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Which states will win out on $9.5B in federal clean hydrogen funding?

The U.S. government is finally investing in clean hydrogen. From L.A. to West Virginia, everybody wants a slice.
By Jeff St. John

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A sign on a building reads H 2
(Dirk Waem/Belga Mag/AFP via Getty Images)

The federal government has $8 billion to spend to kick-start construction of the first clean hydrogen hubs” in the U.S. — and competition for that funding is heating up. At congressional hearings this month, a number of senators and representatives from both parties pitched their home states as the ideal sites.

But questions are mounting about how to choose the best locations for centralizing production, storage and delivery of hydrogen as a low-carbon replacement for fossil fuels — and what qualifies a hydrogen production hub as clean” in the first place.

Why hydrogen hubs are important 

Today, almost all hydrogen is made in a carbon-intensive way and then put to use in a handful of industrial processes. But as the world transitions toward clean energy, hydrogen needs to be produced using climate-friendly methods — and in vastly greater quantities, for use in many more applications.

We use over 10 million metric tons of hydrogen a year in this country for things like petroleum refining and ammonia production,” Jigar Shah, head of the Department of Energy’s Loan Programs Office, said in an interview. Almost all of that hydrogen is made via methane steam reforming, which uses steam and pressure to break the bond between carbon and hydrogen in fossil gas — a process that emits significant amounts of carbon. That hydrogen has to be decarbonized,” he said.

And then much more clean hydrogen will be needed in turn to decarbonize heavy transportation — think freight trucks, ships and planes — and additional industrial processes that currently cannot be electrified at commercial scale, including steelmaking and production of chemicals and cement. Hydrogen can also replace fossil gas as a fuel for power plants and fuel cells that can provide stable and carbon-free electricity output for an increasingly wind- and solar-powered grid. But switching to hydrogen as a climate strategy will only work if it can be made in ways that don’t emit carbon dioxide or methane.

Clean hydrogen is one part of a comprehensive energy strategy,” Sunita Satyapal, director of DOE’s Hydrogen and Fuel Cell Technologies Office, said at a Feb. 10 hearing of the Senate Energy and Natural Resources Committee. Hydrogen offers versatility and flexibility, both in terms of production and end use” — whether to replace fossil fuels in heavy industry and transportation, or to store energy to generate electricity when renewables can’t meet the grid’s needs at times of high demand. This DOE graphic captures the many ways clean hydrogen can be made and put to use.

A graphic showing many ways that hydrogen could help with decarbonization and the transition to clean energy

Clean hydrogen is key to cleaning up American manufacturing and slashing emissions from carbon-intensive materials like steel and cement while creating good-paying jobs for American workers,” Energy Secretary Jennifer Granholm said in a recent statement.

$9.5 billion in federal clean hydrogen funding on the table 

The Bipartisan Infrastructure Law passed last year includes $500 million in grant funding for clean hydrogen projects, plus $1 billion for research and development into electrolyzers that can use electricity from renewable sources to convert water to hydrogen.

But the big prize is the $8 billion dedicated to developing four clean hydrogen hubs. The law requires at least one of the hubs to use nuclear energy to power electrolyzers and at least one to use fossil fuels as a feedstock along with carbon capture and storage. The remaining two could be powered by renewables.

Hearings in the Senate and the House of Representatives this month saw lawmakers question DOE officials and industry experts on how this funding could drive down the cost of clean hydrogen production and boost U.S. competitiveness in the global clean hydrogen race. The hearings also drew multiple proposals for siting hydrogen hubs in lawmakers’ home states. Last week, the Department of Energy issued a request for stakeholders to provide input on how it should manage its funding for hydrogen infrastructure.

The oil and gas industry is calling for some of the funding to go toward facilities that produce hydrogen via methane steam reforming — the method used to produce the vast majority of hydrogen today — and then tack on carbon-capture equipment. Clean energy and environmental groups argue that this process should not count as clean; they want hydrogen to be made with electrolyzers that run on renewables.

While weighing those competing interests, and following Congress’ instructions, DOE will also need to consider which regions can offer the necessary inputs for hydrogen production — among them, low-cost, carbon-free electricity or readily available fossil gas, as well as ample fresh water. It must also determine which regions have naturally occurring underground formations that can store massive amounts of hydrogen — for example, salt caverns — and human-made infrastructure that can transport it where it’s needed, whether that’s via specially designed pipelines, tanker trucks or trains, or in the form of chemical compounds such as ammonia.

