A fight over a vital federal tax credit intended to kickstart a market for clean hydrogen and worries over high production costs are cooling near-term expectations for the climate-friendly fuel.
Clean hydrogen has been heralded as a carbon-free fuel that’s key to efforts to remediate the climate crisis. It would help clean up dirty industries like chemical and steel production, be a source of clean transportation fuel and help the U.S. hit a goal of net-zero greenhouse gas emissions by 2050. But getting things started isn’t going so well.
After years of hype, fundraising, and billions of dollars of federal support to get a green hydrogen market off the ground, there’s growing pessimism over how fast the carbon-free fuel can ramp up. Frustrated by proposed guidelines for a crucial government incentive that they deem too strict, companies including ExxonMobil and Plug Power are threatening to scrub or delay big hydrogen projects.
“Two years ago this was super-hyped. It was like, everybody’s exuberant,” Raffi Garabedian, CEO of Electric Hydrogen, told Forbes. “What’s happened is people started realizing, ‘Oh, shit, this thing I’ve been talking about for a while — the hype-to-reality ratio — projects aren’t getting built. I wonder why? People have started realizing this is really hard.”
Clean hydrogen — particularly the “green” variety made from just water and renewable electricity — is central to the Biden Administration’s strategy for slashing carbon pollution. But proposed rules for a tax credit worth up to $3 a kilogram to offset the fuel’s higher production costs favor projects that rely on new renewable (or nuclear) power sources, which raises the cost substantially. Garabedian is fine with that, but some competitors say it’ll keep the price of green hydrogen too high. And ExxonMobil is unhappy that its approach — making hydrogen from natural gas but capturing the CO2 before it can escape into the atmosphere — probably won’t get the full credit.
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Dirty hydrogen can be made for $1.06/kilogram. Green hydrogen costs up to four times as much.
As with other low-carbon technologies, including solar panels, wind turbines and electric car batteries that had to conquer early high costs, clean hydrogen has to get cheaper to be competitive and impactful. But getting even to cost parity with the dirty industrial variety made from natural gas won’t be easy — it’s made for as little as $1.06 a kilogram. Green hydrogen costs about four times as much.
The world uses about 92 million tons of hydrogen a year, mainly for heavy industry. By the end of the decade, industry researcher Wood Mckenzie estimates clean hydrogen production could grow to about 14 million tons, from essentially nothing now. It’s an amount that would mark the start of critical mass for the fuel. But that’s about 1 million tons less than it had previously anticipated in late 2023.
“We expected some delays, but they’re a bit more than what we and others had thought,” said Murray Douglas, vice president for hydrogen research at Wood Mackenzie in Edinburgh, Scotland.
“It’s everything: the cost of the renewable generation; it’s the rules; it’s general cost inflation across all industries; and then it’s also convincing (customers) that they should sign up now, rather than waiting for costs to come down,” he said. “When you put these things together, you begin to get a more bearish view of 2030.”
That’s leading some fossil fuel companies to take a presumptive victory lap.
“We should abandon the fantasy of phasing out oil and gas, and instead invest in them adequately, reflecting realistic demand assumptions,” Amin Nasser, CEO of Aramco, the world’s largest oil company, said at S&P Global’s recent CERAWeek conference in Houston. “Many of us have been saying for a long time that the world has been trying to transition in a fog, without a compass, on a road to nowhere.”
Credit Critics
Along with green hydrogen startups, incentives to ramp up a clean hydrogen industry need to compel fossil energy companies that are a big part of the climate problem to join in. But the plan as proposed doesn’t do that.
In a letter to regulators, the biggest U.S. oil company said a project in Baytown, Texas, that it’s touted as the world’s largest low-carbon hydrogen plant, is at risk from the proposed credit rules that don’t incentivize carbon capture and storage. If they’re not altered, “the cost of the hydrogen produced will be such that the market for low carbon hydrogen will not be catalyzed and our project, and possibly others, will not proceed,” wrote ExxonMobil vice president Jim Chapman in the letter.
Even Plug Power, an early leader in green hydrogen, isn’t pleased with having to use power from new, clean sources to get the full credit. The company told Forbes a green hydrogen plant in California intended to make 500 tons of carbon-free hydrogen a day may not open next year as planned due to the 45V tax credit proposal and other factors. (Its first such facility opened in Georgia this year, getting electricity to make hydrogen from a new nuclear power plant. All hydrogen made there will be eligible for the credit)
As currently proposed, “we think the U.S. now takes a real backstep to Europe on hydrogen,” Plug CEO Andy Marsh said in a December 2023 interview.
