Resources for the Future scholars offer analysis on a new funding opportunity announcement from the US Department of Energy for the development of regional hydrogen hubs.
A much-anticipated funding opportunity announcement (FOA) for regional hydrogen hubs was issued on September 22 and will kick off a frenzied proposal-writing process for groups that intend to compete for the $6–7 billion that the US Department of Energy (DOE) has committed to this component of the congressionally mandated hydrogen hubs (H2Hubs) program. Our team at Resources for the Future (RFF) has analyzed the FOA and, in this blog post, we offer our perspective. Overall, we are excited to see DOE start to get the H2Hubs off the ground. This FOA is a tremendous first step, but much work still needs to be done.
Kudos
First, the Office of Clean Energy Demonstrations, Hydrogen and Fuel Cell Technologies Office, and broader DOE Hydrogen Program responsible for the FOA should be congratulated for issuing this 153-page document to guide hub proposers in a very timely fashion, given their stated timeline provided in the notice of intent that DOE issued in June. Even as DOE has spent several months onboarding staff while reorganizing and developing a coordinated response to many new programs mandated by Congress, the agency has managed to develop a well-thought-out and helpful plan to guide hub proposers.
Second, DOE’s top-level process—asking for a much shorter and less detailed concept paper first, then giving feedback to encourage or discourage a full proposal—is a helpful (if fairly standard) way of minimizing the risks of time and money wasted in developing a proposal that is less likely to be selected, while giving those who were discouraged another shot at a winning proposal.
Third, DOE apparently took to heart comments which noted that proposers will need help in developing successful plans and projects. The agency is offering some important supporting programs and processes, such as H2 Matchmaker and Carbon Matchmaker for help in building teams, a promise to make data available to stakeholders as the process unfolds, spreadsheets to help proposers complete their proposals, a Technical Readiness Assessment Guide, help with the requirements of the National Environmental Policy Act, and feedback on the safety of the proposed plans based on reviews by the Hydrogen Safety Panel.
Finally, we’re also happy that DOE has included hydrogen end users as part of the hubs. Many of the uses for hydrogen are still nascent technologies, and DOE funding that helps scale up those uses will help ensure that hydrogen can contribute significantly to decarbonization. The two to four years of operational funding promised by DOE in the FOA also will give the hubs breathing room to ramp up production, develop lower-cost clean hydrogen, and create end-use markets to improve the long-term sustainability of the hubs.
What’s the Application Process?
First up for proposers is the concept paper, a 20-page summary that serves as an appetizer for the full application, with a high-level description of the hub, a preview of the community benefits plan, and a description of the experience of the team. It’s due November 7, so many long days (and nights?) are in store for proposers.
After DOE’s encourage/discourage decision a month later, full proposals are due on April 7, 2023. The full application is quite long and will include the detailed techno-economic analysis and life-cycle analysis projections, a technical volume up to 100 pages, and the community benefits plan of up to 25 pages (along with other required sections, forms, and spreadsheets). As for hub budgets, DOE says that its preferred funding range is $500 million to $1 billion, but that it will consider budgets in the range of $400 million to $1.25 billion. Note that these figures are only the DOE portion of the budget, so the total cost will be at least double these figures.
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Proposal submission will be followed by a merit-review process, pre-selection interviews, and winner notifications by fall 2023, with “award negotiations” after that. After DOE grants awards to the winning proposals, the hub projects will proceed in four phases, and the FOA lays out a plan to cover all four in fiscal years 2022–2026. With at least one go/no-go decision during each phase, DOE ultimately expects to fund 6–10 hubs with $6–7 billion in funding. This plan leaves $1–2 billion for a second launch or other related activities, if further efforts are necessary to meet the program’s goals.
Based on this description, many years will elapse before the hubs can begin operations. However, the phased approach described in the FOA will help ensure that problematic hub development can be identified early and that losses associated with potential project failures can be limited.
Evaluation Process
When it comes to how DOE will decide on which hubs to fund, things get a bit less clear. DOE states that it will evaluate applications based on five high-level criteria, each with different weightings:
- Technical merit and impact (25%)
- Financial market and viability (20%)
- H2Hubs work plan (15%)
- Management team and project partners (20%)
- Community benefits plan (20%)
Under each of these criteria, DOE gives 5–10 bullets describing the various criteria the agency will use for further evaluation. On top of all that, DOE also lists 16 “program policy factors” that the agency will consider, as well. Plus, the FOA mentions a few factors that will be “preferred,” without defining what that means. This is a dizzying array of factors, and it’s not clear what it all will mean in the end.
