U.S. Bets on Hydrogen Hubs to Decarbonize Industry, But Questions Loom on Economics

• President Biden announced $7 billion in federal grants for 7 regional hydrogen hubs across 16 states to boost clean hydrogen production.
• The hubs aim to help decarbonize heavy industries like steel and cement that are hard to electrify. They involve major companies like Exxon, Chevron, and Amazon.
• The plan is to increase US clean hydrogen output from 10 to 50 million metric tons by 2030 and 2050. But the industry has concerns about costs and accessing subsidies.
• Most hubs will use natural gas and need carbon capture. Environmentalists want subsidies to only go to hubs using new clean electricity.
• With pending Treasury rules on accessing subsidies, it's unclear if new projects can get financing. But the hubs are one of the biggest US clean manufacturing investments.

The Biden administration is making a massive bet on hydrogen fuel to help decarbonize major U.S. industries like steel and cement production. But uncertainties around the underlying economics have both industry and environmental groups raising questions even as billions in government funding start to flow.

On a visit to Philadelphia, President Joe Biden announced the Department of Energy had selected seven regional hydrogen hub projects to share $7 billion in federal grants. The public-private partnerships across 16 states from Pennsylvania to California aim to jumpstart clean hydrogen production and infrastructure for industrial end users. With additional private investment, the total price tag stretches to $50 billion. Biden called it "one of the largest advanced manufacturing investments in the history of this nation."

The administration views hydrogen as a promising clean fuel option, especially for hard-to-electrify sectors. Burning hydrogen produces only water vapor, releasing no carbon. Most hydrogen today comes from natural gas in a process that emits carbon dioxide. But it can be "clean" if made using wind, solar, nuclear or fossil fuels paired with carbon capture. Biden has set ambitious targets, aiming to hike U.S. clean hydrogen output fivefold to 50 million metric tons by 2050. The selected hubs represent a downpayment. They involve over 200 companies, from oil giants like Exxon and Chevron to tech firms like Amazon.

Amazon is among the expected end users in the $1.2 billion HyVelocity hub anchored in Texas by Exxon, Chevron, Air Liquide and others. A Pacific Northwest hub combines Amazon, Mitsubishi and Air Liquide to serve markets like steel. Midwest, Gulf Coast, Appalachian and California hubs round out the list.

Looming Questions Around Economics

The administration touts the investment as spurring tens of thousands of jobs and kickstarting a new domestic clean energy industry. But a closer look suggests questions remain around project timelines and underlying economics.

Industry representatives warn many proposed hydrogen ventures may not reach construction. Permitting obstacles, high interest rates, and uncertainty around accessing additional government subsidies all raise economic concerns.

"It's not guaranteed that someone selected is even going to make it through negotiations and get awarded the money," cautioned hydrogen expert Jason Munster.

The selected hubs will now enter lengthy design, permitting and financing phases. Before billions in Department of Energy funding gets wired, the groups must ink grant agreements specifying milestone targets.

All Eyes on Treasury Rules

The hydrogen industry is also awaiting guidance from the Treasury Department on accessing expanded tax credits for clean hydrogen production, worth up to $100 billion, created by last year's Inflation Reduction Act.

The forthcoming rules will shape that program's impact. Environmental groups want subsidies limited to production using new clean energy sources. Industry wants wider access to spur investment. Until the Treasury clarifies, the economics of new projects remain uncertain.

"You can't model out on returns until we have more clarity on policy," said Erika Taugher of developer Pattern Energy. She spoke during the Reuters Hydrogen North America 2023 conference.

Carbon Capture Questions

Most selected hubs plan to use fossil fuels, mainly natural gas, for initial hydrogen output. That means they would need to install carbon capture and sequestration systems to qualify as clean production.

But carbon capture technology remains unproven at scale. Some experts question whether projects will deliver the promised emissions reductions. "We need rigorous guardrails to ensure that U.S. hydrogen does not create an emissions mess," said Rachel Fakhry of the Natural Resources Defense Council.

Investment Upside Over Time

Despite outstanding questions, the hydrogen hubs represent a big bet on a new U.S. clean energy industry with upside for investors over time. Once the first projects get built, subsequent expansions could see improved economics.

There is major demand potential from industries like steel, fertilizer and transport facing pressure to cut emissions. As hydrogen gets produced at larger scales, costs are projected to fall. The Biden administration aims to kickstart a competitive domestic clean hydrogen sector. But near-term hurdles around untested technology, policy uncertainty and high costs may temper outlooks.

Still, successful projects could position first movers to ride growing demand. Over decades, hydrogen may shift from a bit player to a pillar of a decarbonized economy. For investors and policymakers, balancing promise and pragmatism will define the road ahead.