US ​‘hydrogen hub’ plan may push clean hydrogen to the wrong users

Canary Media thanks Verdagy for its support of the Clean Hydrogen series.

One of the most common analogies for clean hydrogen is that it’s like a Swiss Army knife for decarbonization — a handy tool that can kick dirty fossil fuel out of a number of different industries.

But just because a tool can be used doesn’t mean it should be used — especially if it’s a ​“second- or third-best clean energy solution” that displaces much better options at hand.

That’s how Robin Gaster, a senior fellow at Washington, D.C. think tank Information Technology and Innovation Foundation, described the limits of clean hydrogen in a January report.

“The answer is finding actual use cases where hydrogen is the primary solution, not the third-best solution,” Gaster, who is also the president of data and analysis consultancy Incumetrics, told Canary Media. ​“I went through pretty much everything I could find that seemed like at least a half-baked case to show that we could get to significant hydrogen demand. And I struggled.”

Gaster isn’t alone. A growing number of industry analysts are questioning whether hydrogen is viable for the applications where it’s often cited as a decarbonization solution, from long-haul trucking to replacing fossil gas in pipelines for heating buildings and generating power.

And this group is increasingly worried that existing U.S. policy will push federally subsidized clean hydrogen into several of the industries where it makes neither economic nor environmental sense. That’s because current policies focused on making clean hydrogen cheaper aren’t matched with policies to drive its use in the industries where it actually can help replace fossil fuels.

The Inflation Reduction Act’s 45V tax credit will create a multibillion-dollar incentive for U.S.-based hydrogen producers to make low- and zero-carbon hydrogen. But unlike the European Union, the U.S. has few incentives — and no mandates — encouraging certain industries to buy clean hydrogen to reduce their climate impact.

Instead, the chief federal policy on the demand side is a program created by 2021’s Bipartisan Infrastructure Law that will direct $7 billion toward ​“clean hydrogen hubs” — complexes of hydrogen production, transport, storage and end users.

Some of the seven hubs selected in October by the Department of Energy do include plans to direct clean hydrogen toward industries with the greatest need for it, including fertilizer production, shipping and steelmaking. But far more of the focus at these hubs appears to be on developing clean-hydrogen markets in sectors where experts say it is likely to be a suboptimal — and potentially counterproductive — alternative to clean electricity.

Where the hubs go wrong — and why it’s hard to get them right

Among all of the ways hydrogen can be used, there are a few use cases that experts consistently raise flags about. Those problematic applications are well represented in the U.S. hydrogen hubs.

One of these red-flag applications is the use of hydrogen in existing fossil-gas pipelines for use in buildings or power plants, which many hubs include plans for. Gas and electric utilities across the country are eagerly testing this as an option to cut emissions without needing to abandon existing gas-burning infrastructure.

But multiple analyses have shown that mixing hydrogen into gas pipelines wastes energy and is ineffective as a carbon mitigation strategy — at least without major investments in new pipelines and power plants. That money is better spent on alternatives such as renewable energy, batteries, heat pumps and long-duration energy storage.

And when it comes to burning hydrogen in power plants, the energy losses are so staggering that the process makes little economic sense. The exception here is using hydrogen for seasonal energy storage.

Even more hubs plan to direct hydrogen to fuel-cell-equipped trucks, cargo-handling vehicles, public transit and other vehicles. But the past decade has shown that EVs are the most cost-effective and energy-efficient alternative to fossil-fueled cars. Hydrogen might be preferable for longer-haul trucking and heavy-duty cargo vehicles, but rapidly advancing battery technology could eventually win there, too.

With billions of taxpayer dollars now set to flow into the clean hydrogen sector, energy analysts and environmental watchdogs are worried that the money may be wasted on these applications.

Hydrogen ​“can be a really useful potential solution in some sectors,” said Emily Kent, U.S. director for zero-carbon fuels at the nonprofit Clean Air Task Force. But it is also ​“not particularly effective in some other sectors where there might be better alternatives. And that hasn’t been…clearly communicated in a lot of the spaces where those conversations and decisions are being made.”

