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Understanding the Levelized Cost of Hydrogen (LCOH): Applications, Pitfalls, and Best Practices




As Canada accelerates its transition toward a low-carbon economy, hydrogen has emerged as a central pillar of decarbonization strategies across sectors. For industry leaders, investors, and policymakers, a clear grasp of hydrogen economics is essential. Among the most important metrics in this context is the Levelized Cost of Hydrogen (LCOH). At Vaekst, we routinely support our clients in interpreting, benchmarking, and applying LCOH in both technical and commercial decision-making. This article provides a comprehensive overview of LCOH—what it is, how it is used, common mistakes and misconceptions, and key recommendations for its effective application.



What is LCOH?

The Levelized Cost of Hydrogen (LCOH) is a financial metric that represents the average cost to produce one kilogram of hydrogen over the entire lifetime of a production asset. This includes all capital investments, operational expenses, feedstock and utility costs, and financing—discounted to present value. LCOH allows for standardized comparisons across different hydrogen production technologies, project scales, and geographic regions.

Core LCOH Calculation:

LCOH=Total Lifetime Costs (discounted)Total Lifetime Hydrogen ProductionLCOH = \frac{\text{Total Lifetime Costs (discounted)}}{\text{Total Lifetime Hydrogen Production}}LCOH=Total Lifetime Hydrogen ProductionTotal Lifetime Costs (discounted)​

Key cost components:

  • Capital Expenditures (CAPEX): Equipment procurement, construction, permitting, and commissioning.

  • Operating Expenditures (OPEX): Labour, maintenance, insurance, administrative costs.

  • Feedstock and Utilities: Electricity, natural gas, water, and other essential inputs.

  • Financing Costs: Debt servicing and required return on equity.

  • End-of-Life Costs: Decommissioning and asset retirement obligations.


Applications of LCOH

LCOH is widely used for:

  • Project Feasibility and Benchmarking: Assessing the economic viability of proposed hydrogen projects and comparing different production pathways (e.g., green via electrolysis, blue via SMR + CCS, or other emerging methods).

  • Investment Decision-Making: Supporting capital allocation decisions by investors and project developers.

  • Policy and Incentive Design: Informing government targets, subsidy levels, and regulatory frameworks.

  • Offtake Agreement Structuring: Establishing baseline production costs for hydrogen supply contracts and negotiations.


Common Mistakes and Misunderstandings

Despite its utility, there are several frequent errors and misconceptions associated with LCOH:

1. Overreliance on Generic or Outdated Benchmarks

Using LCOH values from international studies or outdated literature can be misleading. Local variables such as electricity pricing, renewable resource availability, and financing conditions can significantly influence project-specific LCOH figures.

2. Confusion Between Production Cost and Delivered Cost

LCOH typically reflects the cost of hydrogen at the production facility (“plant gate”). It does not account for logistics, compression, liquefaction, storage, or distribution to end-use locations, all of which can add considerable cost.

3. Unrealistic Capacity Factor Assumptions

Assuming high utilization rates for electrolysis or reforming—especially when dependent on intermittent renewables—can artificially suppress LCOH estimates. Accurate modeling must reflect realistic operating profiles.

4. Incomplete Cost Inclusion

Omitting key cost categories such as water supply, insurance, carbon management, or end-of-life expenses results in underestimated LCOH figures that may not be bankable or investment-grade.

5. Misinterpretation of LCOH as a Market Price

LCOH is an internal cost metric, not necessarily reflective of achievable market prices, which are driven by supply-demand dynamics, policy incentives, and competitive positioning.


Best Practices for LCOH Analysis

To ensure credible and actionable LCOH assessments, Vaekst recommends the following:

Do:

  • Use Project-Specific Inputs: Tailor assumptions to the actual project location, technology, and scale.

  • Include Comprehensive Lifecycle Costs: Capture all relevant expenditures, including decommissioning and carbon management.

  • Conduct Sensitivity Analyses: Evaluate how LCOH responds to changes in key variables such as electricity price, capacity factor, and financing costs.

  • Clearly Define Scope: Specify whether LCOH represents the cost at the plant gate, delivered to customer, or another point in the value chain.

  • Document and Disclose Assumptions: Transparency strengthens credibility and supports stakeholder engagement.

Do Not:

  • Rely on Generic or Non-Contextual Numbers: Avoid using high-level or global averages without adjusting for local realities.

  • Ignore Policy and Incentive Impacts: Carbon pricing, production tax credits, and other policy tools can materially influence LCOH.

  • Present LCOH in Isolation: Combine LCOH analysis with broader market, regulatory, and technical considerations.


How Vaekst Can Support

LCOH is a foundational metric for the evaluation and comparison of hydrogen projects. Its value lies in robust, context-specific analysis and transparent communication of underlying assumptions and methodology. Misinterpretation or inaccurate modeling of LCOH can result in flawed investment decisions or missed opportunities.

At Vaekst, we provide detailed LCOH modeling, benchmarking, and strategic guidance tailored to Canada’s fast-evolving hydrogen landscape. Our team brings deep market knowledge, technical expertise, and a commitment to analytical rigor—helping our clients unlock value and minimize risk throughout the hydrogen project lifecycle.


To discuss how Vaekst can support your hydrogen initiatives with robust economic analysis and strategic insight, please contact our team. We are committed to supporting your success in Canada’s clean energy transition.




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