HYDROGEN’S PRESENT AND FUTURE IN THE US ENERGY SECTOR

Introduction

Overview

According to the International Energy Agency (the “IEA”), hydrogen is one of the “biggest innovation opportunities” to reduce global carbon dioxide (CO₂) emissions to net zero by 2050, a widely accepted global target to avert the worst effects of climate change.^[1] Because it is an energy-dense molecule that can be used in place of oil and natural gas products in many applications, but does not emit CO₂ when consumed, hydrogen has the potential to become an essential sustainable fuel and feedstock in the U.S. and globally.

Although the U.S. already produces significant quantities of hydrogen, production predominantly uses hydrocarbon feedstocks and industrial processes that release carbon dioxide and other greenhouse gases into the atmosphere. The adoption of other, cleaner modes of hydrogen production in the U.S. is still in very early stages.

This article explores: (i) where the U.S. hydrogen industry is today, (ii) where it needs to be to facilitate a net zero future and (iii) the challenges that need to be overcome to make this happen.

The Hydrogen Rainbow

Different hydrogen production processes have been tagged with different colors. The brighter colors (green and blue) generally refer to hydrogen produced using processes that require lower greenhouse gas emissions and the darker colors (grey, brown and black) refer to higher emissions and pollutants.

Green hydrogen is produced entirely by renewable electricity, such as solar or wind power, which powers an electrolyzer that splits water into hydrogen and oxygen.

Pink hydrogen is produced using nuclear power instead of renewable power to electrolyze water.

Blue hydrogen is produced using steam to separate hydrogen from natural gas, causing significant carbon emissions, which are captured and sequestered. If renewable power is used for production or carbon emissions are limited by the separation technology (for example, because the carbon is captured in a solid rather than a gas form), such hydrogen is sometimes referred to as “turquoise” (i.e. having both blue and green elements).

Grey hydrogen is produced just like blue hydrogen, except carbon emissions are not captured and sequestered, but instead are released into the atmosphere.

Brown (made from brown coal) and black hydrogen (made from black coal) are produced via gasification, which separates the hydrogen and carbon dioxide in carbon-rich materials, releasing the carbon dioxide into the atmosphere (if the carbon dioxide is captured and sequestered, the hydrogen production may be referred to as blue).

The US Hydrogen Industry Today

Production

Approximately 10 million metric tons of hydrogen is produced in the U.S. annually, equivalent to just over 1 quadrillion BTUs per year (1 percent of U.S. energy consumption). Currently, over 95 percent of U.S. hydrogen production is grey. Given that grey hydrogen production produces ten times as much CO₂ as it does hydrogen (by weight), this is a highly emissions-intensive industry. Although green and blue hydrogen projects are starting to emerge, these projects are small and do not substantially mitigate the environmental effects of current hydrogen production in the U.S.

Consumption

Today, almost all hydrogen produced in the U.S. is used for refining petroleum, treating metals, producing ammonia for fertilizers and processing foods.

Storage/Transport

Most hydrogen in the U.S. is transported using dedicated infrastructure, consisting of 1,608 miles of active pipeline – over 90 percent of which is located along the Gulf coast of Texas, Louisiana and Alabama, serving refineries and ammonia plants in the region. Other lengthy pipelines are located in Illinois and California. The California Public Utilities Commission has authorized funds for a pilot test and demonstration of hydrogen blending into existing California natural gas pipelines by the California Energy Commission. And several new hydrogen pipelines are being considered in different parts of the U.S.

Compressed hydrogen gas is also transported by truck, railcar, ship or barge in high-pressure tube trailers primarily for distances of 200 miles or less.

Transportation Sector

Several vehicle manufacturers have begun making light-duty hydrogen fuel cell powered electric vehicles available in the U.S. where there is access to hydrogen fueling stations. Currently, nearly all of the more than 40 hydrogen vehicle fueling stations nationwide are located in California. Significant growth is expected in the coming years for hydrogen fuel for larger vehicles, particularly for municipal, commercial and industrial transportation, which are more difficult to fully decarbonize using battery electric technology because of the weight of the batteries, the lengthy distances such vehicles travel and the need to refuel quickly.

Hydrogen-to-Power

Lastly, as of the end of 2020, there were more than 150 operating fuel cells (technology that converts hydrogen to electricity) at approximately 110 industrial facilities in the U.S. with a total capacity of about 250 MW.

The US Hydrogen Industry Future

Targets and Milestones

Earlier this year, the Biden administration issued executive orders^[2] committing to the following carbon reduction targets: (i) a 50 percent reduction from 2005 levels of economy-wide net greenhouse gas pollution by 2030; (ii) a 100 percent carbon pollution-free electricity sector no later than 2035; and (iii) net-zero carbon emissions by no later than 2050. These targets are generally consistent with the Paris Agreement, which was signed and ratified by almost all of world’s developed nations.

These are ambitious goals that will require the U.S. to scale up a range of new clean energy technologies – in addition to expanding renewable generation and transmission and distribution infrastructure.

