The US Department of Energy has proposed a $1-billion subsidy to support clean hydrogen fuel. The agency hasn’t clearly articulated the need for this funding, and we wonder whether the pricey infusion is justified at this time.
The Office of Clean Energy Demonstrations at the Department of Energy (DOE) recently issued a notice of intent and a request for comment on the subject of putting $1 billion toward subsidizing demand for clean hydrogen fuel that’s produced by hydrogen hubs. We submitted comments in response. Here, and in a forthcoming companion blog post, we summarize those comments. In this blog post, we discuss whether subsidies for hydrogen consumers, also known as offtakers, are needed. Our next blog post will cover the advantages and disadvantages of various forms of subsidies.
Before proceeding, we want to acknowledge some uncertainty about what DOE is intending. One uncertain aspect is the intended recipients of the subsidies. Would the subsidies be directed, as our reading suggests, only at offtakers within hydrogen hubs, or at a subset of these offtakers that are “chosen competitively” (as stated in the notice of intent)? Or could the subsidies be used to develop hydrogen demand outside of the hubs? We assume that the subsidies are intended for hub-based offtakers, although subsidies for niche markets outside the hubs could diversify the pathways toward a clean hydrogen economy.
Another uncertain element is that the specific problem that DOE seeks to address is unclear. Do the hub applications fail to reflect reasonable certainty about offtake demand now and/or after the grant money runs out? Are the expected hydrogen prices too high? Are the risks greater than offtakers can tolerate? Are offtakers worried that they will lock into contracts at high prices that subsequently fall as clean hydrogen production matures? Proposing a solution is difficult when we don’t know what we’re trying to solve. Regardless, going forward, we make no specific assumptions about the nature of the problem that DOE seeks to address.
Background on Clean Hydrogen
Clean hydrogen—by which we mean hydrogen produced with a carbon intensity that’s substantially below that of the 10 million metric tonnes of “gray” hydrogen now produced annually by using natural gas in steam methane reforming—can replace the gray variety in current uses and be exploited for a host of new applications in the industrial, power, and transportation sectors. In fact, clean hydrogen can serve as the only replacement for fossil fuels in some cases.
In light of the potential benefits of clean hydrogen, Congress has passed laws that create a variety of incentives to bring down the costs of hydrogen production and increase demand, including the $8-billion hydrogen hubs grant program; the 45V tax credit for clean hydrogen; the 45Q tax credit for carbon capture, utilization, and storage (which can subsidize the “blue” hydrogen produced using either coal (in China, mostly) or natural gas and decarbonized through carbon capture and storage); and the 48C tax credit for manufacturing, which can be applied to the production of electrolyzer equipment. Some states such as Colorado also are sweetening the pot with credits of their own, and while some of these subsidies are not “stackable” (such that policies can be implemented together), others are.
Is the Subsidy Program Needed?
Considering these incentives, as well as DOE’s requirements for the hubs, the need for the proposed program in the notice of intent is not clear.
The winning hydrogen hubs, each of which will be subsidized with around $1 billion or more, are considered responsive to the call for applications if they include producers, enough offtaker demand to consume the hydrogen that’s produced, and a means to link the two (through co-location, trucks, railroads, or pipelines). In addition, the hubs must show that they will be sustainable after the program is over, 10 years from commencement of operations. Thus, a responsive application is one that presumably has contractual assurances between producers and offtakers for the long-term production and use of the clean hydrogen. DOE has said that it will permit some hydrogen to be consumed outside the hub and even outside the country, though the agency discouraged an Alaskan hub proposal that would have made exports to Asia the centerpiece of its offtake plans.
These requirements for the hub applications should, by design, support the necessary demand for hydrogen to make each hub viable. That DOE is considering this new $1-billion program to support demand suggests to us that the applications may not reflect adequate demand for hydrogen and that the program is thought to be at risk unless DOE provides further support. We do not have access to the applications, but one potential concern could be that the price of the clean hydrogen produced by the hubs—or perhaps more importantly, the level of risk for that price—is so high that it is scaring off the needed investment in and commitments for hydrogen offtake. Another obstacle could be that offtakers are worried that they will be locked into accepting high prices and miss out on price declines later.
Counterpoints to Concerns from Hydrogen End Consumers
DOE probably is hearing from companies, and other players in hub applications, that additional actions are needed to promote investments in hydrogen consumption. But, before taking these suggestions at face value, DOE should consider several points.
First, the hub grants are stackable with the 45Q tax credit for blue hydrogen. Given cost projections from various sources, our expectation is that blue hydrogen subsidized by 45Q should be close to cost-competitive with gray hydrogen for existing users of hydrogen. In our own work, we find that the value of the 45Q tax credit is sufficient to bring the price of blue hydrogen closer to that of gray hydrogen. Until we see the planned uses in the funding applications, we can’t judge which other potential uses are near market ready and which are not. Until the US Department of the Treasury writes rules for the 45V tax credit (which also is stackable with hub grants, but not with the 45Q tax credit), we can’t make inferences about the usefulness of 45V in bringing costs down.
