In September, the US Department of Energy released a funding opportunity announcement for its Regional Clean Hydrogen Hubs program. Earlier this year, the agency requested feedback on the program from interested groups. In this new installment of an ongoing blog series, Resources for the Future scholars summarize the feedback from a selection of respondents—hydrogen-hub developers and producers—and examine how the funding announcement addresses their comments.
Earlier this month, applicants submitted concept notes as a first step in applying for the Regional Clean Hydrogen Hubs (H2Hubs) program that’s been funded by Congress and administered by the US Department of Energy (DOE). This phase follows the release of DOE’s $8-billion funding opportunity announcement in September. The H2Hubs program will support the production, processing, delivery, storage, and utilization of clean hydrogen in multiple hubs across the United States.
With the H2Hubs proposal process fully underway, we continue our series of blog posts that examine responses to DOE’s request for information on the H2Hubs program that was issued in March. We have analyzed the comments that were submitted by H2Hubs proposers and end users of hydrogen (or “offtakers”), and this latest blog post focuses on the comments from 22 hydrogen developers and producers. We examine what has been incorporated into DOE’s funding announcement, along with several remaining issues and concerns. We also highlight areas where additional effort or clarification from DOE may be needed.
Accounting for Grid Emissions
For hydrogen production to be clean, hubs need to ensure that production equipment (such as electrolyzers, which use electricity to produce green hydrogen) are using energy that comes from low-carbon sources. The request for information suggested several avenues, including power purchase agreements with a renewable generator, or a direct connection to a renewable generator. The majority of hydrogen producers advocated flexibility in how they approach this issue, including through the use of direct connections, power purchase agreements, or book-and-claim systems like renewable energy credits.
But flexibility presents several challenges and may lead to an unintended large carbon footprint. Many existing book-and-claim systems are less than adequate for establishing emissions reductions, as these systems could introduce new electricity demand to the grid without equal additions in clean generation. Furthermore, failure to temporally match this new demand with renewable energy generation could mean that producers would be drawing from the grid when emissions are high. RFF researchers have detailed the challenges of assessing life-cycle emissions for the electricity that’s consumed in hydrogen production in a previous blog post.
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As part of the 45V tax credit for hydrogen production in the Inflation Reduction Act, the US Department of the Treasury will establish rules for calculating life-cycle emissions in determining the value of the tax credit. DOE also has issued a proposal for a Clean Hydrogen Production Standard that is based on life-cycle emissions. The Infrastructure Investment and Jobs Act requires that hubs “demonstrably aid the achievement of [this standard].” DOE currently is seeking stakeholder comments on the details of its proposed standard. Presumably, DOE will use the comment process to develop detailed guidance on how the hubs can demonstrate that they are using low-carbon energy.
Currently, the funding opportunity announcement briefly outlines DOE’s methodology during the selection phase for evaluating emissions, which aligns closely with the Clean Hydrogen Production Standard. But high uncertainty remains when estimating these emissions during the planning phase, and DOE does not detail whether emissions tracking or evaluation will be completed once projects are fully operational.
Leveling the Playing Field between Large- and Small-Scale Producers
When producers discussed in their responses the approaches that they would take to secure offtake agreements from end users of hydrogen, a contrast emerged between large-scale, well-established producers of hydrogen and smaller producers.
Most larger producers historically have established strong relationships with end users and have demonstrated production volume at scale. In their responses, these producers were confident that they could secure at least 50 percent of their estimated hydrogen production volume with offtake commitments.
However, the same could not be said for smaller producers, which do not have the same scale, recognition, and operating history. Additionally, many of these smaller producers have production processes that likely will become cheaper over time, meaning that a long-term offtake agreement that would lock in a high, less competitive price would not provide the necessary flexibility over the next decade.
Under the ‘Buy America’ requirements outlined in the funding opportunity announcement, proposers must source all H2Hub iron, steel, manufactured products, and construction materials from US producers.
Challenges with securing these agreements can inhibit a producer’s ability to secure private-sector investments that are needed for the project. For smaller producers, a common suggestion was that a DOE loan guarantee could mitigate some of the financing risks. Under such a program, DOE would guarantee the repayment of the principal and interest on the loans issued for a portion of the project. However, the funding opportunity announcement has effectively shut that door. The announcement explicitly states that federal financing mechanisms such as loan guarantees cannot be used by applicants as part of the hub group’s cost share. This decision is understandable from DOE’s perspective. Each hub already will have between $500 million and $1 billion of DOE funding in the form of a cooperative agreement. While loan guarantees do not require direct debt financing from DOE, and guaranteed projects have a low rate of failure historically, this practice effectively would be another transfer of risk from the project to DOE.
