The Hydrogen Hubs Selection Sets Off the Dawn of U.S. Hydrogen Economy
A short, spoken-word summary from CSIS’s Jane Nakano on her commentary with Mathias Zacarias, “The Hydrogen Hubs Selection Sets Off the Dawn of U.S. Hydrogen Economy.”
The much-awaited announcement of first round of winners for the Regional Clean Hydrogen Hubs (H2Hubs) came on October 13, 2023. The H2Hubs are part of a $8 billion initiative at the U.S. Department of Energy (DOE) to facilitate the development of a domestic clean hydrogen value chain. Created by the Infrastructure Investment and Jobs Act (IIJA), the H2Hubs must meet a few criteria, such as the diversity in geographic allocation, feedstock and production pathways, as well as end users.
Collectively, the seven hubs would produce over 3 million metric tons (mmt) of clean hydrogen annually. This is roughly one-third of the total volume of hydrogen produced in the United States today, as well as the national clean hydrogen production target for 2030. Here are some key initial observations.
End use is the least articulated element of the hub initiatives.
The Biden administration has been eager to see clean hydrogen applications in sectors that are hard to electrify. Top examples are in the industrial sector (e.g., cement-making, steelmaking and petrochemicals), and long-distance transportation. It therefore is no surprise that a few hubs seek to serve these hard-to-abate sectors. However, at least one hub (Appalachian) was basically mum on intended end use.
Several hubs aim to use clean hydrogen for space heating and power generation. These applications will be more controversial, as both renewable power and electric heating are cost-effective and energy efficient. A recent study by the London Energy Transformation Initiative notes that heating buildings by burning electrolysis-based hydrogen is 6 times less energy efficient than using electric heat pumps. Using hydrogen from steam methane reform (SMR)—the other dominant pathway to producing hydrogen—with carbon capture is 4.5 times less energy efficient. In these applications, the case for hydrogen will be based on consumer preference and reliability. The viability of electricity generation by blending natural gas and pure hydrogen is an approach that may be shaped by upcoming power sector regulations. The U.S. Environmental Protection Agency’s (EPA) proposed rule would establish standards based on fossil-fired power plant’s operational timescale and frequency to ensure that using hydrogen reduces emissions.
The lack of clarity on end uses shows how important demand expansion is if these hubs are to succeed. Additionally, demand offtake remains a key barrier to securing project final investment decisions (FIDs) and getting projects off the ground, largely in part to end-user hesitancy to commit to long-term offtake agreements as continued cost reduction is anticipated. Unsurprisingly, this is reflected in the announcement’s lack of details surrounding targeted end-use demand volume, which stands in stark contrast to an expected collective annual supply of 3 mmt of clean hydrogen by 2030. The ongoing effort at the DOE to develop the H2Hubs demand-side mechanism will be critical to addressing this barrier.
Renewable-based hydrogen is the clear preference.
At least five of the seven selected hubs plan on using renewable energy sources for clean hydrogen production, including two hubs that are focused predominantly on renewables (California and Pacific Northwest). Meanwhile, the inclusion of nuclear energy and natural gas should not come as a shock. The DOE was specifically required by Congress—via the IIJA language—to select hubs that focus on nuclear (e.g., Mid-Atlantic and Midwest) and carbon-captured natural gas (Appalachian, Gulf Coast, and Midwest) production pathways. The strong show of interest in renewables-based hydrogen needs to be taken with caution. Although less numerous, fossil-based projects with captured emissions could have higher production volumes than their renewables-based counterparts. The lack of feedstock-based production targets in hub documents renders it unwise to assume, based simply on number of projects, that renewable-based hydrogen would account for the largest share of the nation’s clean hydrogen supply mix in 2030. Additionally, the future supply mix would also be affected by forthcoming guidance on inputs for sourced electricity emissions accounting and the EPA guidelines on upstream methane leakage, although the DOE H2Hubs program has already laid out a clean hydrogen definition and basic guidelines with regards to using the GREET model to determine hydrogen's life-cycle emissions.
