Author: Janet Howard, Partner, Fasken Martineau DuMoulin LLP, Regional Leader of Fasken’s global energy and climate group and co-founder of the firm’s hydrogen energy advisory team.
You can’t see it, smell it, or taste it. But can you hear the buzz?
It can be grey, blue, green, pink, turquoise or white. It can travel as a gas by road, as a liquid by pipe, or as ammonia by ship. It can be made from electricity. It can also make electricity. It is a carrier of energy. It is a storer of energy. It is not a battery, but it can help make them. It can be converted to derivatives, it can be used as a feedstock, it can generate heat and steam. It is not a source of energy, but it can be used as a source of power.
Its versatility is its value.
Hydrogen is the simplest possible molecule (two protons and two electrons). Hydrogen can only exist by bonding to another hydrogen, a strategic partnership in its purest form.
Production Side of the Market
Economic production at scale is key. Efforts are underway. North American governments have developed national and local level hydrogen strategies, deploying significant financial support and incentives.
A production tax credit in support of U.S. project provides up to U.S.$3 per kg of hydrogen produced with low lifecycle greenhouse gas emissions. An investment tax credit in support of Canadian projects provides U.S.$12.6 billion to cover 15%-40% of an eligible project’s costs, based on life cycle carbon intensity. Note the focus on the carbon intensity of the hydrogen and not the colour.
It’s a lot of funding, a lot of focused effort, a lot of wrinkles that will be ironed out - notably those relating to additionality, time-matching and geographic correlation, at the moment.
"With over 80 hydrogen production projects in various stages of development across Canada, clean hydrogen production capacity could reach five million metric tonnes (Mt) per year. In the U.S. clean hydrogen production is expected to scale to 10 million Mt per year by 2030, 20 million Mt per year by 2040 and 50 million Mt per year by 2050."
With over 80 hydrogen production projects in various stages of development across Canada, clean hydrogen production capacity could reach five million metric tonnes (Mt) per year. In the U.S. clean hydrogen production is expected to scale to 10 million Mt per year by 2030, 20 million Mt per year by 2040 and 50 million Mt per year by 2050. Globally, hydrogen production is expected to increase to 110 million Mt per year by 2030 and to 240 million Mt a year by 2040. (One Mt = 1,000 kg).
It’s a lot of hydrogen - coming soon to a pipe or pump near you, hydrogen produced by natural gas, biomass, wind, solar, hydro, and eventually nuclear power.
Time now to shift the focus from production to the next steps necessary to develop the North American market.
Who is going to buy all of this hydrogen?
Demand Side of the Market
Demand is there. The offtake agreements are not.
Not a half bad position to be in considering that hydrogen markets have been slow to develop in the past on the basis that demand was uncertain and so production did not follow. This time appears to be different.
Incentives to Drive Down Price
What is needed to encourage buyers to sign offtake agreements to purchase the hydrogen? Likely, the right price and the right price may depend on who is purchasing and for what end use purpose.
As a starting principle, the price of hydrogen competes with the price charged for conventional carbon emitting fuels (diesel, oil, and natural gas). In most cases the cost of hydrogen needs to be less expensive than these conventional fuels.
In certain circumstances, a premium paid for hydrogen can be tolerable for some buyers, if the cost they pay for fuel in their business is a small enough line item in their budget. If the business happens to be focused on decarbonizing its operations– all the better.
Increasingly, in certain cases the cost of hydrogen will also start to compete with the cost of electricity. As businesses seek to decarbonize through “electrification” the costs of electricity will come into play when assessing the costs incurred to run and charge an electric battery. If a business can get hydrogen more cheaply than it can acquire electricity, there will be an incentive to buy and secure supply.
"It is estimated that the U.S, production tax credit could represent a 50-70% reduction in the cost of green hydrogen production in the U.S."
It is estimated that the U.S, production tax credit could represent a 50-70% reduction in the cost of green hydrogen production in the U.S. Assuming those savings can and will be passed along to the purchasers of the hydrogen, that’s a great start. Direct funding is a helpful next step.
