Commodities 2023: US clean hydrogen sector may see 'start of exponential growth'

The US' nascent clean hydrogen economy, which now has support from the most generous subsidy regime in the world, is expected to see a slew of new hydrogen projects begin to take shape in 2023 while questions remain over key policy and funding allocations.

The subsidy regime that has set the stage for the US clean hydrogen sector came in two parts. The first was the Infrastructure Investment and Jobs Act passed in late 2021, which will distribute up to $8 billion to develop six to 10 regional clean hydrogen hubs. Then came the Inflation Reduction Act, which will provide hydrogen producers between 60 cents/kg and $3/kg in tax credits depending on the hydrogen's carbon intensity levels.

The IRA has already prompted several new hydrogen project announcements in the latter half of 2022, most recently the $4 billion green hydrogen production facility in North Texas being jointly developed by Air Products and AES Corp. With 1.4 GW of dedicated renewable power, the facility will likely enjoy both the IRA's maximum $3/kg hydrogen production tax credit on top of tax credits stemming from its wind and solar assets.

Those kinds of announcements are expected to keep coming in 2023, said Brian Murphy, hydrogen analyst at S&P Global Commodity Insights.

"I think the regulatory and subsidy regime took shape in 2022 -- we now know what the flows of government money are very likely to look like, at least over the near-to-medium term," Murphy said. "We also have clarity now that the government is going to take a carbon intensity-focused approach, which means that producers are going to need to consider that when evaluating their projects at the front-end engineering and design stage."

"I would expect a lot of front-end engineering work [in 2023] and a lot of contracts to companies that do that kind of thing," he said.

According to S&P Global data, around 240 MW of electrolysis capacity is either under construction or permitted to come online in 2023 in the US, while another 136 MW of capacity have been announced or are in the early planning stage. Together, they are equivalent to about 7% of the global electrolyzer production capacity expected to be added in 2023, compared to Europe's 16%.

However, US levels are projected to make gains in the following year. In 2024, the US is slated to have 3,169 MW of electrolyzer capacity come online, or about 17% of global added capacity compared to Europe's 35%.

The groundwork being laid now, Murphy said, will begin to reflect in total US capacity figures beginning in 2025 through the rest of the decade.

"It's still very early days," he said. "It's the very early start of the exponential growth you need to get to potentially hundreds of gigawatts by 2050."

Hub funding

One of the key spending decisions still on the table is how the IIJA's $8 billion for hydrogen hub funding will be divided up between regions. Regional groups competing for a slice of the funding submitted concept papers to the Department of Energy Nov. 7, and final applications are due April 2023.

That timeline means that federal hub funding likely won't begin flowing until 2024. And while many hydrogen investors and project developers will mostly be locating their facilities around these hubs, it's reasonable to expect projects to begin setting plans ahead of the DOE's hub announcements, said Joseph Webster, senior fellow at the Atlantic Council's Global Energy Center.

"I think you are going to see movement ahead of the hubs, especially in spaces where hydrogen is already a use-case," he said.

One of the regions most likely to receive federal hub funding is the US Gulf Coast, according to Webster, thanks to the region's surfeit of clean energy resources -- sun and solar assets across West Texas and natural gas resources with ample CO2 capture and storage capacity along the Gulf Coast. Organizers spearheading the Houston-based hub said they aim for it to produce about 3.2 million mt/year of clean hydrogen.

"I don't think it's irrational to place bets on that," Webster said. "Can you imagine the controversy that would stir if Houston didn't receive significant funding for a hydrogen hub? That would be a shock."

Measuring carbon intensity

The second key policy decision relates to how the federal government decides to measure and verify the lifecycle emissions of a project's hydrogen, which will ultimately determine the project's tax credit amount. Per the law, the credit would offer $3/kg of hydrogen produced with no more than 0.45 kilograms of CO2 emissions, and between 60 cents/kg and $1.02/kg for hydrogen produced with between 4 kg and 0.45 kg of CO2 emissions.

According to the bill text of the IRA, lifecycle emissions measurements will be based on Argonne National Laboratory's Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies Model, known as GREET. The GREET model was originally developed to estimate the emissions output of various vehicle types. But how exactly the DOE and producers will apply the GREET model to the hydrogen value chain remains to be seen.

In November, the Treasury Department and the Internal Revenue Service requested public input on how hydrogen lifecycle emissions rates should be calculated, including how hydrogen production processes should be required to verify the energy inputs, and what methodologies or technologies should be used for monitoring.

"Whether the tax credits will be a climate hit or miss almost entirely hinges on the guidelines that the IRS and [US] Department of Energy will enforce on hydrogen producers to account for their emissions," Rachel Fakhry, a senior advocate at the Natural Resources Defense Council, wrote in a Dec. 2 letter to the Treasury Department. A bad accounting system "would dole out large subsidies to dirty hydrogen sources."