Feature: Logistical woes and high pump prices stall California H2 market development

California's success in decarbonizing its transportation sector using hydrogen as a zero-emission fuel option is being hampered by the lack of reliable infrastructure and prolonged elevated hydrogen prices at fueling stations, according to an analysis by S&P Global.

By requiring all new car sales to meet the net zero-emission threshold by 2035, the California Air Resource Board's (CARB)

aims to reduce emissions and promote the widespread adoption of ZEVs.

Despite the progress made towards ZEV adoption, the hydrogen fueling system continues to face challenges across the supply chain.

ZEV sales have grown 118% from 2018-2023, with electric vehicle sales making up most of the volume while the adoption of hydrogen fuel cell electric vehicles (FCEV) has been sluggish, according to ZEV and infrastructure data from the California Energy Commission (CEC).

The CEC held a joint public workshop on Nov. 6, 2023, with CARB, the Governor Office of Business and Economic Development (GO-Biz) and several of the hydrogen fueling station providers to discuss the fuel cell driver experience and barriers to commercialization and deployment of FCEV's.

The state's hydrogen fueling network had "poor reliability" that has frustrated drivers and stifled the proliferation of FCEVs, California's District 29 Senator Josh Newman said at the workshop.

Some key challenges affecting hydrogen supply and prices according to an analysis by S&P Global are: fuel reliability, starting with challenges associated with cost of feedstocks haven risen due to Russia's invasion of Ukraine; station deficiencies; unforeseen costs of operating and maintaining fueling stations, and the decline in Low-Carbon Fuel Standard (LCFS) credit values.

All of these challenges reflect the immature state of the FCEV fueling infrastructure and slow the transition away from fossil fuel based internal combustion vehicles.

The fuel price reality: 3 times gasoline

Platts last assessed California's retail hydrogen price at $33.48/kg Jan. 4, 2023, which is the weighted average hydrogen price offered at retail fueling stations across the state. The price has risen 112% from when Platts began the assessment in September 2021, according to S&P Global Commodity Insights data.

On a fuel basis comparison with conventional gasoline sold in California, the Platts hydrogen price is three times more expensive than gasoline after being adjusted for fuel efficiency.

"We look at costs between $7 and $8/kg ... and then you layer on the [LCFS] and the transportation market and the [hydrogen] production tax credit ... you can get close to $5/kg," said Tyson Eckerle, Senior Advisor at GO-Biz, and member of the Alliance for Renewable Clean Hydrogen Energy Systems, or ARCHES said during the CEC's webinar.

According to pricing data collected by S&P Global for hydrogen projects being developed in California, at-gate pricing has been offered in the range of $6-12/kg after including the environmental attributes that help it meet the 33% renewable content rules and excluding costs associated with transportation and IRA subsidies.

All hydrogen sold in California receiving state funding must meet the 33% minimum renewable requirements as set up by current incentive programs and SB 1505 (Lowenthal, Chapter 877, Statutes of 2006). Other CEC grant funding and hydrogen refueling infrastructure grants require a minimum of 40% renewable implementation.

CARB in its 2022 annual market evaluation projected total hydrogen sales could exceed 3.5 million kg/year, but in its latest report, projections were updated to be more conservative, instead expecting to meet the 3.5 million threshold, not surpass it.

Low FCEV sales and high fuel prices contributed to a plateau in hydrogen fuel usage in 2023, said Brian Murphy, Senior Hydrogen and Low-Carbon Fuels Analyst at S&P Global Commodity Insights.

The effects of supply disruptions

Shane Stevens, CEO of First Element Fuels and True Zero, California's largest hydrogen fueling provider said in the CEC workshop that its company continued to improve the reliability of supply at its stations and the supply chain around them despite the rising cost of production and of delivered hydrogen, reflected in pump prices.

Matt Miyasato, Vice President at First Element Fuel said the cause for over 10 True Zero stations being taken offline at the start of October was, "the gaseous hydrogen supply in Southern California is currently halted because of technical issues at the supply which is in Ontario."

Miyasato's sentiment was echoed by another supplier, Iwatani Corp. of America.

"Hydrogen costs and the value of LCFS credits have a significant impact on our business case, which has caused retail prices to increase," Iwatani leaders told S&P Global Commodity Insights.

Other stations operators— such as Shell Hydrogen, Iwatani and Messer — also took several stations offline over November and December for similar reasons, with an operator for Shell Hydrogen telling S&P Global that it was related to "site enhancements."

Station refueling availability "has again fallen to around 60%, with recent lows around 45%, and recent highs only reaching 77%," CARB noted in its 2023 Hydrogen evaluation report published in December 2023. "... network availability has remained low in the past year, largely due to challenges with station equipment."

The availability of hydrogen fuel, equipment failures and challenges in the supply chain for replacing and finding the proper parts have been other reasons for fueling station downtime, according to an analysis by S&P Global.

On the other hand, transit agencies in the state using hydrogen fuel cell buses have not been exposed to the fuel supply disruptions and pricing volatility that the light-duty vehicle (LDV) sector faces. This is because transit agencies structure long-term fixed price hydrogen supply contracts that meet their larger volumes and O&M needs, relieving risk from their operations, according to data collected by S&P Global.

How LCFS credits affect the market

"We've kind of lost that incentive from the LCFS program that we were... [dependent] on in order to bridge us to the future where we can get that equipment at scale, [get it] reliable, and do it at a price that's competitive with gasoline," Stevens added.

The rise in renewable fuels and slow recovery of fossil fuel demand since COVID has led to a large build of LCFS credits, leading to a surplus and lower credit prices, said Erin Tully, Environmental Commodity Analyst at S&P Global.

Despite a decline of 58% in LCFS credit values and rise in hydrogen pricing of 112% over Q3 2021 to Q4, 2024, the credit revenue generated per kilogram of hydrogen dispensed under the LCFS fell just shy of 24% to $6.20/kg from $8.16/kg through to Q2 2023, according to an S&P Global analysis.

CARB proposed regulatory changes for LCFS in response to the surplus of credits that will be voted on in March, Tully added.

Hydrogen's role as a zero-emission fuel and ZEV options

An initial proliferation of reliable hydrogen fueling stations and network would improve the fuel's convenience and could help boost HFCV customer adoption, said Andrew Martinez, a CARB representative.

Supporting CARB's commitment, LCFS credits awarded to hydrogen infrastructure were higher compared to credits awarded to fuel generation, even amidst the decline and stagnated growth in fuel credits over Q2 2022 to Q1 2023, CARB's quarterly LCFS data showed.

In the near- to medium-term, state ZEV mandates leading to bulk purchases of FCEV trucks and buses for commercial or municipal fleets are the most likely path to a large-scale hydrogen market for transportation, Murphy said.

Alison Hawkins, part of Air Product's Hydrogen for Mobility business, said during the workshop that by 2027 about $15 billion could be invested in new clean energy projects and the infrastructure behind the company's six fueling stations in southern California. She said the selection of ARCHES as one of the seven [Department of energy] hydrogen hubs will also lead to "tremendous investment" in the state.

"The challenge today is waiting for those investments to come to fruition," Hawkins said.

Air Products and Linde could not be reached for questions from S&P Global with regards to the recent supply disruptions and hydrogen challenges mentioned in this analysis.

Platts is a part of S&P Global Commodity Insights.