Green shoots emerge in US renewable hydrogen market

Data Insight Inside Infra 31 May

Green shoots emerge in US renewable hydrogen market

Green hydrogen projects are starting to gain traction in the US thanks in part to state and federal government incentives.

The US green hydrogen market is showing signs of life as public sector support and expectations that costs will fall entice private investors into the market, according to Infralogic data and energy transition experts.

If costs fall as predicted over the next 25 years, the sector will grow — albeit slowly, the experts said.

Some of the incentives stem from the US Infrastructure Investment and Jobs Act, signed into law in 2021, which included USD 9.5bn for hydrogen initiatives. Of those, USD 8bn will go to funding regional clean hydrogen hubs; USD 1bn will fund a clean hydrogen electrolysis program; and USD 500m will finance clean hydrogen manufacturing and recycling initiatives.

The Department of Energy (DOE) issued two requests for information in February for input on the implementation and design for the regional hydrogen hubs (known as “H2 Hubs”) and for research on clean hydrogen technologies including electrolysis for green hydrogen.

“This significant federal support has the potential to galvanize the industry,” said Paul Epstein, a partner specializing in project financing at the Shearman & Sterling law firm. “The goal of the H2 Hubs program is to pair supply and demand in certain regions in the US.” 

Activity, sparked

Of five US hydrogen projects that meet Infralogic’s criteria and have reached financial close since April 2020, three were M&A transactions and two were refinancings. The ten US transactions in the pipeline, however, are predominantly Greenfield deals, according to Infralogic data.

In late April, the DOE issued a conditional commitment of up to USD 504.4m in debt financing to three companies to fund the Advanced Clean Energy Storage Project, which is expected to become the world’s largest industrial green hydrogen production and storage facility.

Additionally, the DOE in May awarded  USD 24.9m in funding for six research and development projects for clean hydrogen. General Electric and Raytheon Technologies were among the companies awarded.

But not all progress in renewable hydrogen is being pushed by the government. Clean Energy Holdings on 23 May announced it hired ING Americas as financial advisor to help secure financing for a 250 MW green hydrogen and liquefaction project in Texas that will eventually produce 30,000 kg a day of liquified green hydrogen.

And on 11 May, Enbridge and Humble Midstream announced the joint development of a low carbon hydrogen and ammonia production and export facility near Corpus Christi, Texas.

State incentives are also prompting activity. The California Energy Commission's Clean Transportation Program supports the development of hydrogen infrastructure such as fueling stations. Almost all hydrogen fueling stations in the US are in California.

The Texas Department of Transportation (TxDOT)’s Provision for Establishment of Hydrogen Program will be used to seek funding from public and private sources to acquire and operate hydrogen vehicles and establish and operate publicly accessible hydrogen fueling stations, according to the DOE.

Not all regulatory schemes are helpful for green hydrogen. For instance, the US government does not differentiate in its regulatory scheme between renewable hydrogen and carbon-heavy hydrogen, and this lack of clarity — and the fact that the government offers no incentives to produce clean hydrogen — is limiting the sector’s development, according to PwC.

And some regulatory help remains in the proposal stage. A hydrogen tax credit included in the stalled Build Back Better bill could boost hydrogen development with a clean hydrogen production tax credit of USD 3/kg.

“The tax credit has a potential to incentivize a shift to green hydrogen for the private investors,” said Julio Friedmann, a non-resident fellow at the Center of Global Energy Policy at Columbia University.

Cleaning it up

Hydrogen production is not new to the US, but about 95% of that production is grey hydrogen, according to the DOE. A shift to clean hydrogen is considered vital to reach the 2050 net-zero emissions goal set by the Biden Administration last year.

The advisors agree that the current cost of hydrogen is not yet bankable. According to the DOE, hydrogen costs average USD 5/kg, though that is expected to fall steadily to USD 1-USD 1.5/kg by 2050, according to PwC.

“We expect most green hydrogen projects to have a heavy dose of equity given the still nascent market in the US,” said Epstein. “Unlike some infra deals with contracted revenues, we certainly will not see these projects with debt-to-equity ratios of 90:10 or 80:20. The clean hydrogen market currently does not have the risk tolerance and underlying infrastructure to support such debt exposure and to increase leverage will likely need to rely on funding from the public sector such as the Department of Energy loan programs.”

The lack of creditworthy offtakers willing to commit to long term agreements is also adding to the project financing risks, according to Omar Samji, an energy transition partner at Shearman & Sterling.

“The billion-dollar question for developers is finding creditworthy offtakers that can commit to 10-to-20-year offtake agreements for clean hydrogen while figuring out delivering the product to their doorstep,” said Samji.

Demand for hydrogen will grow at a moderate, but steady pace as the cost of the fuel falls, according to the advisors.

According to PwC, hydrogen trading markets will grow in tandem with demand. PwC expects that regions with densely populated areas and ample renewable resources will mostly import hydrogen.

Advisors also say demand for hydrogen will rise as the market finds more uses for hydrogen.

“What gets the market excited is potentially using hydrogen as a fuel since it doesn’t emit CO2,” said Gabriel Salinas, an energy and infrastructure counsel at Shearman & Sterling. “People will find more ways to use hydrogen on top of the current uses, which mostly concentrates on petroleum refinery and fertilizer production.”   

A crucial part of the hydrogen economy will be the underlying transportation infrastructure that moves hydrogen from producers to offtakers, according to Shearman & Sterling’s Samji.

“Private investors may find opportunities in not just hydrogen production, but also in establishing the underlying hydrogen transportation infrastructure to facilitate the development of the sector,” said Samji.

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