Cost is one of the biggest barriers to producing clean hydrogen. Today, hydrogen made via electrolysis with renewable energy costs about four or five times more than hydrogen produced in the traditional way with fossil gas and no carbon capture. The infrastructure law funding is aimed at helping to bring that cost down.

Satyapal, speaking at the Senate hearing, also cited other significant challenges,” including the lack of a hydrogen infrastructure, the lack of manufacturing at scale, as well as issues of durability and reliability” for the storage and transport systems that will be needed.

The U.S. lags well behind the European Union and many Asian countries in providing the financial support that has driven the majority of the world’s clean hydrogen development to date. But the Biden administration is trying to catch up. DOE’s Hydrogen Shot initiative, launched last year, seeks to reduce the cost of producing clean hydrogen from $5 per kilogram to $1 by 2030, via improvements in both technology and manufacturing.

But while research and development support is extremely useful, it will likely not be enough to overcome cost challenges,” Jonathan Lewis, senior counsel and transportation decarbonization director for the Clean Air Task Force, said at the Senate hearing.

Tax incentives and other support will be needed to increase the scale of production to the point where we can expect clean hydrogen costs to come down dramatically,” he added. 

Who’s going after hydrogen hubs? 

Growing U.S. hydrogen production to that scale will take a massive amount of investment. Just how much is reflected in the price tags for would-be clean hydrogen hubs being contemplated across the country.

In the greater Los Angeles area, the HyDeal LA public-private consortium aims to produce large quantities of hydrogen to replace a significant portion of the natural gas now used in the region for heating and power generation, and to replace gasoline and diesel used for transportation. The group is planning to build gigawatts of solar power and electrolyzer capacity and billions of dollars of new underground storage and pipeline infrastructure. It estimates the project will cost about $27 billion over the next 15 years.

Another consortium in Utah intends to build large-scale facilities to produce hydrogen via clean-energy-powered electrolyzers and store it in salt caverns, with an initial estimated cost of more than $1 billion. This project is also linked to Los Angeles; its intended customer is the city’s Department of Power and Water, which wants to convert its Intermountain coal-fired power plant in Utah to run on hydrogen.

Salt caverns also exist in the U.S. Gulf Coast region, the center of the country’s oil, gas and petrochemicals industries. Hydrogen company HyStor is planning a $3 billion hydrogen project that would use wind and solar power to electrolyze hydrogen at massive scale, then store it in salt caverns in Mississippi. A number of other projects in the region are planning to convert natural gas to hydrogen and capture the resulting carbon emissions.

Other would-be hydrogen hubs are seeking a seat at the table as well. In New York, state agencies are hoping to create a statewide production and use network, centered on plans by Plug Power, a manufacturer of fuel cells and electrolyzers, to build a green hydrogen production facility that will use hydropower and other carbon-free electricity.

Projects to use excess nuclear electricity to produce hydrogen are being pursued at Xcel Energy’s Prairie Island nuclear power plant in Minnesota and Arizona Public Service’s Palo Verde nuclear plant.

Proponents of all of these projects would like to get a slice of the federal hydrogen hub money. 

And U.S. Senator Joe Manchin, the West Virginia Democrat whose support will be critical for the Biden administration’s broader climate and energy agenda, has led the creation of a working group to develop a West Virginia hydrogen project to vie for some of the hub funding.

At this month’s Senate hearing, Manchin, who chairs the Energy and Natural Resources Committee, highlighted that his home state is already an energy player, producing natural gas and coal as well as an increasing amount of renewable energy. We are also in close proximity to hydrogen end-use applications including power plants and refineries, so we are well-positioned for one of these hydrogen hubs,” he said. We have the pipeline system. Maybe we can at least get our environmental friends to build a pipeline to carry clean hydrogen. They’re stopping everything else.”

But if Manchin wants his state to produce hydrogen using natural gas, environmental groups and climate advocates are not going to be supporters. They argue that investments in converting gas to hydrogen would prop up the gas industry and prolong its negative impacts on the climate.

Those views were echoed in the Senate hearing by New Mexico Senator Martin Heinrich (D), who questioned whether carbon-capture technology can reduce emissions from fossil-methane-to-hydrogen plants enough to qualify the hydrogen as low-carbon. He also emphasized the risk that methane leaks from fossil gas wellheads and pipelines could swamp any reductions in carbon dioxide emissions that might be achieved through switching to hydrogen.

This dispute has disrupted some state-level efforts to pursue hydrogen hubs. Democratic lawmakers in New Mexico proposed legislation in January that would incentivize low-carbon” hydrogen production facilities, and they had the backing of the state’s Democratic governor. But the bill was shelved this month after environmental groups raised objections that it could support projects that produce hydrogen from fossil fuels and thereby perpetuate fossil fuel extraction in the state.

