In recent years there have been many efforts to develop a hydrogen energy system in Iran. For instance, the Iranian fuel cell steering committee conducted a project and determined some targets to implement hydrogen in different sectors, especially transportation. In this paper, the costs of building stations and the levelized cost of hydrogen for two types of stations, SMR and electrolysis, with various sizes and capacity factors have been investigated. Also, in the case of electrolysis, hydrogen cost sensitivity to the price of electricity has been examined. According to the cost analysis conducted here, it is understandable that hydrogen costs ($/kg) vary considerably based on station type, size, and capacity factor. Hydrogen production from natural gas results in lower costs ($3-7/kg H-2) in comparison to electrolysis ($6-10/kg H-2). Hydrogen cost would decrease by increasing the capacity factor, but in the case of electrolysis, from a specific capacity factor, hydrogen cost begins to rise; this is due to the trade off between the capacity factor and the price of electricity in various load zones. In general, hydrogen costs in Iran are estimated from 3 to 10.5 $/kg, however a strategy for producing even lower cost hydrogen in the early years of hydrogen implementation, is proposed, which all together indicates that hydrogen could be an economical alternative fuel to substitute gasoline in the Iran's transportation sector. (c) 2008 Elsevier Ltd. All rights reserved.