Hydrogen hubs and the shifting hydrogen ladder

Article by:

Don Kalenits, Senior Vice President of Energy Transition Solutions

MasTec Clean Energy & Infrastructure

On October 13, President Joe Biden announced the long-awaited, seven U.S. hydrogen hub locations that will receive a collective $7 billion in federal funding.? The selection by the Department of Energy (DOE) of these seven hubs could have a direct economic impact across 17 states. This is the first step in a long process, as hub applicants will spend the next 12 to 18 months validating their concepts for technical and financial feasibility before undergoing a final Go/No Go review. However, the selection of these hubs provides insight into the future role of hydrogen in the U.S. energy economy.

Hydrogen is often referred to as a “Swiss Army” knife of decarbonization because of its wide array of use cases.

In theory, you could use hydrogen for everything, from producing fertilizer to generating industrial process heat to domestic heating to powering cars, trains, ships, planes, and much more. But economic and technical analyses quickly show the limitations of the Swiss Army knife analogy – it may never make sense to use hydrogen for this broad array of applications.

Michael Liebreich, CEO of Liebreich Associates and founder of Bloomberg New Energy Finance (BNEF), has developed a useful concept called the Hydrogen Ladder to show what use cases for hydrogen will be close to unavoidable in a decarbonized economy due to a lack of cheaper, safer, or more convenient alternatives. Following the announcement of the hydrogen hub winners, Liebreich revised the Ladder, upgrading three use cases (jet aviation, regional trucks, and short-duration grid balancing) to one step below unavoidable.

MasTec has spent the last year working with investors and developers on multiple hydrogen projects, and our experience validates a lot of what Liebreich has identified. We are also talking to utility clients who see the value of hydrogen for long-duration storage but are also exploring hydrogen use for power generation and other applications. Currently, there are 39 hydrogen pilot projects underway at utilities nationwide.

The DOE hub selections hint at where they see the market headed:

• Green hydrogen may be the future: All seven of the selected hubs include a green hydrogen component, and BNEF is projecting green hydrogen will outcompete blue hydrogen on a levelized cost basis (LCOH) by 2030. However, renewables projects are facing significant cost pressure due to rising grid connection costs, supply chain issues and other challenges. The longer-term trajectory of renewables shows enormous potential for cost efficiencies, but early in the development cycle, the economics are very challenging.
• Blue hydrogen might be the near-term reality: As a surprise to many, four of the announced hubs incorporate blue hydrogen with plans to capture and store up to 25 million tons annually.
• Hydrogen will likely play a key role in aviation decarbonization: We are seeing a lot of interest in sustainable aviation fuel projects, including both e-fuel (hydrogen combined with carbon captured from direct air capture systems), as well as power and bio to liquid fuel. A big part of this early demand is due to the 45Z Clean Fuel Production Tax Credit, which applies to fuels produced after 2024 and sold before 2028.?With that said, there is an increasing consensus that sustainable aviation fuel is the most viable path forward for a decarbonized aviation industry.
• (Big) hydrogen-powered trucks are a potential winner: Every DOE hub region, except the Heartland Hub, describes building networks of hydrogen fueling stations for long-haul trucks, buses, municipal waste, and other heavy-duty vehicles.
• DOE views hydrogen as key to decarbonizing hard-to-abate industrial sectors: Six of the hub projects plan to use hydrogen in industries such as chemical, steel, and cement manufacturing.

While the DOE announcement on hydrogen hubs is certainly exciting news, the reality is that a clear, defined path forward depends on the Internal Revenue Service’s guidance on the 45V Clean Fuel Production Tax Credit, which is anticipated to be released by the end of the year. It’s been reported in multiple industry publications that pressure is mounting on the U.S. Treasury Department to deliver guidance that is void of overly stringent requirements.

A favorable ruling is the key to unlocking off-taker demand for hydrogen and will instantly change the economic viability of a broad range of hydrogen projects.

The DOE’s hydrogen hub announcements are an important milestone in what will ultimately be a multi-decade journey. Perhaps the biggest takeaway from the designation of these seven hydrogen hubs is that the multi-decade journey to decarbonization will continue to be led by our energy industry.

These hubs are exceptionally complex and large in terms of capital required to get them to commercial operation, so the long-term viability of hydrogen will depend on successful project execution and our ability to apply lessons learned and drive costs down over time.