The US Department of Energy has announced the award of U.S.$750 million in grants to 52 hydrogen projects across 24 U.S. states in an effort to drive down the cost of producing clean hydrogen. More than 60% of the U.S.$750 million has been allocated to electrolyzer and fuel cell manufacturing with U.S.$316 million going to eight electrolyser manufacturers and U.S.$150 million to five projects scaling up fuel cell production.
In markets where government funding may not be as prevalent, there are impactful alternatives. Electric utilities could reserve and allocate a portion of the electricity available from clean grids for industrial production at a fixed rate for a long term. Interruptible rate pilot projects are under evaluation in the Province of Ontario.
The use of contracts for difference, can also be effective in markets where a price is charged for carbon emissions. The Canada Growth Fund (CGF) has a mandate to use contracts for difference to de-risk investments in technologies or projects that reduce emissions and generate carbon credits. Through a carbon credit offtake agreement, the CGF purchases these carbon credits for a fixed price and a specified term. The first carbon contract for difference involved the CGF’s purchase of up to 185,000 tonnes per year of carbon credits for 15 years at a precedent setting price of Cdn$86.50 per tonne (Cdn$16 million per year and Cdn$240 million in total).
Incentives to Encourage End Use
As noted above, hydrogen is a very versatile molecule and can be used in several different applications. Some end uses will be more accessible and make more financial sense early on, compared to end uses that might make the most sense, but take longer to develop.
"Hydrogen is very light and can therefore carry more energy per unit of weight. These attributes position the molecule very well to decarbonize heavy industry and hard to abate sectors (heavy transportation, oil and gas refining, steel and cement making)."
Hydrogen is very light and can therefore carry more energy per unit of weight. These attributes position the molecule very well to decarbonize heavy industry and hard to abate sectors (heavy transportation, oil and gas refining, steel and cement making). These applications will require a significant and steady supply of hydrogen on a 24/7 hour basis that is not readily available at the moment.
In the interim, as supply comes online and starts to scale, other applications might make more immediate financial and practical sense. For example, industry has safely used grey hydrogen for decades in applications including petroleum refining, aerospace applications, semiconductor manufacturing, pharmaceuticals, fertilizer production, glass purification and for the welding, annealing, and heat-treating of metals. Replacing the use of grey hydrogen with clean hydrogen in these conventional applications could be low hanging fruit.
Where else could we start?
Anything that currently runs on diesel could be converted to run on clean hydrogen. Think trains, planes, freight and delivery trucks, cement trucks, fire trucks, garbage trucks, tractors, military vehicles, buses, boats, ferries, barges, snowmobiles, generators for portable power, equipment used in construction, farming, and mining.
Hydrogen can also be used for heating. Several gas utilities are already starting to blend hydrogen into their natural gas pipelines- usually starting at 5%, working their way towards 15% with a view towards 25%. Hydrogen boilers, similar in size to conventional ones, can be designed to burn both hydrogen and natural gas for heating.
There is potentially a lot of equipment that needs to be replaced so it can run or be powered by hydrogen. Government rebate programs to encourage its purchase could fast track development and deployment.
Hydrogen can also enable the production of hydrogen derivates such as methanol, ethanol, sustainable aviation fuel, ammonia and kerosene which can be used in both industry and transportation.
Incentivizing the production of e-fuels can address both the demand for green fuels and certain environmental concerns. The requirement for CO2 in the production of certain e-fuels creates the opportunity for CO2 to be captured directly from the atmosphere from various industrial sources such as power plants or as a byproduct in biogas production. Government’s use of clean fuel standards has been helpful in generating momentum.
Hydrogen itself and the oxygen generated from splitting water through the process of electrolysis can be used as feedstocks in certain industrial process including those directed towards manufacturing green steel, green iron ore and green cement. If certain business is not yet ready for the hydrogen, initial offtakes for the oxygen may be of interest. Oxygen is also used in the manufacturing of steel and in other industries, including agriculture (for fish farming and wastewater streams) and healthcare (to treat respiratory illness).
There is a lot of equipment that will be needed to produce the hydrogen.