Perhaps as a way to level the playing field, DOE outlines in the funding opportunity announcement its preference that end users should be incorporated into H2Hubs proposals. DOE encourages a balance of supply and demand completely within each hub. We have outlined our concerns with this provision in our analysis of the H2Hubs funding opportunity. Through their comments, larger producers have signaled confidence that they can secure offtake agreements for a substantial portion of their production volume and presumably could make use of those relationships to integrate these end users into each hub. This practice may be more of a challenge for smaller producers. DOE has suggested that potential applicants could make use of the H2 Matchmaker tool to find partners for forming hubs, but how broadly this tool is being used, and if it would be sufficient, remains unclear.
In their responses, some producers discussed ways to ease the process of securing offtake commitments and financing. As we have mentioned in a previous blog post in this series, a common suggestion has been for DOE to provide additional support that can protect producers in case of nonpayment from end users, which could open the door to a more diverse set of offtake options. One suggested approach was a DOE-issued letter of credit between producers and end-user buyers, which would guarantee buyer obligations in an offtake agreement in case of nonpayment. Other mechanisms, such as federal procurement agreements, also could help mitigate this issue.
Manufacturing Capacity
A common concern highlighted by hydrogen producers and developers was the availability of key components and materials that are necessary to build H2Hubs. Under the “Buy America” requirements outlined in the funding opportunity announcement, proposers must source all H2Hub iron, steel, manufactured products, and construction materials from US producers. This domestic-procurement provision can be a significant hurdle. For manufactured products, which includes hydrogen production equipment, the provision requires manufacturing to take place domestically and that greater than 55 percent of the cost of the components of the product are mined, produced, or manufactured in the United States.
This provision creates a particular constraint for scaling electrolysis. Electrolyzer components such as anodes, cathodes, membranes, and minerals like platinum and iridium may need to be imported, given current domestic limitations. Over time, as green hydrogen production begins to scale up due to this funding, a more robust domestic supply chain and precious-metal recycling system for these components likely will develop. But in the short term, the Buy America requirements may hamper green hydrogen production in favor of other production methods. And, even if the domestic supply chains are developed, these components may be more expensive than if the materials were sourced abroad.
In their responses, hydrogen producers and developers urged DOE to take a long-term view on electrolyzer manufacturing. Some commenters suggested bolstering efforts within DOE’s technology offices to expand domestic manufacturing capabilities. Additionally, the $1–2 billion in funding reserved by DOE could be allocated toward scaling up the supply chain.
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This concern with domestic procurement also is mitigated by guidance from the Office of Management and Budget, which states that the Buy America requirements do not apply to projects “in which the prime recipient is a for-profit entity.” Only nonfederal entities such as state and local governments, tribes, universities, and nonprofit organizations are subject to this constraint. Furthermore, the Buy America requirement depends only on how the hub itself is classified. Thus, if the hub is a for-profit entity, the Buy America requirements do not apply to any subrecipient of funding, regardless of the subrecipients’ classification. Conversely, nonfederal entities must enforce the Buy America requirements for all subrecipients associated with nonfederal hubs. This enforcement creates a significant advantage for H2Hubs that are led by the private sector. As a consequence, we expect that most, if not all, hubs will end up being led by a private, for-profit entity for the purpose of keeping procurement costs low. Whether this type of leadership is best for society is another issue.
Surely, many nonfederal entities are well-positioned to understand the unique challenges of their region. They can identify specific needs and distribute funds based on engagement with labor unions, Native nations, and Justice40 communities. Those entities that lack the staff and legal expertise that are necessary to comply with the requirements presumably will be disfavored in the proposal process. Regardless of the prime recipient, coordination and collaboration between the nonfederal and for-profit entities affiliated with H2Hubs will be essential for ensuring a fair distribution of funds and the ultimate success of hubs.
The Office of Management and Budget also outlines a waiver process for the Buy America requirement. If the quality or quantity of domestic components is insufficient, or if overall project costs increase by more than 25 percent, H2Hubs may be eligible for the waiver. More clarity is necessary to understand how this process will work. Because only a subset of H2Hub developers is subject to short-term supply-chain constraints on electrolyzer components, obtaining a waiver should allow them to remain competitive in the selection process without inhibiting their ability to win funding or further commercialize green hydrogen production technologies.
Conclusions
DOE’s H2Hubs funding opportunity announcement has addressed many of the key concerns raised by respondents in their comments to the initial request for information. However, these responses point to additional areas where further clarification is needed, including the accounting of life-cycle emissions for hydrogen production, support for less-established hydrogen producers, and the Buy America manufacturing requirements. Addressing these issues could ease the process going forward, as proposers begin to work on their full applications, which are due in April next year.
