The big unsettled policy question about clean hydrogen: How to use it

U.S. clean hydrogen policy appears to be stuck in neutral — and not everyone is convinced that’s a bad thing.

Last October, seven ​“clean hydrogen hub” projects were awarded a collective $7 billion in potential funding through the Bipartisan Infrastructure Law. These massive infrastructure projects are meant to kick-start the U.S. clean hydrogen industry, which some energy experts see as key to eliminating fossil fuels from sectors like steelmaking and aviation. But the plans for these projects have yet to emerge.

Meanwhile, the other key pillar of U.S. clean hydrogen policy — tax credits created by the Inflation Reduction Act — is also in limbo. The rules that govern eligibility for this incentive have been the source of intense debate and are not yet finalized. In all likelihood, they will remain unsettled until after the November election. Developers are holding off on multibillion-dollar clean hydrogen investments until these rules are firm.

Many companies working in the space have argued that the Biden administration’s approach is stifling the U.S. hydrogen industry before it has even begun to grow. But an increasing number of energy and climate experts warn that the greatest risks for clean hydrogen development lie not in moving too slowly on these major investments but in being too hasty.

Hydrogen can be made in ways that emit carbon dioxide into the atmosphere and in ways that don’t. While hydrogen can be used for a number of different purposes, such as producing electricity and making fertilizer, it’s not the best option in most cases.

That creates a potential problem for U.S. hydrogen policy: If poorly designed, these well-meaning programs could spend hundreds of billions of taxpayer dollars to make and use hydrogen in ways that won’t help fight climate change and could instead sap funding from cleaner and cheaper alternatives. They could also sink capital into industrial infrastructure that can’t compete economically without government subsidies.

That’s not to say that government support isn’t critical to build a clean hydrogen sector for the industries that need it to decarbonize. But without policies promoting genuinely carbon-free hydrogen in the right applications, the U.S. hydrogen push ​“risks doing more harm than good.”

That’s the argument Dan Esposito of think tank Energy Innovation lays out in an August report, in which he describes a ​“narrow path forward for hydrogen policy.”

“We need clean hydrogen to fulfill our climate goals, but this will happen if and only if it’s truly clean and applied to highest-value applications,” Esposito, who leads hydrogen policy work at the think tank, told Canary Media.

He detailed three policy principles to make that happen. ​“One is subsidizing truly clean hydrogen production. Two is investing in hydrogen’s high-value uses. And three is reversing support for hydrogen’s low-value uses. By straying from any of these components, you could reverse or delay or raise the cost of emissions reductions.”

Right now, U.S. clean hydrogen policy isn’t necessarily set up to support those principles.

The current approach focuses on bolstering low-carbon hydrogen production, which has spurred conflicts between groups that want looser rules to maximize the industry’s growth and those that want stricter rules to limit greenhouse gas emissions. But the U.S. has said far less about how clean hydrogen should be used — and how to tell which applications are true pathways to decarbonization and which ones are dead ends. 

Ranking the pathways for clean hydrogen from best to worst

Esposito’s report differentiates between potential end uses for hydrogen using the following categories:

This taxonomy may be familiar to hydrogen-policy watchers. According to Esposito, it’s largely aligned with the well-known ​“hydrogen ladder” created by Michael Liebreich, head of Liebreich Associates and co-founder of clean energy analysis firm BloombergNEF.

In simple terms, high-value uses are those for which ​“in 20 to 30 years, hydrogen will still have value competing on a level playing field with other technologies,” Esposito said.

Notably, almost all those high-value uses are industries that either need clean hydrogen to replace the tens of millions of tons of fossil-fuel-derived hydrogen they’re already using today, as with refining, ammonia, and petrochemicals production; or they are sectors unable to easily replace fossil fuels with electricity, as with aviation and marine shipping.

Low-value uses, conversely, tend to be good candidates for direct electrification. That means hydrogen faces harsh competition from ever-cheaper solar and wind power. Building heating, road transportation, and electricity generation and storage fall into this category.

In these industries, ​“hydrogen is not competitive today, and the long-term trajectories on cost and performance strongly suggest that when everyone is back on a level playing field — with everyone or no one getting subsidies — hydrogen will not be able to play even a small role in the market,” Esposito said.

This perspective is backed up by a long roster of reports from climate advocates, energy analysts, and think tanks ranging in political perspective from liberal to bipartisan to conservative. The U.S. Department of Energy, which administers the hydrogen hub program, has also emphasized the need to target ​“strategic, high-impact uses for clean hydrogen.”

But the idea of wielding policy to restrict the growth of hydrogen production and use is also contested by a number of pro-hydrogen industry groups — including some largely backed by fossil fuel companies — that have argued for encouraging the broadest possible uses of hydrogen while the industry gets off the ground.

