Blue hydrogen projects are advancing in the U.S. despite speculation that market or policy forces favoring zero-emission green hydrogen technology could make the natural gas-derived fuel redundant.

At least nine U.S. states in the Midwest, Southwest and Gulf Coast are vying for federal funding to develop a blue hydrogen economy. Exxon Mobil Corp. is also advancing a blue hydrogen project in Baytown, Texas, the company said in its July 29 earnings report.

The conventional wisdom has been that blue hydrogen is the more prudent investment. In July, however, London's Financial Times reported that surging gas prices in Europe, driven by the Russian invasion of Ukraine, have practically "extinguished" the case for blue hydrogen on the continent. An analysis earlier in July by Institutional Shareholder Services Inc. said blue hydrogen assets run the significant risk of becoming "white elephants."

But even as production costs for blue and green hydrogen are anticipated to converge, blue hydrogen is not expected to be priced out any time soon in the U.S., according to S&P Global Platts price forecasts for the Gulf Coast.

"I think there's a lot of assumptions that go into" the Institutional Shareholder Services statement, said Kirt Conrad, a founding member of the Ohio Clean Hydrogen Hub Alliance. One is the assumption that renewable electricity, used to power green hydrogen, will be cheaply available as electric vehicles demand more from the grid.

"I just don't see how we can move forward without a blue hydrogen strategy, at least not here in Ohio," Conrad said.

Hydrogen is a colorless, clean-burning fuel, but most hydrogen production today uses steam methane reforming, which is carbon-intensive. The race to decarbonize hydrogen tends to focus on two technologies: blue hydrogen and green hydrogen. Blue hydrogen applies carbon capture technology to a natural-gas-based process, while green hydrogen relies on zero-emissions electricity to run an electrolyzer that splits water molecules into hydrogen and oxygen.

The U.S. Energy Department has made a point of being technology-neutral in its funding opportunities for hydrogen development, defining its standards instead by the carbon output per kilogram of hydrogen produced. The recently introduced Inflation Reduction Act, if enacted, would award hydrogen production tax credits based on similar emissions standards. Hydrogen producers must limit their carbon emissions to 0.45 kg per kg of hydrogen — about 5% that of gray hydrogen made from natural gas — to be eligible for the full tax credit. Projects that exceed this benchmark are only eligible for up to one-third of the tax credit.

Making the case for blue hydrogen

Only hydrogen produced from electrolysis, powered by zero-carbon electricity, is 100% carbon-free. So far, most blue hydrogen projects have been able to capture about 60-90% of carbon dioxide emissions, according to industry watchers.

But "the reality is, there's not many actual 'green' [projects] that would meet that definition where they only operate on renewables," said Mike Hopkins, CEO of hydrogen hub developer Bakken Energy LLC. "Most of the ones that are out there are actually tied to the grid. And when they don't get their renewables, they're using grid power, in which case, they're nowhere near as clean as our project or some of the [other] 'blue' ones."

In February, Bakken Energy proceeded with plans to build a blue hydrogen hub in North Dakota, announcing the Mandan, Hidatsa and Arikara Nation as its natural gas supplier. The infrastructure developer and Mitsubishi Power Americas Inc. plan to produce hydrogen by autothermal reforming, a process that captures 96% of its carbon dioxide emissions, according to Hopkins.

Autothermal reforming differs from steam methane reforming in that carbon capture is incorporated into the process, rather than added as a retrofit. Air Products & Chemicals Inc.'s development arm plans to build hydrogen facilities using the same method in Louisiana and Alberta.

"It's not a new technology, but it's never been deployed at the scale that we're talking about, so there's a technological risk," Hopkins said. "I think any engineer would tell you it's a small risk. And that's the view of our shareholders, our financiers."

Some in the industry still see a market for blue or gray hydrogen as businesses and public sector off-takers not yet committed to net-zero carbon emissions transition from fossil- to hydrogen-powered technologies.

"If you wait until the perfect solution, we'll never do anything," said Conrad, who is also CEO of Stark Area Regional Transit Authority in Canton, Ohio. The public transportation company has replaced 20% of its fleet with hydrogen fuel cell vehicles, Conrad said, and continues to make headway, even if that means burning gray hydrogen in the short term.

The Ohio Clean Hydrogen Hub Alliance is one of about two dozen initiatives in the U.S. to develop a network of hydrogen producers, off-takers and infrastructure. The Ohio initiative, while focused on building off the region's natural gas abundance, plans to supplement that blue hydrogen with green as well as pink, which uses nuclear power.

"A hub is not necessarily one big user and one big producer," Conrad said. Rather than looking into the "crystal ball" to predict natural gas and electricity prices over the next decade, according to Conrad, the industry is better off insulating itself from price fluctuations with a more diverse hydrogen mix, not less.

Shades of blue

But blue hydrogen is not just subject to market forces. Politics are "shaping up to play a significant role" in whether blue or green hydrogen will dominate, Institutional Shareholder Services wrote in its analysis.

According to Hopkins, carbon dioxide output — rather than the blue or green label — is the better indicator for investors, bringing a blue hydrogen project that achieves 96% carbon capture rates almost on par with green. A blue hydrogen project that involves retrofitted technology and captures only 60%-90% of carbon dioxide emissions, on the other hand, may be "a gamble," Hopkins said.

"If it doesn't meet the DOE's definition of clean hydrogen, I would say that's a risky bet. It's not that the DOE determines the market. But I think that DOE has a lot of influence," Hopkins said. "But I think the biggest thing is if you're not producing a product that the market wants, then yeah, you have a high risk of failing as a business."

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