The US has a robust domestic hydrogen market, but as clean energy developers chase federal incentives for low-carbon hydrogen production, legacy customers have shown little interest in paying a green premium.

Hydrogen is colorless and odorless, whether produced from renewable energy or natural gas. The seemingly fungible commodity can also be costly to transport, setting up the expectation that large domestic offtakers — particularly those in agriculture and refining — would be the first stop for "clean" hydrogen producers.

Despite this, stakeholders say hydrogen has defied market principles, with green and blue hydrogen developers targeting international customers and novel end uses while the majority of US customers buy gray hydrogen.

"I'm really surprised at how quickly people are developing real projects for the intercontinental shipping or transport of energy, largely in ammonia form," Raffi Garabedian, CEO of electrolyzer technology developer Electric Hydrogen Co., said in an interview.

The trend has taken off on the Gulf Coast, which is already a major worldwide energy exporter. One corporate coalition that includes Chevron Corp. and L'Air Liquide SA hopes to establish Houston as the center of the global clean hydrogen economy. The project was one of dozens earlier this year to apply for funding from the US Energy Department's $8 billion grant program for the low-carbon fuel. Other contenders along the coast of Texas and Louisiana, including one application led by the Port of Corpus Christi, have announced similar plans for the funding.

Canadian developers on both coasts are also laying the groundwork to ship out clean hydrogen, driven in part by political commitments. In August 2022, Nova Scotia company EverWind Fuels LLC signed a tentative agreement to export 500,000 metric tons of green ammonia per year to help Germany shore up its energy supply. Meanwhile, Alberta's fossil fuel industry is advancing plans to send blue ammonia, produced from natural gas using carbon capture technology, to Asian customers via Canada's west coast.

At first glance, the development pattern is "one of the last things that should happen, because you're competing against other resources that are established and cheap," Garabedian said. "But it turns out that for various reasons, that's part of the business that will probably emerge fairly quickly and drive much, much larger scale than other industrial or chemical use cases."

One reason is geopolitical, as the Russian invasion of Ukraine has caused energy prices to skyrocket in Europe. Other projects plan to target countries with high native energy costs, including Japan and South Korea, which are already importing North American LNG. Those same import regions are "very committed to decarbonizing their economies in a way that here in the US, we're just starting to realize," Garabedian added.

Slow adoption in agriculture sector

Meanwhile, the "obvious use case" for hydrogen — the agriculture industry — has been slow to decarbonize by switching to clean hydrogen, Garabedian said. "It's not mobilizing quickly, and there's really not much willingness to pay any green premium whatsoever for low-carbon or zero-carbon fertilizer," he added.

About 43% of hydrogen sold worldwide in 2021 went to ammonia producers, according to S&P Global Commodity Insights' March Hydrogen Market Monitor. The rest of the demand came from refining, petrochemicals and other incumbent offtakers, with "new sectors," such as transportation and the power sector, accounting for virtually 0%. Nearly all demand was met by gray hydrogen, produced using fossil fuels without carbon capture.

But as green and blue hydrogen production scale, the majority of that supply through 2030 will go toward novel or unknown end uses, according to the quarterly analysis.

As of early June, electrolytic hydrogen was valued at around $12 per MMBtu on the Gulf Coast, excluding capital expenditure costs, according to S&P Global Platts cost-based valuations. Hydrogen produced by the carbon-intensive steam methane reforming process hovered at around $2.50 per MMBtu.

Industry watchers say clean hydrogen's price premium is not the only factor preventing incumbent customers from decarbonizing. Industrial gas companies may be locked into long-term contracts with natural gas suppliers, while fertilizer plants that produce their own gray hydrogen on-site would have to write off the cost of equipment. "Breaking into that ecosystem is a very slow, involved and lengthy process with relatively little motivation on the part of the consumers to make the change," Garabedian said.

Suppliers of gray hydrogen or ammonia, now branching into lower-carbon products, also note different sources of demand for the otherwise identical molecules. CF Industries Inc. executive Bert Frost, when asked about low-carbon ammonia demand at a May 18 investor's conference, cited the maritime industry and Japanese power sector as prospects. Both would be for novel use cases — alternative fuels and ammonia co-firing with coal.

However, "when we talk to farmers and retailers, they're like, 'great, we would love to have your blue and green products. But we're not going to pay a dime more than conventional,'" Frost, senior vice president of sales and market development, said at a conference in February. "And I understand that. Just like you choose your gas station and what gas you put in your car, all of these are economic decisions."

The agriculture industry's reticence has not stopped CF Industries, the world's largest ammonia manufacturer, from preparing for demand from the sector in the long run. The company plans to invest nearly $200 million to install carbon capture equipment at its Donaldsonville, La., plant, enabling the production of up to 1.7 million metric tons per year of blue ammonia. And in April, CF Industries partnered with NextEra Energy Resources LLC to develop a 100-MW green hydrogen plant in Oklahoma, supplying the production of up to 100,000 metric tons per year of ammonia for fertilizer products.

The American Farm Bureau Federation, which lobbies for agribusiness, did not immediately provide comment on farmers' demand for low-carbon ammonia products.

Paths expected to converge

Other hydrogen producers are optimistic that government incentives, along with technological development, will make the clean version cheap enough to attract gray hydrogen offtakers. The US Inflation Reduction Act of 2022 authorized tax credits worth up to $3 per kilogram of low-carbon hydrogen produced. The spending package also nearly doubled federal tax credits for companies that capture and store their carbon emissions, supporting the production of blue hydrogen.

"Most companies around the world, left to their own accord, are going to buy the cheapest product possible," Andy Marsh, President and CEO of Plug Power Inc., said in an interview. According to Marsh, the Inflation Reduction Act subsidies alone are enough to make green hydrogen cheaper than gray in the US, "if there is green available." The main cost barrier is the transportation of the gas, he added.

Unlike CF Industries, Plug Power is both a hydrogen producer and an electrolyzer manufacturer, serving mostly new use cases for the industrial gas. The company in August 2022 announced an offtake deal with Amazon.com Inc. for 10,950 metric tons per year of liquid green hydrogen, which will fuel the retail giant's forklifts and heavy-duty trucks starting in 2025.

Looking ahead, however, Marsh said hydrogen-powered vehicles — despite being one of the more visible use cases of clean hydrogen today — will make up a fraction of the market.

"It's actually going to be used in applications where gray hydrogen is used today," Marsh said. "Things like fertilizer manufacturing; it's going to be used in concrete manufacturing; it's going to be used as substitutions for natural gas in many applications."

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