In November, Clean Air Task Force published a report analyzing the prospects for clean hydrogen across a number of sectors. Its core takeaway is that ​“low-carbon hydrogen is best used in applications where there are simply no other good decarbonization options.” 

Clean Air Task Force is ​“really interested in seeing some of these demonstration projects get off the ground,” Kent said, referring to the hydrogen hubs. It also wants to ​“make sure that we aren’t going down paths that really might not make sense.”

But policymakers, regulators and public- and private-sector partners involved in the hydrogen hubs face a set of conundrums when it comes to deciding which sectors should and shouldn’t use the clean hydrogen they produce.

The first one stems from the legislative language that created the hydrogen hub program, noted Aaron Bergman, a fellow at the nonprofit research group Resources for the Future. The relevant section of the Bipartisan Infrastructure Law specifies that at least one hub must test a number of end uses for hydrogen.

“One has to be electric power generation. At least one has to be industrial use. At least one has to be residential and commercial heating — which is not what most people consider a high-value use. And at least one has to be in the transportation sector,” he said.

The second conundrum is that the sectors seen as the most promising targets for clean hydrogen also face significant cost and capital-investment barriers to making the switch — even with generous subsidies.

For the capital-intensive industries that currently use dirty hydrogen to pivot to clean hydrogen, they’ll need more certainty that those investments will hold solid for decades into the future, Gaster pointed out. ​“I don’t see existing plants swapping out gray hydrogen until they’re forced to. It’s cheap, it’s there, it’s established. Why would you risk your business taking on an uncertain future?”

The future is even murkier for the industries where hydrogen has high potential but is not in use today, like steelmaking. Not only do these industries need to make large capital investments and develop rock-solid supply agreements with clean hydrogen producers — but they also need to convince investors to finance costly first-of-a-kind projects that embrace emerging technologies and processes on an industrial scale.

The green-premium blues 

This latter dilemma — that the industries for which clean hydrogen makes the most sense are also among the least able and willing to quickly adopt it — leads to an uncomfortable conclusion: Scaling up clean hydrogen might require some tolerance of suboptimal buyers, at least in the near term.

That’s why a host of alternative users are being sought to make the first commitments needed to get early-stage production facilities off the ground. These buyers may also be able to pay higher prices for clean hydrogen — to cover the so-called ​“green premium” between the cost of dirty hydrogen and lower-carbon alternatives — than today’s primary users of dirty hydrogen are willing to pay.

There’s a clear tension between these short-term economic realities, which favor casting a wide net for clean-hydrogen users, and the long-term imperatives that call for policies that concentrate clean hydrogen use in the industries that lack low-carbon alternatives.

These two charts from reports from clean energy think tank RMI highlight this tension. (Canary Media is an independent affiliate of RMI.)

The first categorizes different industries in terms of their capacity for clean hydrogen, their technological readiness to use it, and the ​“criticality” of making the switch to achieving decarbonization.

Shipping, methanol and ammonia production (much of the latter for fertilizer) rank the highest in terms of readiness and critical need. Steelmaking and aviation are ranked as less ready but as needful, while heavy-duty trucking is ranked at high readiness but lower need, given the alternative option of battery-electric vehicles. 

The second chart shows a different set of variables — the volumes of clean hydrogen that different industry sectors could buy at a price that allows them to compete with incumbent fossil fuels or ​“alternative decarbonization solutions.” Think of it as a chart of the break-even price for each end user. 

(Note: RMI used biofuels and electrification as ​“alternative decarbonization solutions.”)

In this case, long-haul trucking leads in terms of the price it’s able to pay, largely because it would be replacing refined fossil fuels bought at retail prices. Hydrogen for heavy transportation also receives incentives and policy support at the federal and state levels, making it an early target of almost every hydrogen hub set to receive federal funding.

Aviation, which can use hydrogen as a feedstock to produce low-carbon alternatives to fossil fuels, can also pay a premium for clean hydrogen, albeit a smaller one than trucking can.

The price that fertilizer production and steelmaking can bear is roughly equivalent to those now being paid for dirty hydrogen. But other sectors would need clean hydrogen at prices below dirty hydrogen — and some, such as residential heating and baseload power generation, have cheaper alternative decarbonization pathways (heat pumps and batteries charged with renewable energy, respectively).

