Governance and Institutional Design Will Be Critical to Growing a Clean Hydrogen Economy
January 14, 2022
Under the Infrastructure Investment and Jobs Act (IIJA), the United States will make substantial investments in clean hydrogen. Most of this investment will run through an $8 billion grant program for the establishment of regional hydrogen hubs, which are intended to seed this new hydrogen economy by connecting producers and consumers of hydrogen while controlling greenhouse gas emissions. How these hubs are designed, and how broader market forces evolve around them, will be key to the future of the hydrogen economy in the United States.
Hydrogen is already produced and consumed within the petrochemical sector, but to make it useful for decarbonization, the United States will need to make more and make it with lower greenhouse gas emissions. In its net-zero by 2050 scenario, the International Energy Agency sees global hydrogen demand increasing to 530 million tons (MT) from only 90 MT today (a small portion of which is produced without emissions). To meet that growing demand with low emissions, the scale of clean hydrogen production will have to grow by a factor of 60. The growth of the clean hydrogen industry will carry some key economic benefits, both for the regions where it is produced and utilized and in technical innovation. Establishing hubs will be a first step toward creating a hydrogen strategy in the United States and building economies around the innovative technology and business models.
Under the IIJA, the Department of Energy (DOE) has four years to establish and fund at least four regional hydrogen hubs. As a portfolio, they will have to demonstrate a variety of hydrogen production methods and end-use cases. On the production side, that includes hydrogen produced from coal or natural gas processing with carbon capture at an emissions intensity less than 2 kilograms (kg) CO2 per kg hydrogen and hydrogen produced by electrolysis powered by renewable and nuclear power. On the end-use side, it means demonstrating use cases across industry, transportation, building heating, and power generation. Rather than focusing on one use case or production method, DOE will have to find ways to support various technologies and business models, though it is not necessary that they enjoy equal levels of support.
There are some safe bets for where and how regional hubs could be implemented. The natural gas resources and existing demand and infrastructure from the chemical industry make the Gulf Coast and surrounding area an easy candidate for one hub based around blue hydrogen. Likewise, the rust belt states provide ample coal resources and nuclear power for electrolysis and could see hydrogen used for steelmaking or other industrial activities. One could imagine a hub in the plains states, where abundant wind power could fuel the production of green ammonia. And in the Southwest, a hub built around solar or hydropower could provide green hydrogen to California to co-fire with natural gas in the power sector or support transportation. A hub in the Northeast could utilize offshore wind to make hydrogen for power and building heat. With so many options, how DOE sets priorities and governs the program might be as important as how the agency matches regions, production, and end use.
More than just a platform for technology demonstration, innovation hubs are a tool to jumpstart a virtuous cycle: investment and opportunity attract people and capital, new and ancillary industries feed off each other, and public and private institutions—universities and businesses—act as anchors for entrepreneurs and their workforces, which attracts more people and capital. This is where the positive spillovers from government investment can help regions with economic development and employment. With only four years of grantmaking authority, DOE will need guideposts for setting up those cycles and attracting private investment. The agency will seek to build hubs out of consortia, or even combine separate endeavors into regional efforts, but with limited time to establish a program and start making progress toward benchmarks, the pressure will be on.
There will be many interesting questions facing the agency as it designs the solicitation for applications and begins awarding grants. How will DOE draw boundaries around a hub in each region, production mode, or end use? Should it make a lot of small grants or a few big ones? Will hubs pool resources or allow for individual proposals under an umbrella of activities? What activities should DOE prioritize with grantmaking? How should DOE set metrics and evaluate proposals? How will DOE govern hubs and evaluate their progress over time? Should DOE disburse everything up front or pay for success? Is there enough time to achieve success?
How DOE approaches these challenges will be important not only for the development of the clean energy economy and progress toward decarbonization, but also as a demonstration of successful implementation of industrial policy. If the Biden administration and Congress want to make climate action synonymous with jobs and opportunity and give the United States a fighting chance in the energy markets of the twenty-first century, these policies need to allow for technical demonstration and build the virtuous cycles that yield lasting results. Success is not guaranteed.
Under the stimulus bill of 2009, DOE spent over $1 billion supporting demonstration projects for carbon capture—in a program that failed. A recent report from the Government Accountability Office shows how DOE spent hundreds of millions supporting the demonstration of carbon capture at coal plants, but only one of the eight facilities the agency supported is still operating. The GAO cited DOE’s haste in contract negotiations and overriding of cost controls as key reasons for the high cost of the program, including $472 million the agency spent on designs for facilities that were never built. The market conditions for carbon capture never developed, as cap-and-trade failed to pass into law, and what jobs and investment came of the program were fleeting.
The need to scale clean hydrogen rapidly to meet climate goals and compete in space internationally leaves less room for failure this time around. But there is an opportunity for more investment and innovation in the regional hub model, where multiple actors and diversified activities can help bolster hubs even if individual firms or projects fail. Competent and creative implementation by the DOE will be critical.
The long-term prospects for hydrogen in the United States will depend on more than how well DOE administers hydrogen hubs. Without a broader market shift toward hydrogen and long-term policies to back that shift, whatever success the agency can spur through the hub program will be muted. A production credit for clean hydrogen is proposed as part of the Build Back Better Act, but the future of that legislation is uncertain. If federal policy on climate continues to lag, then states might need to step up to give markets for nearby regional hubs. The development of hydrogen hubs will be an important exercise in industrial policy in the United States, but it will only be the start of a longer journey.
Joseph Majkut is director of the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.
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