DOE Selects Consortium to Bolster Demand for Regional Hydrogen Hubs
The Department of Energy (DOE) has selected a consortium that will work to foster demand for commercial clean hydrogen at seven regional hydrogen hubs (H2Hubs), which the agency in October 2023 selected to receive $7 billion in federal funding.
The Hydrogen Demand Initiative (H2DI) consortium will be tasked with designing and implementing demand-side support mechanisms, which will seek to stimulate hydrogen demand and unlock “market potential” for the H2Hubs, the DOE’s Office of Clean Energy Demonstrations (OCED) said on Jan. 17.
The effort is part of a DOE initiative announced in July 2023 that dedicates federal investments of up to $1 billion to foster hydrogen demand-side initiatives. “Hydrogen projects affiliated with the H2Hubs will be eligible to qualify for demand-side support under this initiative,” it noted.
The initiative is ultimately geared toward bolstering the growth and sustainability of the H2Hubs program by providing “improved offtake certainty,” which could allow hydrogen producers to attract private sector investment as well as end-use buyers, the OCED said. “It will also lay the foundation for broader private sector scale-up and use of the clean hydrogen market by providing price transparency and standardized contracts for the projects it supports.”
Unique Set of Expert Knowledge
The newly selected H2DI consortium will comprise EFI Foundation (EFIF), a Washington D.C.-based nonprofit headed by former DOE secretary Ernest Moniz, Intercontinental Exchange, a firm that operates financial exchanges, including the New York Stock Exchange, and intelligence company S&P Global. The H2DI, notably, also includes Dentons, one of the world’s largest law firms that specializes in energy regulatory issues, and a modeling and analysis group from the MIT Energy Initiative.
The DOE on Wednesday said one or more demand-side support mechanisms “will be determined over the course of 2024, in partnership with EFIF, S&P, and ICE, and with input from the H2Hubs and the private sector.” Possible mechanism types “include pay-for-difference contracts, revenue backstops, or off-take guarantees,” it said.
The agency noted it selected the consortium after a competitive Request for Proposal process that evaluated applicants on five key evaluation criteria: market experience and expertise, operational ability, ecosystem credibility, strength of proposal for a demand-side mechanism, and business systems and processes.
The DOE chose a third party to partner with on the hydrogen demand-side initiative to provide “more flexibility to contract with projects,” it noted. A third party also “allows DOE to access expertise in commercial contracting and project finance that the Department may not already have in-house,” it added.
“Each partner brings a unique set of expert knowledge to H2DI,” EFIF noted on Wednesday. EFIF will lead the consortium and manage activities, including performing financial and commercial analysis and developing community engagement strategies. S&P Global will market assessments, evaluate financial workflows, engage the stakeholder community for input, and provide and manage data. ICE will build the market and products (including the mechanism’s governance program), operate the demand-side mechanism platform, and provide and manage data.
The MIT Initiative said it will perform a techno-economic analysis of the hydrogen demand, perform greenhouse gas lifecycle accounting, as well as granular sector “coupling” modeling (for gas, electric, CO2, end-uses) using the modeling platform SESAME (Sustainable Energy Systems Modeling Environment). Finally, Dentons will advise on regulatory due process and permitting issues, including, as they concern the National Environmental Policy Act and the Federal Energy Regulatory Commission. It will also develop contracts, support monitoring, reporting, and verification, and create operational requirements.
A ‘Critical Step’ to Ensure Market Certainty
According to the OCED, developing a hydrogen demand-side initiative marks a “critical” step to enhance “the early commercial viability” of the H2Hubs. While the seven regional hydrogen hubs—which span Appalachia, California, the Midwest, the Gulf Coast, the American heartland, the Mid-Atlantic, and the Pacific Northwest—will receive $7 billion allocated by the Infrastructure Investment and Jobs Act (IIJA), “demand formation for new energy sources often lags the creation of new reliable supply,” the agency noted.
“Demand-side support and other ‘demand pull’ measures bridge the gap between producers, who need medium- to long-term offtake certainty for a significant portion of their projected output to secure financing to build a project, and buyers, who often prefer to buy on a short-term basis for energy inputs that are beginning to be produced at scale, like clean hydrogen,” it explained. “Demand pull” measures “have been a valuable tool in the scale-up of renewable energy technologies like wind and solar,” it noted.
The DOE said it expects to work with the H2DI consortium over the next six to nine months to design demand-side support measures. The effort will include crafting demand-side support agreements for H2Hubs hydrogen projects, which could ultimately “unlock final investment decisions and catalyze the formation of a mature clean hydrogen market.” The team is also expected to “develop an operational plan for how to administer these mechanisms once finalized,” the agency said.
In a February 2023 study evaluating hydrogen demand, EFIF suggested that recent federal incentives, including tax credits furnished by the Inflation Reduction Act (IRA) may not create adequate demand to drive the formation of a national hydrogen market, and it urged additional policy and regulatory actions. The study’s detailed techno-economic analysis of potential end-use sectors on the low end of the cost curve—including steelmaking, refining, ammonia, and methanol—suggested that clean hydrogen costs “may be competitive in the $0.27–$0.90 range, using an assumption that these industries will seek to avoid passing additional costs to their customers.”
But for most potential sources of new demand—such as hydrogen blending in natural gas pipelines, long-duration energy storage, and power generation—“this cost range may not sufficiently de-risk the switch to clean hydrogen, which requires competitive costs with incumbent and alternative technologies, familiarity with and certainty of the technology, as well as durable policy support,” it says.
The study recommends several actions, including as they relate to policy and industrial strategies, that could rapidly accelerate hydrogen use. These include calling on Congress to “significantly increase” funding for the H2Hubs program,” to incentivize additional hydrogen clusters, and a pragmatic approach on 45V, the IRA’s tax incentives designed to spur the development of clean hydrogen production.
A Concerted Push for Hydrogen
According to the DOE, clean hydrogen production for domestic demand has the potential to scale from less than 1 million metric tons per year (MMTpa) to an estimated 10 MMTpa in 2030. It estimates most near-term demand may come from transitioning existing end-uses, which currently hold a carbon-intensive hydrogen production capacity of around 10 MMTpa. The agency suggests that the “opportunity” for clean hydrogen, aligned with the DOE National Clean Hydrogen Strategy and Roadmap, is 50 MMTpa by 2050.
However, if water electrolysis becomes the dominant hydrogen production method, the DOE estimates up to 200 GW of new renewable power will be needed by 2030 to support clean hydrogen production. At the end of September 2023, the U.S. held a total capacity of about 1,180 GW, of which 321 GW was from renewables, and 96 GW was from nuclear.
But as POWER recently reported, while the Treasury Department recently released its long-awaited proposed regulations and guidance defining 45V tax credits, the measure was received with disappointment by the power industry. Prevalent concerns cited by the industry include a lack of flexibility in the proposed rule. The groups argued that limitations could impede the development of a domestic clean hydrogen economy, hinder broader decarbonization goals, and adversely affect opportunities for American workers.
—Sonal Patel is a POWER senior associate editor (@sonalcpatel, @POWERmagazine).