Government Support for Private Investment

Hydrogen is widely recognized as a critical technology for the decarbonization of the U.S. economy, especially “hard-to-decarbonize” sectors such as steel, cement and fertilizer production, transportation, off-grid power generation and building heating. The U.S. Department of Energy (“DOE”) takes the view that “[c]lean hydrogen is a form of renewable energy that – if made cheaper and easier to produce – can have a major role in supporting President Biden’s commitment to tackling the climate crisis.”^[3] Accordingly, this summer DOE announced the “Hydrogen Shot,” a “1-1-1” goal to cut the cost of clean hydrogen to $1 per 1 kilogram in 1 decade, an 80 percent reduction from its current estimated average cost of $5 per kilogram.^[4]

Consistent with this goal, the Infrastructure Investment and Jobs Act, currently being discussed in the U.S. Congress,^[5] would provide $8 billion to establish at least four regional clean hydrogen hubs for the production, processing, delivery, storage and end-use of clean hydrogen. The bill would also provide $1 billion for hydrogen research and development focused on the commercialization of green hydrogen and $500 million for the advancement of clean hydrogen production, processing, delivery, storage and use. A U.S. $3-per-ton subsidy for low carbon hydrogen production, proposed in the bill, could significantly incentivize production by bringing down the price of green, pink, blue and turquoise hydrogen relative to grey hydrogen and even natural gas itself.

Both public officials and industry recognize the important role hydrogen could play in the decarbonization of the U.S. economy. Yet, as the world’s largest economy, the U.S. is still far from the investment levels required to achieve its net zero goals. In its 2021 Global Hydrogen Review, the International Energy Agency (the “IEA”) estimated that a $1.2 trillion investment in hydrogen is needed globally if the world stands a chance of reaching net-zero emissions by 2050. According to the IEA, the U.S. and other major countries need to move faster and more decisively on policy measures and incentives to enable hydrogen and other clean energy technologies to truly emerge.

Challenges

Production Cost

Per the IEA, “the main obstacle to the extensive use of low-carbon hydrogen is the cost of producing it.”^[6] Currently, hydrogen from renewable sources costs about $5 per kilogram to produce in the U.S., with the cost heavily driven by the cost required to acquire and install renewable power equipment, electrolyzers and hydrogen compressors. As noted above, the DOE has a goal to unlock new markets for hydrogen, including steel manufacturing, clean ammonia, energy storage and heavy-duty trucks, to achieve an 80 percent cost reduction to bring the cost to $1 per kilogram.^[7]

With technological advances and economies of scale, the cost of making hydrogen with solar photovoltaic (“PV”) electricity can become competitive with hydrogen made with natural gas, according to the IEA’s Roadmap to Net Zero by 2050.^[8] The Roadmap^[9] provides a scenario in which hydrogen from renewables falls to as low as $1.30 per kilogram by 2030 in regions with excellent renewable resources and to $1 per kilogram in the longer term. This scenario makes clean hydrogen from solar PV cost-competitive with hydrogen from natural gas, even without carbon capture, usage and sequestration (CCUS).

The cost of automotive fuel cells and electrolyzer units is also expected to come down significantly thanks to technological advances and economies of scale, though we may ironically see cost increases in the short term due to demand for equipment significantly outstripping supply.

Infrastructure

The next biggest obstacle to widespread adoption of green (and blue) hydrogen in the U.S. is the slow pace of development of low carbon hydrogen infrastructure. Whereas large megaprojects are already beginning to be developed in Australia, the Middle East, the UK, Europe and Africa, the U.S. is regarded by many as a sleeping giant, with world-leading production potential and consumption demand waiting to be unlocked.

Achieving the Biden administration targets using green hydrogen, the cleanest hydrogen, would require massive investment in renewable sources and related power grid infrastructure to connect renewable power to green hydrogen producing hubs or plants.

On the consumption side, hydrogen prices for consumers are highly dependent on how many refueling stations there are, how often they are used and how much hydrogen is delivered per day – as well as the cost of competitor fuels and, of course, the market share increasingly occupied by battery electrification which is very well suited to personal vehicles. Tackling this will require planning and coordination that brings together federal, state and local governments, industry and investors.

Offtake

There is currently no merchant market for green hydrogen in the U.S. (or indeed elsewhere) and developers and lenders are grappling with how to manage the associated market risk exposure. To be considered bankable, green hydrogen projects will generally require long-term, fixed price offtake contracts with creditworthy offtakers, structured on a take-or-pay basis, similar to early LNG projects.

However, there is a limited pool of creditworthy offtakers with the risk appetite and downstream distribution network to offtake green hydrogen at utility scale. It is difficult for producers to commit to steady and predictable production profiles because of the reliance on renewable power sources, making volume commitment arrangements complex.

Regulatory

The lack of regulation and proper incentives currently limit the development of a clean hydrogen industry. The U.S. government and industry would also need to work together to ensure the regulatory environment does not pose an unnecessary barrier to investment.

U.S. regulations setting criteria for description of hydrogen as green, and acceptable carbon limits for describing hydrogen as blue or “low carbon,” do not yet exist. Therefore, first mover developers must be conservative so as to not inadvertently exclude themselves from a particular market. This drives up the time and cost of engineering and potentially reduces the operating efficiency of the projects, making hydrogen unnecessarily more expensive for consumers. It is important for the U.S. to define green criteria for hydrogen projects that are consistent with global standards and provide certainty for project developers and lenders. All aspects of the supply chain should be considered in determining the carbon content. Ideally, the U.S. would work with the European Union and Asian countries to set global standards allowing for a traded market similar to crude oil and LNG.

Conclusion

The U.S. is currently at an inflection point in the decarbonization of its economy. Hydrogen is expected to play a crucial role as an essential clean fuel for the future of major U.S. industrial sectors. To meet the targets set by the Biden administration, regulators and industry participants need to come together within a framework that will incentivize the development of large scale, clean hydrogen projects. Challenges ahead are significant but less so than the consequences of staying the course, and potential market participants are encouraged to consider the opportunities of first-mover advantage before the rush starts.