US green hydrogen market grapples with growing renewables demand, hourly matching

Developers of "green hydrogen" production facilities in the US are grappling with sourcing renewable energy and certification requirements under proposed federal production tax credits -- amid a landscape of fierce competition for electricity with power-hungry data centers.

Under the US Inflation Reduction Act's draft rules for 45V hydrogen production tax credits, developers of green hydrogen, produced by separating water using electrolyzers powered by renewable energy into hydrogen and oxygen, must follow what are known as the "three pillars": hydrogen production after 2028 must match hourly renewable energy consumption; the energy supplied must be incremental, meaning it is a new facility; and it must be regionally produced and procured.

"Adding conditions to how electrolytic hydrogen projects procure power puts them in disadvantage to other buyers that do not have to comply with those conditions," an official of EDP Renewables, a Houston-based renewable energy producer, told S&P Global Commodity Insights. The 45V conditions "are not mandatory and just aim to evaluate if those projects are eligible to receive tax credits to incentivize the production of clean hydrogen," the official said.

EDPR has saidit supports a transition period until 2030, instead of the initial 2028 start date, to address challenges in fully implementing hourly renewable energy matching for hydrogen production. But grandfathering of preexisting renewable facilities for the hourly matching requirement would result in higher emissions and create distortions in the future hydrogen market, it added.

"We're going to comply with 45V no matter what," said Matt McMonagle, CEO and founder of Colorado-based NovoHydrogen.

The green hydrogen developer expects to begin construction next year, with operations starting in early 2026, McMonagle said.

"I will build my own renewables that are physically connected to my electrolyzers," he said. "Not only is that the cheapest electron I can get, it's of course clean; because I can physically track the electron involved in producing my hydrogen as it's connected to me."

"For other projects, I will be grid connected, and therefore, be acquiring green power through the grid," McMonagle said, explaining that dedicated renewables are not suitable for all NovoHydrogen's proposed projects due to the significant amounts of renewable energy, often in the hundreds of megawatts, and the required "hundreds, if not thousands of acres" of necessary land.

Some supporters of the three pillars policy have emphasized that hourly matching and regional sourcing help reduce the risk of hydrogen producers exploiting easily accessible and sometimes less-clean energy while producing hydrogen in other locations, which could result in a net increase in carbon emissions.Currently, only PJM-GATS among US tracking systems offers hourly REC trading.

Renewable energy competition

States with initiatives for green hydrogen production, especially California, Oregon and Washington, determine the cleanliness of the energy used by the carbon intensity score of hydrogen, while 45V tax incentives are linked to the utilization of renewable energy. Thus, certifying renewable energy usage is crucial for securing a primary revenue stream for such projects.

"Energy supply is an integral part of project development, adopting a vertically integrated approach allows us to manage both the availability and cost of renewable energy," said Pedro Pajares, US CEO of H2B2 Electrolysis Technologies. The company's SoHyCal project is the only operational renewable hydrogen facility in California. "We consider hourly matching a competitive disadvantage for grid-connected hydrogen projects," he said.

Corporate energy procurement in the US is expected to require another 13 GW/year of utility-scale renewable electricity through 2035, according to Commodity Insights' US Corporate Procurement Outlook, released in May. If more corporations increase their ambitions, this could rise to as high as 19 GW, the report said.

As the power grid becomes increasingly strained by demand and capacity due to population growth, hydrogen developers are competing with other market participants that have seemingly unlimited budgets, including the growing number of data centers and major tech companies.

"For [grid-connected hydrogen] projects, we are indeed observing increased renewable energy competition due to artificial intelligence growth and overall load growth, particularly from the electrification of transportation and heating," McMonagle said. One of the most appealing aspects of behind-the-meter -- not connected to the grid -- hydrogen production is not having to wait in such interconnection queues, he added.