How Digital Twins Can Revolutionize Renewable Hydrogen Projects And Cut Costs – McKinsey Insights

As the world pushes towards decarbonization, renewable hydrogen is emerging as a key alternative to fossil fuels. However, there are currently no large-scale renewable hydrogen production plants operating, and meeting future demand could require significant investment. The challenge is substantial: about $700 billion might be needed to stay on track for net-zero goals by 2030.

Today, the majority of hydrogen production is “grey” or “blue,” used mainly in the fertilizer and refining industries. To support the shift towards cleaner energy, developers need reliable tools to assess risks and speed up the scaling of green hydrogen plants. Digital twins—a technology that creates a virtual model of a physical plant—could be crucial in addressing these needs.

Digital twins can simulate a plant from the planning stages through to its operation, helping to reduce investment risks, save costs, and accelerate project timelines. They can also tackle the economic pressures associated with renewable hydrogen projects, such as high infrastructure costs and variable renewable energy sources. Developers have faced difficulties in securing final approvals for grants and investments across Europe and other regions.

Several challenges hinder large-scale renewable hydrogen projects. Electrolyzers, essential for these plants, have seen a sharp increase in capital costs by about 70%. This rise is due to higher financing costs, labor, and materials. Additionally, while cheaper electrolyzer options exist, they may not always perform well under certain conditions, adding complexity to project planning. Developers must balance the costs and performance of electrolyzers, considering their size and sequencing.

Investors need high confidence to commit to large projects. Securing offtake agreements early—guaranteeing at least 50 to 70 percent of production—can help, but higher interest rates have made it harder to obtain affordable debt. This situation often forces developers to seek more equity, increasing initial costs.

Navigating various regulatory requirements is another challenge. Different regions have different rules about carbon intensity and where production facilities can be located. Legislation such as the US Bipartisan Infrastructure Law the Inflation Reduction Act, and the EU’s Renewable Energy Directive, requires close integration between renewable energy sources and hydrogen production, adding to the complexity.

To overcome these obstacles, digital twins can optimize plant design by simulating numerous configurations and combinations of components. They can help reduce lifetime operating costs by improving the design before construction begins. For instance, digital twins can model different electrolyzer types, storage sizes, and other factors to find the best setup.

Digital twins can also aid in various stages of a plant’s life cycle. During operations, they help refine maintenance and operational strategies, offering clearer cost predictions. For financing, having a digital twin makes the investment process less risky, potentially improving financing conditions and contract negotiations. They also streamline future projects by allowing rapid virtual modeling and assessment.

Furthermore, digital twins can enhance finance and management through customizable dashboards for stakeholders, and they can be used for internal and external audits, providing a basis for comparing actual performance with model predictions.

As the world invests in renewable hydrogen, digital twin technology offers a valuable tool for reducing costs and improving efficiency throughout a plant’s life. This technology could be key to making large-scale hydrogen projects economically viable and meeting global decarbonization targets.