Building clean hydrogen economies of scale

One key to achieving America’s clean hydrogen ambitions is aligning the location of production hubs with the industries that can use hydrogen to replace carbon-emitting fossil fuels. 

Even just converting current levels of hydrogen production to low-carbon methods will require a gargantuan amount of investment,” said Shah of the DOE Loan Programs Office. Expanding hydrogen’s use for decarbonizing wide swaths of the economy would require a dramatic expansion of infrastructure to connect production sites with users, he said.

In a research paper published this month, investment bank Goldman Sachs projected that the world would need to invest about $5 trillion in the global clean hydrogen supply chain to reach net-zero carbon emissions by midcentury. Roughly $3 trillion of that would be dedicated to electrolyzers and carbon-capture-and-storage technologies, but another $2 trillion would need to be invested in storing and transporting the hydrogen, according to the analysis.

The federal government can’t afford to shoulder the U.S. share of that investment on its own, and private-sector investors are far less likely to put their money into hydrogen projects that lack confirmed and reliable buyers of their product. At the same time, companies are loath to invest heavily in making their vehicles, industrial facilities or power plants ready to run on hydrogen without a secure source of supply.

That’s why today’s clean hydrogen projects are built on bilateral arrangements between hydrogen producers and hydrogen purchasers. But for the industry to grow to scale, it will require multiple producers serving multiple buyers, Shah said.

That’s what the industrial hubs are for,” Shah said. You find people who want to provide the backbone of clean hydrogen, and also the backbone of CO2 removal, which we also fund.” That could allow would-be users of clean hydrogen to just plug in” to infrastructure that can make it available, he said. You’ve got risk reduction — no one company has to solve the problem.”

We have a good map of all the most polluting industrial centers in the United States — we know where it would be best to deploy,” he added.

A new report from the Great Plains Institute identifies 14 regions that have both natural underground features capable of storing hydrogen and large amounts of carbon-emitting industry — including production sites for hydrogen or ammonia, a chemical made from hydrogen that is used in fertilizer and other chemicals production and is being explored as a carbon-free fuel for ships.

A map of the United States showing potential sites for hydrogen and carbon-capture-and-storage facilities
(Great Plains Institute)

Building a clean hydrogen market one step at a time

Developing this mutually reinforcing network of clean hydrogen suppliers and clean hydrogen buyers will require a large amount of capital investment, said Thomas Koch Blank, senior principal with the Breakthrough Technologies team at nonprofit research organization RMI. (Canary Media is an independent affiliate of RMI.)

These projects are by their nature capital-intensive,” he said. To get built, a clean hydrogen production facility will need to have customers lined up in advance. Getting that asset utilized is going to be your make-or-break performance indicator. The worst possible outcome is that you don’t get to utilize your asset or you don’t get [buyers for] your product. In such an environment, I think you’ll see lots of bilateral agreements to get the market going.”

Large-scale customers like steel mills or chemical manufacturing plants are more attractive than smaller-scale markets such as hydrogen-powered vehicle fleets.

You need 100,000 fuel-cell buses to compare to one steel mill,” he noted. 

As for the infrastructure to move hydrogen from where it’s made to where it’s needed, that’s the hardest piece of the supply chain to raise capital for because it’s close to impossible to assume what kind of utilization you will be operating with,” Koch Blank said. Government support can play a role here, whether via loan guarantees that help lower the risk to private-sector backers or through the development of hubs that aggregate multiple types of hydrogen buyers in a single area, he said.

There’s also value in hydrogen producers that can find multiple uses for their product — or create multiple products through their process. Shah offered the example of Monolith, a company planning to expand its Nebraska facility that converts fossil methane into hydrogen through methane pyrolysis technology, which separates the carbon in methane from the hydrogen in an oxygen-free, high-temperature process. The Loan Programs Office provisionally offered Monolith a $1 billion loan guarantee in December.

Monolith is now using the hydrogen it produces for ammonia fertilizer production to meet market demand in its Midwestern home region. In addition, Monolith’s version of pyrolysis yields carbon black, a key ingredient of tires and other rubber products, as a byproduct that can be sold alongside its hydrogen output.

They’re already at sub-$1 [manufacturing cost] per kilogram of hydrogen because they’re making money selling that carbon black,” Shah said. 

Jeff St. John is director of news and special projects at Canary Media. He covers innovative grid technologies, rooftop solar and batteries, clean hydrogen, EV charging and more.