Can hydrogen be the US net-zero hero?

Since hydrogen does not exist freely in nature, it must be produced from other sources. There are many sources of hydrogen and many methods to produce hydrogen based on these sources, and a spectrum of colors has been adopted to classify hydrogen fuel based on source. 

Currently the most widely used, gray hydrogen is produced through natural-gas-fueled steam and stream-methane reforming. Unfortunately, these processes produce greenhouse gas (GHG) emissions. However, when gray hydrogen is combined with carbon capture use and sequestration technologies, the carbon footprint is vastly reduced and the resulting hydrogen is considered blue hydrogen. Separately, there are promising opportunities around green hydrogen, which is produced using renewable energy (e.g., solar, wind) in the electrolysis of water (H20) (i.e.., separating hydrogen (H2) from oxygen (O)). Additionally, there are encouraging opportunities from pink, red and purple hydrogen production processes, which leverage nuclear energy (electrical and thermal) to produce hydrogen by incorporating the hydrogen production processes into the existing energy facilities and thus generating net-zero GHG emissions in the production processes. The energy industry continues to explore and innovate to produce hydrogen at scale while producing net-zero emissions.

While it’s clear that the recent legislation has the potential to change the economics of hydrogen production and that the need for reducing GHG emissions creates an increasing opportunity and need for hydrogen use, which companies will be most likely to shepherd the revolution?

Three classifications of hydrogen players will progress this technology in the next six to 18 months. First are the relatively small companies, especially those that have already identified technologies and plans, or have firm offtake agreements in place. These companies are often dedicated to niche areas, with a singular focus, agile governance and a desire to reach final investment destination (FID) quickly. Second are the larger companies that can scale the hydrogen economy, such as the largest oil and gas companies. While these companies may take longer to sanction their own projects (and may be eventual buyers of the first movers), it presents an opportunity and time to reflect the need for greater diligence in establishing new low-carbon business units.

Finally, the eventual hydrogen market leaders will be those that can pounce on the opportunities and sew together multiple value pools, either through competitive advantages in technology or differentiated elements in the supply chain. These companies will be able to capture additional margin through maximization of credits and incentives — and likely also extend the life of legacy assets and infrastructure.

It’s clear that economic and regulatory incentives have unlocked an opportunity for hydrogen, particularly around the blue and green hydrogen pathways. However, there are three essential considerations for any company exploring hydrogen investments:

1. Define the commercial model. The IRA positions enough projects to have potential economic impact that a natural experiment to test the merits and concerns with various competing commercial and financing approaches will be tested. Similar to the US liquified natural gas (LNG) sector, differentiated commercial models reflect the other assets of project owners, access to feedstocks and preferences of buyers. Hydrogen can follow a similar model.
   
   
2. Develop additional downstream markets. It is expected that the initial hydrogen projects will be aimed at helping current consumers of the gas decarbonize their supply chain. But the real work — and opportunities — will come in developing new applications and opening new markets. These include transportation, utilities and hard-to-abate industrial segments.
   
   
3. Build out the enabling infrastructure. The IRA focuses US federal income credits and incentives in the hydrogen space toward production to spur initial investments more quickly, and so much on the infrastructure and midstream portion of the supply chain. In theory this should lead to further demand, but the infrastructure to connect supplies with these consumers will need to be defined and built. Most critically, having a full-lifecycle end-to-end view of the value stream can help companies design projects, including midstream elements, that can further accelerate the development of new hydrogen value pools.  

Because of its potential to decarbonize electricity generation, transportation and end-use heating, hydrogen is critical to the future energy system. And because of the vast opportunities and government-based incentives, the first-movers will gain advantage.