CERAWEEK: More policy certainty needed to unlock hydrogen capex in US

Decreasing investment risk around hydrogen projects in the US will be key to unleashing new financing, but doing that in the absence of a carbon price will make that evolution tricky, members of a panel on the hydrogen economy said March 8.

In the US as in Europe, natural gas prices have remained significantly less expensive than clean or low-carbon hydrogen.

Although this picture has changed recently in Europe as the war in Ukraine has shot up gas prices to record highs, Geoff Wright, Brookfield Renewable Partners senior vice president, said market fundamentals will likely bring gas prices back down in the near term. Wright was on the panel at the CERAWeek by S&P Global energy conference in Houston.

European hydrogen developers have a distinct advantage over their American counterparts, the panelist said. In Europe, hydrogen developers have a much easier time raising necessary financing to get projects done, and that's thanks to the European Union's price on carbon.

"I think clear carbon pricing is critically important to have that financial model, because these are capital intensive projects," Wright said. "You need some certainty that the revenue is going to be there to support that."

While the EU has long had its emissions trading system in place, with prices having reached record highs in recent weeks, attempts to pass such legislation in the US have consistently come up short. Last year, for instance, there were roughly five different proposals to introduce a carbon pricing system, including fleeting considerations to include the policy within the Biden administration's infrastructure bill and Build Back Better Act.

"The dynamics in Europe and the US are fundamentally different, and hopefully that's going to change in the US," said Christophe de Mahieu, director of the Belgian green hydrogen supply company TES-H2.

Rather, clean energy developers in the US have relied on tax incentives, which are seen by investors as potentially risky given the fact that a new presidential administration could withdraw the incentive according to political whims.

"It's certainly a risk space, and it's probably is why we are in the million of dollars of capex for these projects today," Wright said. "And when we figure out how to get more certainty around that revenue side, that's what's going to unlock the billions of dollars [for capex]."

This creates an environment where blue hydrogen, or hydrogen produced using conventional methods paired with carbon capture technology, may be more able to scale up in the US than green hydrogen. Blue hydrogen is significantly less capital intensive than green, and it will likely retain that advantage so long as US natural gas prices remain low. It also provides the option of using the carbon byproduct to create additional revenue streams, like enhanced oil recovery.

According to Platts price assessments by S&P Global, the cost of green hydrogen (including capex) in the US Gulf Coast was $4.05/kg as of March 7, while the cost of producing conventional hydrogen using steam methane reforming (including capex) without carbon capture was $1.25/kg.

"The objective is to decarbonize," said Mahieu. "Hydrogen only makes sense if you want to decarbonize. But once you decide to decarbonize, it's a fantastic molecule."