A final version of the credit rules is expected late this year, likely before the November election.
Pricey Fuel
ExxonMobil’s interest in making cleaner hydrogen is understandable. Like Aramco, it already uses huge amounts of conventional hydrogen — and ranks among the world’s largest sources of carbon pollution. That’s not a good look as the worsening climate crisis brings new record temperatures on land and sea almost weekly.
Given the global scale of its operations and cash reserves of more than $31 billion, ExxonMobil is well-positioned to be a leader in capturing and storing CO2 from its operations, making what’s known as blue hydrogen. But the Biden Administration has decided not to reward that approach.
A landmark study by Cornell scientist Robert Howarth found that carbon capture and storage is energy-intensive and leads to even more climate pollution than if the CO2 just wafted into the air. Its greenhouse gas footprint is also “more than 20% greater than burning natural gas or coal for heat and some 60% greater than burning diesel oil for heat,” the study found.
Unlike petroleum-based fuels, there’s no commodity market price for hydrogen. It’s supplied directly from producers to consumers. Big users, like oil refineries and chemical plants, get it for the lowest cost. Others pay much more.
“The cost of hydrogen is running about 2.5 times more than for compressed natural gas.”Foothill Transit CEO Doran Barnes
In California, the only U.S. market for hydrogen vehicles, Toyota-backed First Element operates dozens of fuel stations dispensing highly compressed hydrogen for an eye-popping $36 a kilogram to drivers of Toyota Mirai sedans and Hyundai Nexo SUVs. (The price is distorted by the fact that most hydrogen vehicle owners get prepaid cards for up to six years of free fuel.)
Prices are a bit better for Foothill Transit, a Los Angeles-area agency with three dozen hydrogen buses and that’s adding 20 more. It negotiated a multiyear rate from a hydrogen supplier of $9.12 a kilogram, said Foothill CEO Doran Barnes. And while the buses are reliable, “the cost of hydrogen is running about 2.5 times more than for compressed natural gas,” he said.
Need For Power
The requirement that power to make green hydrogen come from new clean energy sources is understandable. The electric grid is already struggling to keep up with rising demand from power-hungry data centers, booming U.S. manufacturing and growth in electric vehicles that require charging.
“If we’re going to grow energy demands by producing electrolytic hydrogen we have to add new clean power resources to support that,” said Eric Guter, vice president of hydrogen mobility for Air Products, the world’s biggest supplier of the gas. “Otherwise we’re going to exacerbate the emissions problem on the backs of taxpayers, and that will destroy the long-term outlook for a viable clean hydrogen market.”
Air Products plans several large-scale green hydrogen projects that open later this decade — including one in oil rich Saudi Arabia — and supports the proposed tax credit rules. So too does Electric Hydrogen, which is developing large-scale green hydrogen plants. Cofounded by two solar industry veterans, the Boston-based company’s business plan is to locate hydrogen operations near new wind or solar projects and, ideally, avoid plugging into the grid. It’s raised more than $600 million from investors including Bill Gates’ Breakthrough Energy Ventures, Energy Impact Partners, BP Ventures and Amazon.
“We’re competing against 100 years of global subsidy, war, blood, fortune and gold that’s gone into making oil and gas what it is today.”Electric Hydrogen CEO Raffi Garabedian
It wants to deliver its first commercial-scale green hydrogen plant late this year to billionaire Wes Edens’ New Fortress Energy. New Fortress intends to sell the fuel it makes to an ammonia producer. Powered by 100 megawatts of electricity, the plant will be capable of making up to 45 tons of fuel daily.
Garabedian said another early market for green hydrogen may be for sustainable aviation fuel, or SAF, as regulations in Europe force airlines to use more low-carbon fuel. But as the company lines up customers, he understands the challenge ahead.
“We’re competing against 100 years of global subsidy, war, blood, fortune and gold that’s gone into making oil and gas what it is today. And it’s still the most highly subsidized industry in the world, other than the military,” he said. “Trying to compete with that on a cost basis, it’s insane.”
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