A dispatch from the dawn of the green hydrogen era

MOSS LANDING, California — A green hydrogen boom is about to jolt American heavy industry, and it’s all thanks to a set of tax incentives that are wildly generous, wickedly complex — and still not fully finalized.

Hydrogen is carbon-free if produced with renewable energy, and some experts see it as the key to decarbonizing certain ​“difficult-to-abate” industries. As of now, the fuel exists more in clean-energy models than in the real world, as almost all hydrogen is currently made with fossil gas.

But now we may be at the dawning of the green-hydrogen economy, as tens of billions of dollars in Inflation Reduction Act incentives encourage both startups and established companies to invest in driving down the cost of generating the carbon-free fuel.

The clean-hydrogen production tax credit in the IRA is ​“incredibly rich,” said Jane Sadler, an associate at think tank RMI’s U.S. program, during a recent webinar. (Canary Media is an independent affiliate of RMI.)

“It’s definitely going to change the landscape of hydrogen,” she added. ​“Unlike some tax credits in the IRA, the uncapped hydrogen incentive is available as direct pay (rather than a credit) to any applicant for five years and 10 years to tax-exempt applicants.”

One company already moving to take advantage of the incentive is California-based startup Verdagy, which develops electrolyzers, the technology needed to produce green hydrogen.

The company is currently building a 2-megawatt pilot plant in Moss Landing, a Monterey County, California town that’s also home to the world’s largest grid battery and a good-sized otter population. Canary Media recently visited the Moss Landing facility for a tour and a firsthand look at the Inflation Reduction Act’s impact on the embryonic green-hydrogen industry.

“In 10 years, you will not recognize the landscape of the energy supply,” said Marty Neese, Verdagy’s CEO, as we donned hard hats and fashionable neon safety vests to tour the electrolyzer factory.

Even though the IRA tax credits for hydrogen are not yet finalized, Neese said that ​“without the IRA, this would not be happening in the U.S. The IRA changes the polarity of the worldwide hydrogen market.”

Right now, hydrogen is most commonly used to produce ammonia, which could eventually act as a sort of green-hydrogen carrier, and methanol, which is a building block used to make more complex chemicals. Hydrogen is mostly used in the mining, steel and petrochemical industries, but it’s also in the early stages of consideration for use in power generation, transportation fuels and, most dubiously, for home heating.

Most hydrogen made today is produced using a process called steam methane reformation (SMR), which employs fossil gas as the feedstock. SMR subjects methane to high-temperature, high-pressure steam and produces hydrogen — along with significant amounts of carbon dioxide. Fossil-based hydrogen production accounts for more than 2 percent of total global CO₂ emissions on an annual basis, according to the International Energy Agency.

If the IRA’s massive hydrogen subsidies are mishandled and their clean-energy requirements are too lax, they could unintentionally create an even larger hydrogen supply chain that is powered by a dirty grid. This potentially disastrous outcome is a key reason why the debate over hydrogen tax credits has reached a fever pitch as the Treasury Department draws closer to finalizing its approach.

But if the large amount of power needed to fuel a hydrogen-electrolyzer plant comes not from fossil gas but from a source such as wind, solar or nuclear, then hydrogen production is essentially decarbonized. This is the green-hydrogen vision Verdagy is pursuing at its facility and which the IRA hopes to foster with its tax credits.

The trick of electrolysis

While a new solar module or lithium-ion battery factory might bear some resemblance to a clean-room environment, Verdagy’s hydrogen electrolyzer factory floor is a loud, bustling industrial space full of pipes, pumps and cables for transporting fluids, gases and power.

Electrolyzers perform the trick of electrolysis, the process by which electricity is applied to water at sufficient levels to split the hydrogen atoms from the oxygen atom in water. To make these machines, manufacturers sandwich an electrolyte between an anode and a cathode using a wide selection of materials, designs and scales.

For its part, Verdagy’s basic building block is a table-top-sized electrolyzer cell that can be grouped together to achieve the scale needed in the approaching hydrogen economy.

The company uses a membrane-based advanced alkaline water electrolysis cell. The membrane technology is relatively new, but its material costs are relatively low, and it can create larger cells operating at higher current densities, which equates to more hydrogen production per cell, according to Neese, the CEO. He also stressed that the company’s design provides the ability to monitor the health of each individual cell in an array.

Verdagy closed on a $25 million funding round in 2022 to scale up this facility and is about to add approximately $80 million more in its next finance round from Sand Hill Road venture capitalists and strategic investors in the oil, gas and chemicals industries, according to the CEO.

Neese envisions customers such as an ammonia manufacturer swapping out an SMR process for a multi-megawatt electrolyzer with hundreds or thousands of cells ready to produce hydrogen. And he believes green hydrogen could find its most lucrative opportunities in the reddest of states, where the fuel can make use of the plentiful preexisting oil and gas infrastructure — and consumer base.

“We want to decarbonize those industries and make a ton of money doing it. Texas, Louisiana, Mississippi, Alabama — they all have salt caverns, they have infrastructure, they use hydrogen. They’re in oil and gas or industrial chemicals. They have pipelines that run all the way to Nebraska — now they can make money at green hydrogen,” said Neese.

If the financial carrots in the IRA perform as intended, Neese’s vision of helping provide carbon-free hydrogen to the oil and gas, chemicals and mining industries will come true not just for Verdagy, but for an array of manufacturers just like it.

Alongside the tempting IRA incentives, European mandates have helped unleash a torrent of hydrogen-production expansion plans like Verdagy’s.

Gigawatts’ worth of electrolyzer production capacity has been announced by global corporations including Cummins, ITM Power, McPhy, Nel, Plug Power, Siemens Energy and thyssenkrupp, as well as startups such as Electric Hydrogen and Ohmium.

VC-funded startups are targeting the green-hydrogen transition as well. The aforementioned Electric Hydrogen is developing large-scale integrated electrolyzer stacks at sizes starting at 100 megawatts, or about five times larger than the biggest electrolysis facility in the world today. Ohmium is betting on modular garage-sized electrolyzer units in the 300-kilowatt range.

With all of this growth, electrolyzers might scale up even faster than solar and wind did in previous decades, according to Matthew Klippenstein, executive director of Hydrogen BC and regional director at the Canadian Hydrogen and Fuel Cell Association. In particular, Klippenstein thinks the imminent construction of IRA-funded green-hydrogen hubs will drive the industry’s growth.

But a poorly administered hydrogen incentive — one in which fossil-fuel interests prevail over those of clean-energy advocates — could mean that rapid growth results in more fossil-fuel-based hydrogen production, leaving the planet worse off.

The forthcoming guidance from Treasury, which is expected as soon as next month, will set these high-stakes rules for the climate law’s hydrogen tax credits, including those that apply to grid-connected electrolyzers like Verdagy’s.

Those devilish details will determine if green hydrogen is an energy savior or a gassy greenwash.