about 2%.

Prognostics: predicting failures to plan repairs. Holds for: one Gulf of Mexico site and one weather year.

The studies in time

  1. May 2022 · Conference paper. A grid-connected wind farm gets electrolyzers, a hydrogen tank and fuel cells, sized by an extended REopt model. Source: Li et al. (2022), J. Phys.: Conf. Ser. 2265, 042063
  2. June 2023 · Conference paper. Concentrated solar and photovoltaic designs for making hydrogen are compared by their cost per kilogram. Source: Li et al. (2023), EEM 2023
  3. December 2023 · Journal article (this case). Four system configurations, wind profiles from four regions and a hydrogen-price sensitivity; published online in December 2023, in the February 2024 issue. Source: Li et al. (2024), Journal of Mechanical Design 146, 020903
  4. June 2024 · Conference paper. An offshore wind farm supplying hydrogen: a maintenance simulation feeds the same kind of plant optimization. Source: Li et al. (2024), J. Phys.: Conf. Ser. 2767, 062016
  5. 30 October 2026 · Code released. A documented, open implementation of the model, with synthetic examples (version 1.0.0). Source: reopt-hydrogen-framework on GitHub, as of 3 November 2026

Every result about the studies is quoted from approved excerpts of the published papers named in the sources. The toy below uses illustrative round numbers.

The idea behind it, then where the result holds

Your electrolyzer, one 10 MW block at a time (illustrative)

The toy's assumptions (illustrative)
Electricity free in this toy: it is surplus wind the grid cannot take, which would otherwise be curtailed
Full-power hours fewer for each added block: it runs only when the surplus is larger than the blocks below it
Building cost and fixed upkeep $140,000 per MW a year (annualized)
Hydrogen per MWh 18 kg (about 55 kWh per kg)
Water and stack wear $0.20 per kg

Worked block: 10 MW × 5,000 h × 18 kg/MWh = 900,000 kg a year. It costs $140,000 × 10 + $0.20 × 900,000 = $1,580,000 a year, so $1.76 per kg.

Net cost change below zero: the system saves money compared with no electrolyzer.

Each 10 MW block of the electrolyzer: the hours it runs at full power and its own cost per kilogram.
Block Full-power hours a year Hydrogen, kg a year Its cost per kg
0–10 MW 5,000 900,000 $1.76
10–20 MW 4,200 756,000 $2.05
20–30 MW 3,500 630,000 $2.42
30–40 MW 2,900 522,000 $2.88
40–50 MW 2,400 432,000 $3.44
50–60 MW 2,000 360,000 $4.09
60–70 MW 1,600 288,000 $5.06
70–80 MW 1,300 234,000 $6.18
  • At $3.00/kg the system's net cost is lowest at 40 MW (−$2.26M a year against no electrolyzer), where the hydrogen costs $2.19/kg on average.
  • At $4.00/kg the system's net cost is lowest at 50 MW (−$5.31M a year against no electrolyzer), where the hydrogen costs $2.36/kg on average.
  • At $5.00/kg the system's net cost is lowest at 60 MW (−$8.88M a year against no electrolyzer), where the hydrogen costs $2.53/kg on average.
  • The lowest cost per kilogram is always the smallest size, 10 MW ($1.76/kg), whatever the price.

Two numbers, two questions

Measure How it is built The question it answers Best size in the toy at $4.00/kg
Cost per kilogram (LCOH) the electrolyzer's yearly cost ÷ the kilograms it makes: an average How cheaply does this design make a kilogram? 10 MW
The system's net cost all of the system's costs − all of its revenue, for one owner Which design leaves the owner best off overall? 50 MW

The best size: keep adding blocks while each extra block makes hydrogen for less than the price; stop before the next one would cost more.

That is a marginal test, like lesson 8's marginal plant. An average cannot see it.

Slide the hydrogen price

  1. A higher hydrogen price makes each kilogram worth more, so the optimizer builds a larger electrolyzer to capture more surplus wind.
  2. The extra capacity runs fewer full-load hours, so the cost per kilogram, the levelized cost of hydrogen, goes up.
  3. Yet the added hydrogen revenue lowers the net cost of the whole system.
  4. The cost per kilogram and the system's cost move in opposite directions.

A separate example with stylized numbers, from the course author's open explainer: not the study's data or results.

It has its own wind shape, and its readout is the whole system's net cost, not the change from no electrolyzer, so its sizes and dollars differ from the blocks above.

Where the result holds

It holds when
  • one planned 253 MW wind farm in West Texas, with ERCOT wholesale prices;
  • hydrogen sold at a set price per kilogram;
  • cost assumptions dated 2020 to 2023.
It leaves out
  • final federal hydrogen credit rules, which came later;
  • the rest of the grid, which enters only through wholesale prices;
  • where the hydrogen goes after it is sold.

From the approved excerpt of Li et al. (2024), Journal of Mechanical Design.

Go deeper · ModelerSizing and running equipment in one program
  • In a sizing model, each size is a decision variable; each hour adds an energy balance and limits. Lesson 10 writes a small model like this down.
  • Yes-or-no choices, such as whether to build a unit at all, make it a mixed-integer program, solved as in lesson 11.
  • M4 (storage and coupled carriers, in the Modeler tier) builds such a model step by step.

Check yourself, then try it

Myth or fact? “The design that makes the cheapest kilogram is the cheapest design to own.”

  • Myth
  • Fact
Answer

Myth. In the toy at $4.00/kg, 10 MW makes the cheapest kilogram ($1.76), but 50 MW gives the lowest net cost. The cost per kilogram ignores what the extra kilograms earn.

Myth or fact? “If one part's upkeep gets 10% cheaper, the product's cost per unit falls by 10% too.”

  • Myth
  • Fact
Answer

Myth, unless that part is the whole cost.

In the offshore study, about 10% lower turbine upkeep cut the cost per kilogram of hydrogen by about 2%: upkeep is one share of all the costs.

Try it yourself

Optional, about 30 minutes; needs Python on your computer (lesson B2).

  • Run examples/configurations.py. Its hydrogen-price cases solve one synthetic site at several prices: compare the electrolyzer size, LCOH and the objective (net life-cycle cost) row by row.
  • Predict first, then halve the electrolyzer's capital cost (parameter_factors): does the best size grow, and which way does LCOH move?

reopt-hydrogen-framework: public example repository · MIT licence · synthetic data.

Numbers, sources and what’s next

Numbers to remember

Number What it means Source
about 7% and 26% Compared with wind and a battery alone, adding an electrolyzer reduced total system cost by about 7%, and using hydrogen as the storage medium for fuel cells reduced it by about 26%. Li et al. (2024), Journal of Mechanical Design · published online December 2023
about 2% The saving applies to the turbines alone, so its effect on the whole system was smaller: the levelized cost of hydrogen fell by about 2%. Li et al. (2024), J. Phys.: Conf. Ser. 2767 · published June 2024

Keep going

Back to the course map

Where this came up before

Lesson 7 built a levelized cost of electricity and showed what it leaves out: when the energy arrives. This case adds a second gap: what the extra output earns.

Sources and further reading

Spotted an error, or stuck? Write to hlli@ksu.edu. Corrections are made in place and dated here.

Text licensed CC BY 4.0, code MIT: teachers and students may reuse and adapt it, with credit to Honglin Li.