That camp includes the coalitions set to receive $7 billion in federal funding for the hydrogen hub projects. These groups, which include some major oil and gas companies along with existing industrial hydrogen producers, energy developers, and companies in various industries eyeing hydrogen as a decarbonization strategy, have asked the Biden administration to loosen its strict proposed rules for assessing the greenhouse gas emissions impact of hydrogen production.

Why clean hydrogen works for some industries but not others 

These disputes complicate efforts to focus policies on supporting high-value uses and discouraging low-value uses, Esposito conceded. But that’s not a good reason to ignore the underlying economic and thermodynamic realities that make hydrogen a bad choice for many industries now being asked to commit to using it.

The problem is that ​“the six good and excellent uses are by and large difficult to break into,” Esposito said. ​“You’re talking about giant industrial complexes making investment decisions that last decades and have really tight margins.”

A 2023 analysis by the nonprofit think tank Energy Futures Initiative found that today’s major hydrogen-using industries will need clean hydrogen to be much cheaper than dirty hydrogen in order to cover the cost of retrofitting their facilities and building new infrastructure to use it.

Lower-value uses are temptingly easy near-term targets. It’s much simpler to blend hydrogen into existing fossil-gas-delivery pipelines or to use it to fuel power plants owned by utilities that are also participants in hydrogen hubs, for example. And hydrogen-fueled vehicles have been around for more than a decade, despite their failure to compete against battery electric vehicles.

The subsidy of up to $3 per kilogram set to become available from the Inflation Reduction Act’s 45V tax credit program could make clean hydrogen economically attractive for those lower-value uses. But that program maintains those subsidies for only a decade.

Once they expire, what once looked like a cost-effective alternative to electrifying building heating, industrial-process heating, or transportation ​“looks like a much more expensive product,” Esposito said. Meanwhile, ​“you’ve made no progress toward getting to these high-value uses.”

Getting demand-side policies in place

The solution, he and other energy experts agree, is to nurture demand from high-value industries. But it’s far from clear that today’s federal policies are set up to do that effectively.

Take the seven hydrogen hubs set to receive between $750 million and $1.2 billion apiece in federal funding. Each hub must meet successive milestones demonstrating that its plans are economically and environmentally sound.

But it’s unlikely that the total amount of money any one of those individual hubs can receive under the program will be sufficient to move the needle for the major industries identified as the top targets for clean hydrogen. What’s more, each hub is mandated by law to pursue a wide range of end uses for hydrogen, forcing them to spread the money in ways that will dilute its impact on particular high-value sectors.

The Department of Energy, which is responsible for the hydrogen hub program, has identified a lack of long-term clean hydrogen purchasing commitments as a key barrier to scaling up the industry. Earlier this year, DOE launched the Hydrogen Demand Initiative with $1 billion available to create ​“demand-side support mechanisms for enhancing the market potential” of the hydrogen hubs.

Esposito suggested that one option for using that funding is some kind of ​“advance market commitment” from the federal government to commit to buying products made using clean hydrogen. That could give ​“confidence to these investors that they will have a buyer at a rate that’s acceptable for the investments they’re making.”

Steel made using clean hydrogen could be an early target, he said. Today, the U.S. lags behind Europe on this front. In March, DOE announced plans to award steelmakers Cleveland-Cliffs and SSAB up to $500 million each to build hydrogen-fed iron production projects to make low-emissions steel. But Cleveland-Cliffs President and CEO Lourenco Goncalves has questioned whether the project makes economic sense absent commitments from automakers and other buyers to purchase the green steel it would produce.

DOE has laid out several options for how it might put the $1 billion in demand-side funding to work. Those include ​“pay-for-difference contracts” that cover the gap between clean and dirty hydrogen pricing for buyers — a route Japan is pursuing — or a ​“market maker” structure similar to the European Hydrogen Bank.

The DOE-led initiative has yet to report on which option it intends to pursue.

It’s not clear if the companies and government agencies that make up the U.S. hydrogen hub projects would support federal policy that focuses on giving financial support to a handful of high-value industries.

But Esposito highlighted that directing clean hydrogen to anything but those industries jeopardizes decarbonization targets.

His report spells this out by the numbers. The Biden administration has set a goal of 50 million metric tons of annual clean-hydrogen production by 2050. Even if the country can reach that lofty target, that would supply only about half of today’s demand for hydrogen from the high-value uses in his report, as the chart below shows.

In other words, he said, ​“it’s going to be really hard to decarbonize the excellent and good uses” if the country’s scant supplies of clean hydrogen end up going to other uses.