Second, demand for clean hydrogen from other countries could be quite significant. The European Union recently has announced that it intends to import 10 million metric tonnes of “green” hydrogen by 2030, with this hydrogen produced via new renewable energy resources and electrolysis and matched on a monthly basis. Building the necessary infrastructure to meet this demand comes with its own issues, but this avenue of exporting to other countries should be seriously considered.
Third, policymakers seem to be assuming that “supply-side” incentives, such as tax credits, are wholly divorced from hydrogen pricing. Reductions in costs (counting subsidies) can translate into lower hydrogen prices for offtakers, potentially to the point that no additional demand-side subsidies are needed.
Fourth, a presumption exists that matching financing for hubs will come from private capital markets. However, self-financing by the producers and other players involved may be the largest source of capital.
Fifth, a concern exists that expected declining costs may make offtakers reluctant to enter into long-term contracts that lock in near-term higher prices. This concern can be addressed by writing contracts within the context of the hub that pass on future cost reductions to offtakers.
Finally, DOE was wise to provide hub funding in multiple phases, recognizing that hub participants are facing a huge undertaking, including writing contracts. DOE should consider allowing additional time for this process to continue, rather than leaping to put more money into the hubs.
Is $1 Billion Enough?
If we assume, however, that more subsidies are needed, we can evaluate whether providing $1 billion to potential offtakers would be enough to have a major impact on hydrogen demand and therefore achieve the aims of the H2Hub program.
We can approach this question in different ways. One is simply to look at DOE’s clean hydrogen goal for 2030, for example, and examine the per-kilogram subsidy implied. A goal of 10 million metric tonnes per year equates to 10 billion kilograms of clean hydrogen. The subsidy therefore would amount to only $0.10 per kilogram, and only for one year. Such a small subsidy clearly would not be enough to move the needle of demand.
But this calculation likely is unfair, given that the program would be limited to hydrogen produced by the funded hubs. In this case, we could assume that all the hydrogen produced would be subsidized for offtakers. We don’t know how much hydrogen that would be, however, because DOE has not made this type of information contained in hub applications publicly available, even in the aggregate.
Another approach is to assume production at the minimum level that’s required of hydrogen hub producers: 50 metric tonnes of hydrogen produced per day (18,000 tonnes per year) from each hub. Assuming that six such hubs are funded, the subsidy in this case translates into $1.00 per kilogram for nine years. But this production level is unrealistically low, given that one steam methane reforming plant produces between 88,000 and 225,000 metric tonnes per year. With one steam methane reforming plant per hub and six hubs, we could expect hydrogen production to amount to 528,000 to 1,350,000 metric tonnes per year. The subsidy then would translate to as large as $1.00 per kilogram for two years, or as small as $0.75 per kilogram for one year.
However, our reading of the notice of intent suggests that DOE wants to restrict the subsidy to only a portion of the clean hydrogen produced by the hubs that the agency funds. Under this assumption, we can do a different set of calculations which assume that a significant, multi-year subsidy is desirable—say around $1.00 per kilogram for 10 years after the grant program ends—and ask what fraction of hydrogen production could receive such a subsidy. We already calculated that about 300 tonnes of hydrogen per day, or 0.1 million metric tonnes per year, would meet these restrictions. Based on average production at steam methane reforming plants and six hubs funded, we estimate that 10 to 20 percent of the expected hydrogen production would be subsidized.
Is a $1-Billion Subsidy the Best Approach to Boosting Demand?
Based on our arguments and calculations described above, a direct demand subsidy is difficult to justify at the present time, and were it to be implemented, likely would not be effective at achieving its goals.
Using these funds for a direct demand subsidy would come at a huge opportunity cost. We can think of several uses for a $1-billion infusion of funding that would be more effective at helping the hydrogen market develop. For instance, targeted research, development, and demonstration funding, on either or both early- and late-stage technology readiness, might be productive. The notice of intent mentions some alternative ways of spending a fraction of the money that also could be effective, such as developing contract templates and providing funds for feasibility studies.
Additionally, DOE could take some high-impact actions to develop the market that would not require spending vast sums of money. For instance, DOE could be more involved in efforts to reduce barriers to regulation and permitting for hydrogen pipelines, carbon dioxide pipelines, and Class VI well delegation (for wells that inject carbon dioxide into deep rock formations), which would use only a fraction of the proposed spending of $1 billion, but which could have enormous multiplier effects.
We expect that DOE knows internally what problem this money is trying to solve. If so, the agency should communicate its understanding to the public. Without that understanding, it’s challenging for us (and probably others) to provide substantive comments on the best use of this money. Why should the money be used for demand-side support and not for other investments—or even to further subsidize the hubs themselves? It’s hard to say. Our bottom line is that, in addition to DOE clearly articulating the challenges it’s facing, the agency should consider waiting until a clear need for the money arises later in the process—or provide a much more complete justification for why the money is needed now.