The Future of Energy: Commercial Scale Hydrogen

In June, the Biden administration released the U.S. National Clean Hydrogen Strategy and Roadmap, a framework for accelerating the production, processing, delivery, storage, and use of clean hydrogen. Developing commercial-scale hydrogen to fuel America is one pillar of a larger strategy to address the climate crisis and achieving a carbon-free grid by 2035 and a net-zero emissions economy by 2050. Does this mean that the hydrogen-powered passenger vehicles zooming around the streets of Tokyo during the Summer Olympics will be on Main Street in the near future? Probably not. However, key federal policies, programs and tax incentives are being put in place now to jump start a hydrogen economy. The heavy, and front-loaded, government assist is seen as essential to reduce the risks to business. Even with government support, the hydrogen transition will require significant investments in large projects using new technology without assured consumers and persistent questions on just how clean a hydrogen project lifecycle will be and at what cost.

Decarbonizing Hard-to-Electrify Industries

Old-school hydrogen production, i.e., gray hydrogen, is relatively inexpensive and commonly used in heavy industries that are energy intensive, such as the chemical industry. Gray hydrogen is derived from fossil fuel and is considered on the “dirty” end of renewables. According to the International Energy Agency (IEA), production of gray hydrogen is responsible for CO2 emissions of around 830 million tons per year, equivalent to the CO2 emissions of the United Kingdom and Indonesia combined. Given the essential role gray hydrogen has in producing ammonia (needed to make artificial fertilizer) and plastics, decarbonizing the production of these commodities presents a prime opportunity to reduce emissions.

Enter the rainbow of new hydrogen. These color-designated fuels use different technologies and feedstock to create low carbon hydrogen. Blue hydrogen, at the front of the pack, uses natural gas as feedstock but does not allow the CO2 produced to escape into the environment. Through carbon capture and storage processes, it is contained and stored. Green hydrogen uses a different technical process, electrolysis, to separate hydrogen and oxygen molecules by applying electrical energy to water. Wind or solar power can generate the required electricity. No harmful gases are produced in the process. Electrolysers using nuclear power produce pink hydrogen. Hydrogen produced by pyrolysis, heating methane until the hydrogen departs, leaving solid carbon behind, is turquoise hydrogen.

The technology exists. The challenge is to bring it to scale so that it can become commercially viable. The industry will require staggering sums of startup money and a pricing structure that offers a clear advantage over other forms of renewable energy. This is where governments are stepping in.

Creating Economies of Scale

With $9 billion in funding from the 2021 Bipartisan Infrastructure Deal, the U.S. Department of Energy (DOE) launched two initiatives, the Regional Hydrogen Hub program and the Electrolysis and Clean Hydrogen Manufacturing and Recycling program, to help accelerate progress, reduce technology costs, and ramp up the use of hydrogen as a clean energy carrier.

The hydrogen hubs are meant to operationalize the use of low-carbon hydrogen for production, storage, transport and consumption. By year end, DOE will select six to 10 projects using a variety of fuels in the production process from the 33 proposals it received (DOE initially received 79 concept papers from consortiums across the U.S., many backed by local and state governments – a good indicator of the extent of public-private sector interest). DOE targets no more than 2 kilograms of CO2 for every kilogram of hydrogen from the hubs’ production facilities. This is in line with the emission limits laid out in the bipartisan infrastructure law and is less than half of the 9-kilogram of CO2 from gray hydrogen production.

Additional supply-side support, designed to aid producers beyond startup, includes several tax credits under the Inflation Reduction Act (IRA). The Clean Hydrogen Production Tax Credit, 45V, offers up to $3 per kilogram of clean hydrogen produced by electrolysis. Authorized for 10 years, the tax credit could help make the projects financially viable over the longer term if the hub participants can meet the emissions targets. These rules are currently under discussion. Guidelines that are too weak could lead to an increase in net emissions and result in the subsidization of hydrogen with higher emissions intensity than gray hydrogen production methods. Too a high a bar could undercut the business model and commercial viability. The IRA Carbon Capture and Sequestration Tax Credit, 45Q, is a more straight-forward subsidy based on amount of CO2 stored or reused.

But supplying hydrogen at a competitive price point is only half of the equation. To scale these projects, the hubs will require long-term offtake agreements. End users, on the other hand, prefer shorter terms, especially for an unproven commodity. Lack of near-term demand certainty can make clean hydrogen projects a riskier investment, inhibiting the flow of private capital into production and mid-stream infrastructure. In short, to scale, a simultaneous consumer base needs to be developed that extends within and beyond the immediate proximity of the hubs. The DOE envisions that hydrogen hubs can not only fuel heavy industry currently using gray hydrogen, but can expand to clean steel production, heavy transport sectors (trucks and trains), and sustainable aviation fuels. Some experts also see opportunity in exports to Asia through long-term contracts with utility companies. Signaling a commitment to building demand certainty, on July 5, DOE issued a Notice of Intent and Request for Information, calling for ideas for a $1 billion initiative to support demand for clean hydrogen from competitively selected hydrogen projects at hydrogen hubs.

How Clean Is Clean Hydrogen and at What Cost?

Despite the growing excitement about hydrogen as a “fuel of the future” and government plans to invest significant resources to finance this vision, there are significant risks  - even beyond whether the projects can be built, hydrogen produced at scale and consumed by a broader set of economic sectors. Environmental groups warn that publicly funded hubs could still emit significant amounts of greenhouse gases and endanger residents when hydrogen is stored or transported. Electrolysis requires significant water resources, exacerbating the growing problem of water scarcity. Some opposed major investments in technologies that will prolong burning of natural gas as feedstock. Others warn of the potential release of pollutants that cause respiratory illness.

Watch dog groups opposed to large government subsidies question the government’s ability to responsibly manage taxpayers’ money in programs that will demand years of monitoring with risks of waste and fraud. Some warn the risks of long-term government energy subsidies will sap the economic strength of the country, citing countless examples of economies undermined by fuel subsidies.

The Hydrogen Race

The future of the hydrogen economy will not be determined by what happens merely in the U.S. The EU has approved up to €5.2 billion in public funding for hydrogen projects. The United Kingdom is planning a £4 billion investment. Japan plans to invest 15 trillion yen ($107.5 billion) over the next 15 years to supply the country with hydrogen. India has announced a $2.3 billion plan to promote green hydrogen. Competition is shaping up to be a race for technology development and global market leadership. Governments are adopting long-range hydrogen strategies, reflecting an emerging consensus that the transition to clean hydrogen will be essential for a shot at a net-zero emissions economy by 2050.