Demand from the sectors now able to pay the highest prices for clean hydrogen pales in comparison to the scale of today’s existing dirty hydrogen economy, said Pavel Molchanov, director and equity research analyst at Raymond James & Associates. The latest data from the International Energy Agency pegs global hydrogen use in transportation and other ​“new applications” at roughly 40,000 metric tons per year, less than a thousandth of the total global hydrogen demand of roughly 95 million metric tons.

“It could grow by the end of the decade to 5 million metric tons, a hundredfold increase,” he said. ​“But even then, we’re only talking 5 percent of the world’s hydrogen market.”

Nor is it clear that hydrogen can succeed against batteries in the sectors now willing to pay the highest prices. The chief advantage for hydrogen in long-haul trucking — being able to refuel more quickly than truck batteries can recharge — is being eroded by improvements in battery and charger technology, Gaster said. And building a new hydrogen refueling infrastructure is ​“not like setting up a charger for electricity, where you tap into the grid and there you go.”

But for hydrogen producers, being able to find a viable buyer — any buyer — is an existential matter. That’s because producers need to secure contracts with buyers in order to convince investors to give them the capital required to scale up operations. 

Building a hydrogen bridge to where? 

Last month, the EFI Foundation — a think tank co-founded by former Energy Secretary Ernest Moniz — was tapped by the Biden administration to lead a Hydrogen Demand Initiative. Its task is to figure out how to spend $1 billion in funding from the Bipartisan Infrastructure Law to create ​“demand-side support mechanisms for enhancing the market potential” of the hydrogen hubs.

DOE has proposed a number of forms this assistance could take, ranging from feasibility studies to help would-be buyers analyze the prospects of signing long-term contracts to ​“pay-for-delivery contracts” and ​“offtake backstops,” which would put the federal government or another central entity in the position of brokering or supporting large-scale commitments by clean hydrogen buyers.

As Gaster noted, however, ​“a billion dollars sounds like a lot of money, but there are seven hubs.” If each receives an equal share of that available funding, ​“that leaves you with $150 million each.” Such sums may not be enough to move the needle for hubs that DOE expects to spur more than $40 billion in private-sector investment on top of $7 billion in federal grants.

It’s also likely not enough to build the extensive pipeline networks that many industry groups see as vital to allowing a broader range of industries to use clean hydrogen. The Department of Energy’s National Clean Hydrogen Strategy and Roadmap report finds that by 2030, ​“all end-use types are theoretically profitable for producers co-located with [end users] or if salt caverns,” natural geological formations that store vast amounts of fossil fuels today and can cheaply store hydrogen in the future, ​“and pipelines are available.”

Adding the cost of liquefying hydrogen for truck or rail transport, or of above-ground compressed gas or liquid hydrogen storage tanks, pushes the costs out of range for the primary users of hydrogen today, as this graphic indicates. 

“Transportation and storage infrastructure is critical for ensuring that clean hydrogen can be delivered to end users at a cost-competitive price,” said Cihang Yuan, a senior program officer at the environmental nonprofit World Wildlife Fund who works with industrial companies that want to decarbonize their operations. ​“But it is a substantial capital investment — and it will last for a very long time.”

That’s why it’s important for U.S. hydrogen hubs to focus on ​“creating an infrastructure network that’s enabling high-impact use cases,” Yuan said.

Investing in hydrogen fueling networks for low-impact use cases, like vehicles or for heating buildings, could in contrast lock in long-lasting infrastructure for future hydrogen use that doesn’t make sense compared to electrification. And it would do little or nothing to lay the groundwork for supplying clean hydrogen to the industries that need it the most.

Canary Media’s Maria Gallucci contributed reporting for this article.

Verdagy manufactures an advanced AWE electrolyzer system that has superior performance to almost any system in the market — high current densities and the largest membranes leading to higher hydrogen production, high efficiencies leading to lower LCOH, and wide dynamic range and fast turndowns to seamlessly integrate with renewables. In addition to its Silicon Valley factory, Verdagy operates its R&D and highly automated commercial pilot plants in Moss Landing, California, where it continues to advance its cutting-edge technology.