US energy officials must craft incentives that cover steep upfront costs and leverage government buying power to scale up adoption of hydrogen in the power sector, ammonia production, heavy trucking, and other hard-to-decarbonize areas, industry leaders say.
That input came as feedback to the Energy Department’s $1 billion program for demand-side mechanisms announced in a notice of intent this month.
The policies being crafted are crucial to link supply and demand in a nascent industry, the agency said, as they will create certainty for the first wave of hydrogen producers that there will be customers for their product. The policies also provide the certainty needed for customers to make investments to use that hydrogen.
The program aims to fill a gap in incentives to scale up a hydrogen industry as part of the Biden administration’s goal of achieving net-zero greenhouse gas emissions across the US economy by 2050. Clean hydrogen is envisioned to use renewable or zero-carbon electricity to split water into oxygen and hydrogen molecules.
To achieve its goals, the government should support feasibility analyses—an important early step for possible buyers to assess what new technologies may be needed to use hydrogen—as well as contracts for difference, a mechanism that reduces the cost gap between clean hydrogen and conventional fuel, according to one influential trade group.
Those contracts should be flexible and run at least 10 years, as shorter-term deals “may not provide the certainty needed to attract investment in clean hydrogen projects and spur demand,” according to comments submitted this week by Hydrogen Forward, a group of nine companies interested in hydrogen across the supply chain that includes
Such contracts have been used in the United Kingdom since 2014 to support a range of renewable energy projects and are awarded for a period of 15 years, the comments pointed out.
Others are skeptical those contracts could work given the lack of organized markets for hydrogen that have long determined prices for electricity, said Kyle J. Hayes, partner at Foley & Lardner LLP, who wrote comments to DOE on behalf of hydrogen investors, project developers, equipment manufacturers, and others.
The DOE could instead support a take-or-pay contract—a common arrangement in the oil and gas sector that obligates an off-taker to take the molecules or, if they don’t, pay a certain amount. Further, the agency should subsidize equipment and upfront pipeline interconnection costs and beef up the creditworthiness of off-takers, Hayes said.
The department’s program “is centered around something that I don’t know that we’ve necessarily seen, which is DOE subsidizing commodities for off-takers,” Hayes said.
Missing Link
Hydrogen production could jump from almost zero today to 10 million metric tons by 2030 and reach 50 million metric tons by 2050, according to the department’s National Clean Hydrogen Strategy and Roadmap released last month.
Congress, in the climate and infrastructure laws, primarily dangled incentives for the industry to get production facilities. A new clean hydrogen production tax credit promises up to $3 per kilogram of clean hydrogen, though the industry is eagerly awaiting guidance on what types of hydrogen production qualify.
And the Energy Department is moving forward on its $7 billion regional hydrogen hub program, which plans to scale up a hydrogen industry in six to 10 regions across the country. The hubs are expected to include a mix of hydrogen produced by renewable energy; one from hydrogen sourced from natural gas and using carbon capture and storage; and one nuclear-powered hydrogen project.
But the investment needed for hydrogen to be transported, stored, and ultimately used by consumers has been less defined.
“That’s the key thing that was missing from the IRA,” said Alejandro Perellón, head of the Americas for Hy24, a €2 billion ($2.2 billion) fund set up to invest in the entire hydrogen supply chain around the world. “In talking to folks in the downstream segment, the feedback has been: They did wonders for the upstream, but they forgot about us down at the end of the value chain.”
“You kind of have everyone looking at each other, and no one wants to take that plunge unless they know that it’s coming,” Perellón said.
In March, a bipartisan group of Senate lawmakers proposed the Hydrogen Infrastructure Initiative, a collection of four bills that target incentives for ports, trucking, heavy industry, and transportation and storage infrastructure.
The bills “fill in gaps” in incentives for the hydrogen industry, Sen. Chris Coons (D-Del.), who introduced the legislation alongside Sen. John Cornyn (R-Texas), said in a statement this week.
“Demand-side drivers like those included in my proposals are the missing link to dramatically scaling the U.S. hydrogen economy,” Coons said. “I am optimistic we have a path forward to advance the bills this term.”
Off To The Races
Along with sectors like steel and chemicals, utilities could be a major source of demand given the scale of their distribution networks.
But they answer to regulators and rate-payers sensitive to any hike in monthly bills, so hydrogen costs must gradually fall in order for utilities to blend greater volumes, said Ben Wilson, chief strategy and external affairs officer and interim president at National Grid Ventures, a unit of the London-based electric and natural gas utility that operates in New York and Massachusetts.
National Grid is exploring hydrogen investments and is partnering with a Seattle-based startup, Modern Hydrogen, that is working on distributed hydrogen production technology that serves to “disrupt us,” Wilson said. The utility is also involved in a DOE hydrogen hub proposal in the Northeast.
Contracts for difference have worked “incredibly successfully” in the UK to bring down costs of offshore wind and could work well in hydrogen, Wilson said.
A heating standard that mandates gas distributors to source increasing percentages of fossil-free gas would also provide steady demand and certainty for hydrogen investors, he said.
“The missing piece is that demand pull—and not just the demand pull, but the kind of multi-year confidence that provides us a signal,” Wilson said. “If we had that, then I think we’d really be off to the races.”
