A Binary Discounting Method for Economic Evaluation of Hydrogen Projects: Applicability Study Based on Levelized Cost of Hydrogen (LCOH)

Sergey Galevskiy and Haidong Qian ()
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Sergey Galevskiy: Industrial Economics Department, Empress Catherine II Saint Petersburg Mining University, 199106 Saint Petersburg, Russia
Haidong Qian: Industrial Economics Department, Empress Catherine II Saint Petersburg Mining University, 199106 Saint Petersburg, Russia

Energies, 2025, vol. 18, issue 14, 1-15

Abstract: Hydrogen is increasingly recognized as a key element of the transition to a low-carbon energy system, leading to a growing interest in accurate and sustainable assessment of its economic viability. Levelized Cost of Hydrogen (LCOH) is one of the most widely used metrics for comparing hydrogen production technologies and informing investment decisions. However, traditional LCOH calculation methods apply a single discount rate to all cash flows without distinguishing between the risks associated with outflows and inflows. This approach may yield a systematic overestimation of costs, especially in capital-intensive projects. In this study, we adapt a binary cash flow discounting model, previously proposed in the finance literature, for hydrogen energy systems. The model employs two distinct discount rates, one for costs and one for revenues, with a rate structure based on the required return and the risk-free rate, thereby ensuring that arbitrage conditions are not present. Our approach allows the range of possible LCOH values to be determined, eliminating the methodological errors inherent in traditional formulas. A numerical analysis is performed to assess the impact of a change in the general rate of return on the final LCOH value. The method is tested on five typical hydrogen production technologies with fixed productivity and cost parameters. The results show that the traditional approach consistently overestimates costs, whereas the binary model provides a more balanced and risk-adjusted representation of costs, particularly for projects with high capital expenditures. These findings may be useful for investors, policymakers, and researchers developing tools to support and evaluate hydrogen energy projects.

Keywords: hydrogen; Levelized Cost of Hydrogen (LCOH); binary cash flow discounting model; risk-adjusted cost estimation; hydrogen production technologies; investment decisions; discount rate; financial modeling (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2025
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