"In Canada, investment tax credits have been provided for clean technology and the manufacturing of clean technology that are needed to produce hydrogen, increasing supply and lowering costs."
In Canada, investment tax credits have been provided for clean technology and the manufacturing of clean technology that are needed to produce hydrogen, increasing supply and lowering costs.
In the U.S., the Department of Energy’s Hydrogen and Fuel Cell Technologies Office is focused on developing technologies that can produce hydrogen at U.S.$2/kg by 2026 and U.S.$1/kg by 2031 in support of the Hydrogen Energy Earth shot goal of reducing the cost of clean hydrogen by 80% to U.S.$1 per 1 kg in 1 decade (1 1 1).
Incentives to Develop Hydrogen Supply Chain
Once produced, hydrogen is expensive to transport to get it to end use purchasers. Until more is done to encourage the development of a reliable and steady supply chain of hydrogen, initial end use scenarios will be limited. Until then, hydrogen production projects will be constructed close to end users.
To enable transportation across shorter distances (by road) in a gaseous state, compressors and tube trailers are needed.
For transportation across longer distances (by road, rail, or pipeline) in a liquid state, liquefaction facilities to convert hydrogen gas to a liquid, by cooling it (below −253°C/−423°F) and cryogenic tanker trucks and rail cars will be required.
For transportation across longer distances (by rail or pipeline) in its gaseous state, conversion coatings, fiber reinforced polymer, austenitic stainless steels, and austenite-based alloys to help battle hydrogen embrittlement.
Hydrogen will be on the move. But to where?
Refuelling stations will be needed. Avoiding the creation of stranded assets will be critical for success.
"The U.S. has allocated significant funding to support the demand side of the market by focusing support on the creation of regional hydrogen hubs. In October 2023, the U.S. Department of Energy announced the investment of U.S.$7 billion to catalyze nearly U.S.$50 billion in hydrogen investments across 7 selected regional clean hydrogen hubs across the United States."
The U.S. has allocated significant funding to support the demand side of the market by focusing support on the creation of regional hydrogen hubs. In October 2023, the U.S. Department of Energy announced the investment of U.S.$7 billion to catalyze nearly U.S.$50 billion in hydrogen investments across 7 selected regional clean hydrogen hubs across the United States.
Ports will also be constructed for hydrogen’s export. Likely in the form of ammonia from the East coast to European markets and from the West coast to Asian markets. Liquefied hydrogen shipped from central Canada (perhaps from a deep water port in Manitoba) to Canada’s North might make more sense than ammonia, from an ecological perspective, to power remote communities not yet tied to the grid and in support of efforts to secure North American borders.
Carrots and Sticks vs RED III
Approaches used in the United States compared to those used in Canada to incentivize the development of the hydrogen market are often compared with reference to carrots and sticks.
The U.S. approach is largely based on the offering of significant funding to encourage change through innovation, adoption, and transition.
In Canada, greater reliance is placed on a system which imposes a price to be paid in connection with the emission of carbon, encouraging change through means to avoid costs which would otherwise be incurred.
The European Union has recently proposed a Renewable Energy Directive (RED III), effectively signing green energy targets into law, imposing mandates for industry and transport to use an increasing share of green energy. The new directive includes a requirement for industries such as ammonia and chemicals production, oil refining and green steel for at least 42% of their hydrogen use to be renewable by 2030, increasing to 60% by 2035.
Export opportunities (for molecules and the technology needed to produce them could become abundant). While there is an argument that the development of a robust export market facilitates the development of a domestic market, the demand side in North America will need to keep pace to be in a position to purchase when supply comes online.
Janet Howard is regional leader of Fasken’s global energy and climate group and co-founder of the firm’s hydrogen energy advisory team. She has a corporate transactional practice with a specialized focus in the areas of renewable energy and natural resources. Janet provides strategic advice to clients engaged in domestic and international corporate finance, merger and acquisition and private equity transactions. For more information, please visit https://www.fasken.com/en/janet-howard
Janet Howard, Partner, Fasken Martineau DuMoulin LLP, Regional Leader of Fasken’s global energy and climate group and co-founder of the firm’s hydrogen energy advisory team.