Blue hydrogen more likely to be a winner than green under US IRA
Trend article by Global Energy Infrastructure, Hydrogen Research department’
When the Biden administration announced the Inflation Reduction Act (IRA) in August 2022, many welcomed it as a step towards a green rush in the US. Commentators saw the prospect of clean energy system spreading across the states and celebrated how competitive it would make the US with the EU. Fast forward ten months, and Biden’s green push looks increasingly grey.
The financial incentives provided under the IRA looked promising. Without a spending cap in place, the most conservative prognosis for estimate a c. $400bn of investment clean energy infrastructure, delivered primarily through tax incentives (McKinsey, 2022). Some forecasts indicate a need for federal spending of up to $1.1tn for the next ten years the act will be in effect (Goldman Sachs, 2023). However, even with the most generous investments from the Department of Energy (DoE), some obstacles cannot be overcome by federal spending alone.
One such issue is commodity prices. The production of hydrogen through electrolysis and renewables, remains 2-3 times as expensive as production from natural gas and coal. Coupled with the lack of infrastructure for production and transportation, the overall costs of developing the nascent industry will pose a significant obstacle to sustaining momentum for green hydrogen, –particularly after the IRA expires in 2032.
Equally, the IRA does not discourage blue hydrogen production to the benefit of green hydrogen. On the contrary, albeit limited, blue hydrogen, i.e., hydrogen derived from non-renewable sources, enriched by carbon capture and storage and carbon offsetting can enjoy financial benefits, – such as production tax cuts. Clean hydrogen producers, i.e., those of carbon intensity of 60pc or lower producers using steam methane reforming, are eligible. Moreover, the IRA not only extends carbon capture tax credits through 2033 but also lowers the requirements for additional carbon capture facilities to qualify, making investment in CCS a viable alternative to exploring green hydrogen. For example, ExxonMobil’s Beaumont facility, recently partnered with Denmark’s Topsoe for use of use of the latter’s Syncor technology to produce low-carbon hydrogen. Although blue hydrogen production does not qualify for both CCS tax credits and hydrogen tax credits, the cost comparison of retrofitting carbon capture technology is significantly lower, in comparison to the costs of renewable energy. In turn, a growing numbers of grey hydrogen producers may be inclined to offset CO₂ emissions, rather than invest in green tech.
Pre-existing production and transportation facilities will also play a significant part in the nascent green industry. The US Gulf Coast, especially, which is already a prominent grey hydrogen producer, might soon become cleaner and greener. Beaumont, Corpus Christi, and Houston, have a combined total of 14 hydrogen projects. Some, such as Howard Energy Partners’ Corpus Christi hydrogen plant, are several decades old. Regional expertise, together with nearby renewable production centres coupled with pre-existing renewables production, will provide a strategic benefit when expanding into green hydrogen. Tellingly, the passing of the IRA saw the announcement of new green hydrogen projects in the area, including New Fortress Energy’s Hydrogen Beaumont project, set to come online in 2026, and the Horizon Clean Hydrogen Hub, with a target date of 2028. Cumulatively, the grey and green developments have the potential to make Gulf Coast the stronghold of US hydrogen industry.
Opposition and obstacles
Public opinion presents crucial limitation, however, with some projects already being cancelled due to the perceived health and environmental risks. The 1 MW Eugene H2 Project in Oregon, – planned to be the first of kind in the state, – was projected to come online in 2025, but was shelved last year following a public outcry, with no prospect of resurrection. It is likely that other states with no pre-existing hydrogen industry will run into the same issues. Without first addressing the concerns of the public, the opposition witnessed in Oregon could emerge in other places, leading to a greater focus on existing hydrogen hub clusters, while hindering the fuel’s development in new locations.
The ten-year timeframe could also prove to be a big obstacle to the US’ green dreams. Setting the costs of renewables aside, the Capex, and time required for establishing new production centres might make the financial breaks quite insignificant in the long run. In the aftermath of the IRA being announced, 80 proposals were submitted to the DoE, of which, only 33 were invited to make a full application (due in April 2023). One of those that did not pass the muster was the Alaska Blue H2 project, which failed the qualifications, capabilities, and experience assessment of the DoE. One of the reasons behind the decision was the lack of connective infrastructure for end – consumers. Considering that the financial incentives depreciate on annual basis and no project submitted after 2032 will be eligible to receive federal funding, many of the potential hydrogen—producing hubs will at a disadvantage.
Without regionally focused investments, targeting these specific obstacles, a blanket solution offered by the IRA in its current form will not be sufficient to encourage nationwide green boom. Naturally, much remains to be seen relative to what the tax incentives will look like, and whether the regional and technological discrepancies will be addressed later this year when the IRA becomes codified. At present, however, it looks likely there will be regional clustering, predominantly in the South of the US.
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