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5 steps to unlock growth in US clean hydrogen

June 25, 2024
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  • US clean hydrogen developers need clarity on tax credits
  • Off-takers need certification too, says Troutman Pepper report
  • Export market, manufacturing and pipelines are also priorities

 

Efforts to grow the US clean hydrogen sector are being hampered by a lack of clarity about production tax credits announced in the Inflation Reduction Act two years ago.

That is one of the main findings of a report launched today by US law firm Troutman Pepper about how to accelerate the growth of clean hydrogen. The report is called ‘Fueling Up: How to Make US Clean Hydrogen Projects Happen’, and identifies five main areas of concern for developers and hydrogen off-takers. The research draws on insights from over a dozen industry experts, and was conducted in partnership with Tamarindo.

There were 248 clean hydrogen projects in development or being built in December 2023, according to the Hydrogen Council in December 2023. The number of projects in North America has grown 20% in the last year due to support in the Inflation Reduction Act and Bipartisan Infrastructure Law.

But developers face a challenge taking projects to final investment decision and then into construction. The report focused on five areas where more activity is needed:

 

1) More clarity needed on clean hydrogen tax credits

One of the biggest obstacles for developers is the proposed structure of production tax credits under section 45V of the Internal Revenue Service’s Internal Revenue Code. The IRS issued draft regulations in December 2023 setting out the rules for how firms could secure PTCs of up to $3/kg at their clean hydrogen production facilities.

However, developers said they are facing difficulties due to the three strict criteria in the draft rules, about additionality, time matching and deliverability. Companies now need further detail about how strict the final rules will be. Optimists expect clarity this summer, but others have warned this may come after the presidential election.

Those in the industry must keep lobbying for changes, and also keep a close eye on state laws to ensure they align with the final rules, not the controversial draft laws.

 

2) Improved certification to improve off-taker confidence

Firms know about the potential for clean hydrogen to replace hydrogen made using fossil fuels, and how it could revolutionise chemicals production, metals production and oil refining. But interviewees warned that federal activity has focused too much on measures to support clean hydrogen production rather than growing demand.

Tiffany Wallace, legal counsel at Volvo Trucks, said off-takers are keen to use clean fuels that will help them reduce their carbon emissions. But she said one difficulty for off-takers is a lack of certification schemes to verify the environmental credentials of the fuel they buy.

Developers must be aware of how important these standards are for off-takers, and work to provide proof that the hydrogen they produce meets high environmental standards. This will also help developers win vital off-take deals.

 

3) Boosting exports to provide additional routes to market

In the longer-term, interviewees said that developers would benefit if policymakers can support the growth of clean hydrogen export markets, both between US states and overseas. Experts see attractive opportunities for exports of clean hydrogen and related products to Europe and Asia, but said this needed US policymakers to work with counterparts in regions including the European Union to set global standards for low-carbon hydrogen.

This work would also help increase transparency of hydrogen pricing and the growth of the spot market. Those in the industry must contribute to this standard-setting.

 

4) Building the US manufacturing footprint for hydrogen technology

Federal government wants to build the US manufacturing base for clean hydrogen electrolysers. Even though Bloomberg New Energy Finance warned in March that there is a global oversupply of electrolysers, around 68% of that is based in China so investment is needed in the US. There is a short-term opportunity for US developers to bring in electrolysers from China, and they should not be penalised for this while the market gets established.

It is not all about electrolysers either. The report also highlighted the potential for ‘turquoise’ hydrogen, where hydrogen is created by pyrolysis units using a process called methane pyrolysis. A wide range of hydrogen technologies need to reach commercial maturity.

 

5) Prioritising ‘backbone’ infrastructure to reduce project risks

The growth of US clean hydrogen is not just about production and demand. Firms will also need to be able to store and move the hydrogen they create, which means the government has to look at how it can unlock investments in new infrastructure.

For example, one interviewee said the US should look at the European Hydrogen Backbone scheme being developed in the EU, and work to replicate it. This is not a short-term project: the EHB plans for a 39,700km network of hydrogen pipelines that is set to be developed by 2040 and connected to 21 European countries. Companies and policymakers in the US should start working on these long-term initiatives.

In addition, developers should look at how they can take projects to financial close by pursuing schemes that don’t rely on major new infrastructure built by third parties.

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