As environmental economists, we hope that DOE looks at the costs and benefits of the hub proposals when making its decisions and, within the constraints of the law, prioritizes the most cost-effective proposals. But under the five main criteria above, only emissions benefits appear; costs and spillover benefits do not appear directly at all. Instead, costs and benefits are relegated to the program policy factors, to varying extents.
It’s not clear, from either an environmental or economic standpoint, why the US Department of Energy should favor a balance of supply and demand within the hub rather than more broadly. As long as a hub can provide firm contractual guarantees that the hydrogen supplied will be used, we don’t see a reason to discriminate.
Trade-offs are inevitable among the different criteria, and DOE does not state how the program policy factors will be balanced against each other. Even more so, DOE doesn’t say how those factors will be balanced against the main set of criteria. While we recognize the complexity and size of the H2Hubs program, this evaluation process leaves us wishing for a bit more guidance on what DOE thinks is the polestar that will guide its decisionmaking.
Even more, we’d like to know how DOE will go about scoring these applications. The FOA refers to a merit-review process, but the lack of a detailed plan leaves open any number of different possibilities, ranging from a small group of federal employees that advises the selecting official to a larger group of outside peer reviewers who score the applications, and even, dare we say it, political pressure. The funding of H2Hubs is too big a decision to leave the public, let alone proposers, in the dark about how winner will be chosen.
What’s New and Interesting?
Some new and interesting provisions are in the FOA that were either not present or not fully fleshed out in DOE’s notice of intent. Here are the ones that strike us as most important.
Balance of supply and demand and a concomitant emphasis on hydrogen users. While we support DOE’s intention to fund hydrogen end users as part of H2Hubs, we are less sanguine about DOE’s preference that the end users be part of an H2Hubs group. It’s not clear, from either an environmental or economic standpoint, why DOE should favor a balance of supply and demand within the hub rather than more broadly. As long as a hub can provide firm contractual guarantees that the hydrogen supplied will be used, we don’t see a reason to discriminate. DOE further states that, if all the hydrogen is not in the hub, the agency will prefer situations in which the hydrogen end users are domestic. We understand the goal of developing domestic markets for clean hydrogen, but we see a potential conflict between decarbonization and seeking “domestic content,” given that the environment does not care where carbon dioxide reduction occurs.
Technology readiness levels of proposed technologies. DOE wants proposers to limit themselves to using technologies that are close to or already are “market ready,” which translates to achieving a technology readiness level of 8 or higher by Phase 4, effectively meaning that the hub is ready to operate at scale. DOE specifically states that it will not fund projects at the pilot scale, nor will it fund research and development. To meet the goal of jump-starting a clean hydrogen economy, these restrictions seem reasonable and necessary. Given its goal of funding hubs which use technologies that have achieved technology readiness level 8, DOE encourages proposals that initially involve technologies at level 6 (pilot-scale demonstration). However, DOE states that it will accept lower technology readiness levels for certain technologies as part of a hub with adequate justification and risk-mitigation plans.
Requirements on hubs to make performance and profit data available. A key feature of any government-sponsored innovation program is to hold proposers accountable for doing what they propose and for the agency to hold itself accountable for picking the “best” proposals, tracking the projects, and helping to fix or even ending problematic projects if necessary. Thus, the data-reporting requirements in the FOA are well-placed and necessary. Stakeholders will want to see as much of this information as can be released without undermining confidentiality, which seems to align with DOE’s intent. However, DOE needs to provide details about what data will be released to the public and when to keep the process transparent and accountable.
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Leveraging existing resources. The FOA repeatedly notes that hub designs should leverage their existing resources, which include fossil and renewable resources, pipeline networks, trained workforce, and existing manufacturing base. Ultimately, such leveraging implies that costs will be lower than if leveraging is not used. But, as we have noted, the role of costs in choosing winners is not clearly stated among the evaluation criteria. Our concern is that DOE will make judgments about the degree of leveraging without linking such leveraging to cost implications—basically, that DOE will track inputs instead of focusing on outputs.
