Cihang Yuan is the senior program officer for international corporate climate partnerships and Daniel Riley is director of corporate climate and renewable energy at World Wildlife Fund.
As the global community confronts the escalating climate crisis, the prospect of clean hydrogen provides a reason to be optimistic. However, the scarcity of hydrogen incurs high opportunity costs. In order to unlock the true potential of clean hydrogen as a tool for accelerating the phaseout of fossil fuels, it must be deployed strategically to decarbonize sectors of the economy that are hard to electrify. This targeted approach is essential to maximize the efficient use of this valuable but limited resource.
Such an approach will require federal support to build critical infrastructure, mitigate transactional risks, accelerate the learning curve and support the significant facility upgrade investments required for strategic uses of clean hydrogen. The good news is that the Department of Energy's $1 billion fund for demand-side support mechanisms, or DSMs, is a promising start to shore up market certainty and grow demand for priority sectors.
A bit of background: Green and blue hydrogen are the two main clean hydrogen production pathways. Green hydrogen is produced using renewable electricity to separate water into hydrogen and oxygen through a process known as electrolysis. Blue hydrogen uses carbon capture and storage for conventional fossil-based hydrogen production. Clean hydrogen is a versatile solution for tricky challenges in addressing climate change. It's uniquely well suited for decarbonizing sectors such as heavy industries, including steel, chemicals and cement production, and long-haul, heavy-duty transportation where electrification is not feasible or efficient. Moreover, it can serve as an energy storage medium and bolster the resilience of electricity grids that are increasingly dependent on intermittent renewable sources.
Clean hydrogen is critical for these hard-to-abate sectors. It should not be used for the low-hanging fruit of the climate challenge that has other readily available, less costly and more efficient alternative solutions.
Recent federal legislation has provided strong policy support to jump-start the hydrogen economy. The Inflation Reduction Act introduced a production tax credit that could significantly reduce the production cost of clean hydrogen. The Infrastructure Investment and Jobs Act, through its $8 billion Regional Clean Hydrogen Hubs Program, will be a significant first step in establishing the long-term hydrogen infrastructure and ecosystem.
$7 billion will be awarded to seven selected hydrogen hubs to build hydrogen production facilities and critical transportation and storage infrastructure to scale hydrogen applications in various sectors. These regional hydrogen hubs, located at critical industrial clusters and transportation hubs and covering a diverse range of production and end-uses, will form the building blocks of a national hydrogen network. The remaining $1 billion will go towards DSMs, strengthening the much-needed market certainty for hydrogen buyers.
These policy provisions — the production tax credit, the hydrogen hubs and the DSMs — collectively address the principal barriers to a clean hydrogen economy: production costs, the need for hydrogen infrastructure and lack of demand.
However, despite this historically unprecedented policy investment, many projections show that clean hydrogen will be in limited supply for decades to come. In fact, DOE’s National Clean Hydrogen Strategy and Roadmap shows that by 2040, clean hydrogen production will reach 20 million metric tons, which only doubles the amount of fossil-based hydrogen currently produced in the U.S. Demand from three heavy industrial sectors alone — chemical, steel and cement production — could exceed that, estimated at approximately 26 million metric tons in 2050.
Priority applications
So, what are the priority applications for clean hydrogen and why?
First, any government support for hydrogen must focus on high-impact use cases that have scarce alternative decarbonization solutions. This includes substituting fossil-based hydrogen used in industrial processes with clean hydrogen and deploying it for long haul, heavy-duty transportation and high-temperature industrial heat. Indiscriminate use of the limited supply of clean hydrogen will delay the critically necessary progress in these hard-to-abate sectors and waste valuable resources.
Second, efficiency is also an important consideration in determining when hydrogen should be utilized. Renewable electricity, a valuable but limited resource, should be allocated wisely. Green hydrogen production requires a significant amount of renewable electricity. Therefore, the limited amount of clean hydrogen should be directed toward applications where electrification is not feasible or efficient. For example, a hydrogen boiler requires five to six times more renewable electricity to generate the same amount of heat as an electric heat pump, making it inefficient for residential heating. However, they hold significant potential in sectors like heavy industries, where electrification cannot yet deliver the high temperatures that the processes require.
Third, policy investments, such as the clean hydrogen production tax credit, are time-bound and have an end date. The long-term commercial sustainability and scalability of hydrogen applications will hinge on their sustained economic viability. A DOE report reveals that sectors with limited decarbonization alternatives, such as heavy industries and long-haul, heavy-duty transport, exhibit a greater willingness to pay for hydrogen than industries that would use it for power generation or natural gas blending. This translates into a stronger business case to adopt clean hydrogen for buyers and better profitability for producers. Supporting market development for these strategic uses of hydrogen is the key to scale.
Public sector support
Now that we know the priority sectors for clean hydrogen, what public sector support do they need to realize the full potential of a clean hydrogen economy?
Primarily, the regional hydrogen hubs funding must prioritize investments in sectors aligned with DOE’s National Clean Hydrogen Strategy and Roadmap and Pathways to Commercial Liftoff: Clean Hydrogen analyses. Grant negotiations have just begun. DOE still has a lot of time and leverage to ensure that these regional hydrogen hubs invest in strategic uses of hydrogen. This includes investing in facility upgrades in heavy industries to help them overcome the transition cost barriers. The hubs will also need to build the foundational hydrogen delivery infrastructure of our future hydrogen networks. DOE must ensure that the hubs plan and invest in infrastructure that will scale hydrogen uses in priority sectors, such as direct hydrogen pipelines to local chemical or steel facilities, ports and airports, and fueling stations for hydrogen trucks. Hydrogen hub funding must prioritize support for heavy industrial clusters and long-haul, heavy-duty transportation uses.
The DSMs are an additional lever to shape the hydrogen hubs and intentionally foster demand from priority sectors. On January 17, 2024, DOE announced the selection of a consortium to design and implement DSMs for unlocking the market potential of hydrogen hubs. These mechanisms can be the first steps to help end-users manage risks and overcome barriers to entry into the nascent hydrogen market. They can be tailored to specifically focus on critical sectors, such as feasibility studies for chemical or steel facilities, funding to cover facility retrofits, or innovative contracting practices for transportation fuels to provide price certainty.
Notably, while the DSMs are a promising start for scaling hydrogen demand, end-users in these priority sectors need more support. One significant challenge is the upfront capital investment to switch to clean hydrogen. In the industrial sector, for example, end-users may need to retrofit their facilities, replace boilers or tweak their production processes to switch to clean hydrogen. The facility upgrade cost, on average, is about $1,500 per ton of product for the chemical sector and over $500 per ton for the steel sector. To overcome the high upfront cost of retrofitting a facility, they need additional financial support, such as a tax credit.
Without intentional policy support for those hard-to-abate sectors, clean hydrogen may go to ineffective use cases. Blending small amounts of clean hydrogen into the natural gas pipeline or co-firing with natural gas for electricity generation may seem like an easy way out of the infrastructure challenge and significant upfront capital investment needed to scale hydrogen demand in hard-to-abate sectors. However, it will lock in wasteful uses of clean hydrogen and undermine the historic public and private investments in the clean hydrogen industry.
The U.S. is at the dawn of a clean hydrogen economy. The increasing consensus is that we need to grow demand as fast as we scale production. However, this does not mean we should default to an indiscriminate use of clean hydrogen. We need to focus on sectors where hydrogen can have the most significant impact, ensure the efficient utilization of our resources and consider the long-term economic viability of hydrogen applications. Only then can we fully harness the potential of hydrogen to power a sustainable, clean and competitive future.