Creating clean energy jobs is the central theme.
The White House announcement itself put a significant emphasis on economic and socio-economic considerations than decarbonization, with an explicit reference to the Bidenomics, which is about growing U.S. economy from “the middle out and the bottom up.” Creating job opportunities in coal communities is its prime example (the Appalachian Hub). Also, underlining the pro-union orientation of the White House, at least three hubs stipulate plans to conclude project labor agreements (Mid-Atlantic, California, and Pacific Northwest hubs). Moreover, some hubs have strong community engagement elements, including the equity partnership with tribal communities (Heartland Hub), which comports to a White House priority to redress past underinvestment in disadvantaged communities.
The geographical distribution of selected hubs underscores that exports are not a key factor for hydrogen viability in the United States.
While none of the selected hubs emphasize export potential, those located in the coastal regions, such as the U.S. Gulf Coast and California or Pacific Northwest, are good candidates to serve a growing import interest from close trading partner countries around the world. Yet, it is notable that decarbonizing the transportation sector is the primary driver for the California—ARCHES and Pacific Northwest Hubs. For the U.S. Gulf Coast, which is rich with renewable and natural gas resources as well as midstream and natural gas exporting assets, only one emerged on the selection list (HyVelocity Hub); there are three additional known hub initiatives in the region that might continue forward despite not being granted awards. The geographical distribution may suggest that the White House is prioritizing domestic decarbonization or reflect the White House emphasis on the need for these hubs to be self-sufficient, not necessitating the demand pull from overseas markets. This is not to say that hubs are not expecting to capitalize on export opportunities. The Gulf Coast Hub, as recently as May 2022, forecasted exports to be the largest driver of demand, with 10 mmt per year by 2050—equivalent to half of a total forecasted demand of 21 mmt from both domestic and overseas markets.
Commercial sustainability is a key goal.
According to DOE guidance, the H2Hubs are meant to become “self-sustaining entities that operate fully independent of federal funds.” As such, the DOE mandates federal funding to be matched by state or private sector funding while the grant money itself will be spread out over four phases spanning multiple years and continued benchmarking. These seven hubs that were selected to enter in agreement negotiation with the DOE are to collectively catalyze over $50 billion of public and private investment. According to industry group Hydrogen Council, at least 135 projects have been proposed in the United States and Canada by 2030, many already under construction or in operation, with about 40 percent of those having reached final investment decision (FIDs). Together, these committed projects are worth about $9 billion, consisting of 90 percent (1.8 mmt per year) from SMR-based hydrogen projects and the rest (0.2 mmt per year) from renewables-based hydrogen projects.
Expanding midstream infrastructure will be essential to lowering costs.
Although none of the hubs included any projections regarding midstream infrastructure needs, most of them acknowledged that infrastructure expansion would help bring down the cost of hydrogen distribution and storage. Pipelines or fueling stations were a common thread mentioned by nearly all awardees as necessary infrastructure to bring down costs. Some touted their favorable geological conditions for hydrogen storage, as is the case with the Gulf Coast Hub’s salt caverns, while others mentioned plans of developing CO2 storage to permanently sequester byproduct carbon from hydrogen production, as is the case with the Appalachian Hub.
The announcement on the Regional Clean Hydrogen Hubs has highlighted several key challenges—some were well-known while others were underappreciated. Also, some key information such as feedstock-specific clean hydrogen demand projections remain to be seen. Nonetheless, the hub selection is part of a key national exercise in sharpening our focus on how to overcome techno-economic barriers and generating socioeconomic opportunities that are associated with developing a hydrogen economy in the United States. The selection is also a crucial step for private sector stakeholders in refining their approaches to partaking in and expanding the hydrogen value chains. Analysts look forward to further clarity and additional details as the selected hubs negotiate the terms of agreements with the DOE and embark on the first of four phases that focuses on detailed project planning.
Jane Nakano is the senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Mathias Zacarias is a research associate with the Energy Security and Climate Change Program at CSIS.