Calculating emissions reductions. The key emissions criterion is the amount of greenhouse gas emissions that are reduced across the life cycle of hydrogen production and use. Understanding life-cycle emissions comes with many challenges. The FOA, and DOE’s notice of intent released before the FOA, reference Argonne National Laboratory’s Greenhouse gases, Regulated Emissions, and Energy use in Technologies (GREET) model as DOE’s tool of choice for tracking greenhouse gas emissions, with proposers providing the needed inputs. Picking winners efficiently requires as many “apples-to-apples” comparisons as possible. Thus, we support DOE using GREET to evaluate proposals. Any model calculating carbon accounting is only as good as the inputs to the model, however. Particularly tricky is specifying the baseline for current emissions against which emissions reductions by a hub can be calculated or estimated.
Go/no-go criteria. DOE asks proposers to provide quantitative go/no-go decision points and the technical criteria to evaluate these points. These criteria presumably will be negotiated with proposers. This idea of requiring proposers to designate the criteria that determine the worth of their own proposals is a bold move by DOE, and one that could depart in a wholesale way from the need for apples-to-apples comparisons noted above.
Preference for hub attributes. The notice of intent mentioned that DOE had preferences for certain hub attributes. This language appears less frequently now. The key preference appears to favor hubs that plan to produce more than 50–100 metric tonnes of hydrogen per day. Given that large production operations probably can take better advantage of economies of scale, this preference makes superficial sense. But if those economies of scale can be expected, then higher-production hubs should offer hydrogen at a lower price than other hubs. So, why not use production cost or price as a metric, instead?
The H2Hubs program has the potential to jump-start a clean hydrogen economy and enable decarbonization in multiple sectors.
Inclusion of environmental justice concerns. One of the most important metrics that the Biden administration will use to track its environmental justice goals is the Justice40 Initiative, which sets a goal that 40 percent of the benefits from certain federal programs should go to disadvantaged communities. The FOA incorporates this goal in several ways, the most important of which is a two-step process for identifying disadvantaged communities: an assessment of project impacts to disadvantaged communities, and an implementation strategy that covers the mitigation and enhancement measures for impacts in those communities alongside proposed systems for tracking and reporting progress on implementation. This approach seems comprehensive, but one feature is worth comment. Although the FOA mentions the US Environmental Protection Agency’s mapping and screening tool called EJScreen with regard to identifying disadvantaged communities, proposers can use any tool. Based on other work we are doing, we have found that even minor changes in the underlying model structure and data choices can make a big difference in defining what and where such communities are located. We suggest that all proposers be asked to use the same model to identify disadvantaged communities, which can help ensure apples-to-apples comparisons.
Assessment of risk-mitigation plans. Given the large sums of taxpayer money that will go toward these hubs, DOE rightly requires a risk-management plan as part of the proposals, which should disclose the ways in which a project may fail to deliver, along with potential risk-mitigation strategies. We are particularly interested in how this requirement applies to technological risk. DOE says that it will consider technologies at low readiness levels, but “they will be considered higher risk deployments and will require corresponding mitigations which may require development activities outside of the H2Hub scope and funding.” The meaning of this quoted passage is not clear. Would DOE be interested in a portfolio approach, such that other technologies would be available if one fails? What sort of development activities does DOE mean? Given that technology demonstration is central to the H2Hubs program, having clarity on this point would be helpful.
Conclusions
Any concerns we have with this FOA are outweighed by the positive aspects. But, as DOE prepares to evaluate the full proposals that are coming in April next year, we hope that the agency provides a bit more clarity on how the myriad decision criteria will be balanced against each other. Our hope is that cost-effectiveness can be a guiding theme in DOE’s decisionmaking. Making these choices also will require as many apples-to-apples comparisons as possible. DOE has gone a long way in this direction, using GREET to evaluate proposals from the perspective of reducing emissions, but more can be done, including the articulation of clear guidance on specifying the emissions baseline.
We are excited to see DOE starting to get H2Hubs off the ground. This program has the potential to jump-start a clean hydrogen economy and enable decarbonization in multiple sectors. H2Hubs is a complex program with various statutory and regulatory requirements, and we recognize the enormous task in front of DOE. This FOA is a great first step, but DOE has a long way to go and much work to do. We’re eager to see the proposals come in and hope that as much information as possible can be made public and subject to scrutiny.
