Updated US Hydrogen Strategy Is Better, But Still Mostly Good For The Fossil Fuel Industry

Dec 27, 2023

As a living document, the strategy is still deeply flawed, but less flawed than the first one. If the DOE updates it every six months, and there's as much movement each time, then by 2025 or 2026 it could be a good strategy.

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Back in November, I assessed the first draft of the US hydrogen strategy, released in September 2022. The title summarized the problem with that iteration nicely, I think: New US Hydrogen Strategy: Wrong Department, Wrong Authors.

What were the problems that resulted from this? Well, the first was that the diagnosis was wrong, and it was based on hydrogen being essential for the energy transition, as opposed to the industrial transition. As a result, it was scattered all over transportation and industrial heating. The strategy even included the remarkable statement that it would be required for temperatures above 300° Celsius when there are electric resistance, induction, radiative, and arc furnace solutions working in industrial heating at temperatures up to 3,000° Celsius today.

It even had commercial and residential heating as a target for hydrogen, which is a fairly ludicrous proposition given that even in November of 2022 there were dozens of studies globally that made it clear that it was a terrible idea from a safety and economics perspective, and that heat pumps were completely fit for purpose at a much lower cost and risk profile.

And, of course, the strategy had a lot of hydrogen manufacturing from fossil fuels with carbon capture and storage (CCS) bolted on, even though the vast majority of CCS, especially in the USA, is used for enhanced oil recovery (EOR), a non-starter as a climate solution.

Why did that strategy go so wrong? Well, it was authored almost entirely by the US Department of Energy (DOE), with little apparent input from the actual end use case sectors for hydrogen today. The fossil fuel lobby certainly had their say, as while the majority of the DOE's budget is for commercial nuclear energy regulation and safety, the next biggest chunk is for fossil fuels, with renewables fighting for the scraps. Oil refineries use about 33% of hydrogen today to desulphurize fuel, with Houston's heavy, sour oil refineries that deal with Venezuela's and Alberta's products being major consumers, although other smaller refineries use a lot too in the USA.

Clearly, that's going to go away as peak oil hits and the quality discount against Brent crude increases with the increased cost of hydrogen, and the travel discounts remain or increase. Venezuela's and Alberta's products are going to be first off the market.

But did the ammonia industry get a lot of attention? Globally, about 25% of hydrogen is used to manufacture ammonia, mostly for fertilizer. It got a nod, sure, but not the lion's share of attention it should have in any reasonable strategy.

What about direct reduction of iron (DRI) for steel? About 100 million tons of steel is manufactured with synthetic gases which are a big chunk of current hydrogen demand. Cleaning up that? Not a terribly big priority compared to expanding the market for hydrogen, including lots of fossil-fuel derived molecules, the only hope the fossil fuel industry has for continued existence at its current scale and profitability.

Hydrogen today is a global warming problem about the same size as all of aviation globally. Job one is to decarbonize its industrial use cases, not invent new markets it is badly suited for, but the first draft of the US hydrogen strategy was mostly focused on inventing new markets.

So is the updated version nine months later better? Let's find out.

Logos of US agencies and departments involved in the US hydrogen strategy

Well, it's still being led and written by the DOE, instead of the Department of Commerce which I thought would be a better choice. However, they are making it clear that consultations, however deep or shallow, did and will involve a lot of organizations which are current and future major hydrogen stakeholders. It's somewhat odd that the US Department of Agriculture is listed last, as fertilizer is likely the biggest demand area for hydrogen derivates existing today in the USA that isn't going away. But that's just poor optics, not necessarily indicative of anything.

Note that this version of the strategy, like the last one, is trailing the Inflation Reduction Act's massive subsidies for lower-carbon hydrogen, not preceding it. It's a bit ready, fire, aim, but given that the previous US administration was deeply hostile to climate action of any sort, this is much better than nothing.

The executive summary is all about the opportunities, not the climate change problem of hydrogen's current emissions. The big opportunity spaces it identifies are:

"… the industrial sector (e.g., chemicals, steel and refining), heavy-duty transportation, and long-duration energy storage to enable a clean grid."

The first one is good and it's good that it's the first one. Heavy-duty transportation has no pathways for hydrogen in a rational world. Heavy duty trucking will all electrify, with in-hand battery energy densities allowing 500 mile ranges today, 1,000 mile ranges in a year or two, and over double current long-haul diesel rigs in the 2030s.

Outside of the USA, every other major geography is just getting on with electrifying rail with grid connections and box cars full of batteries for tunnels and bridges, with India at 85% electrified and aiming for 100% before 2025, China at 72% and growing rapidly, and Europe at 60% and rising. The USA is a seriously outlier in rail decarbonization and the DOE and Department of Transportation (DOT) clearly don't understand what the right strategy is for that transportation mode, or is cowed into submission by the American Association of Railroads (AAR), which is belligerently opposed to electrification for nonsensical reasons. For maritime shipping, it's going to be batteries and biofuels, not hydrogen derivatives. Even the biggest non-biodiesel or renewable diesel maritime fuel alternative where there are actually contracts is biologically-derived methanol, not a hydrogen derivative.

The US transportation blueprint is somewhat better than the first hydrogen strategy, but still misses the boat (and rail and trucks) on this point, so it's unsurprising that the hydrogen strategy still gets it wrong.

Long-duration energy storage is a fascinating one too. It's going to be too expensive due to the inefficiencies and capital costs to compete in day-ahead reserves or two-day markets, so it's going to be constrained, if ever built, to very long duration storage where there's a national shortage of wind and sunshine for a week. Given the size of the USA, the continued movement to HVDC interconnectors, the massive land and water area for widely spread renewables, this is a once-a-century solution. It's not an island like the UK, where modeling suggests it would be necessary every ten years on average.

Even then, just diverting as much biomethane from existing anthropogenic sources as possible into natural gas storage facilities is a lot more sensible than manufacturing hydrogen for the purpose.

The answer for actually economically sensible long duration storage is pumped hydro and the emerging redox flow battery space, not an expensive molecule that loves to leak.

So I’m not impressed with the new strategy, and still haven't made it past the executive summary. Let's keep going.

"The Hydrogen Energy Earthshot (Hydrogen Shot) launched in 2021 will catalyze both innovation and scale, stimulating private sector investments, spurring development across the hydrogen supply chain, and dramatically reducing the cost of clean hydrogen."

Well, no. This isn't a space that's subject to massive reductions in price. The laws of thermodynamics don't give way to wishful thinking, so the cost of green hydrogen via electrolysis will still require 50 MWh+ per ton of hydrogen. Only the electrolyzer is not a commoditized component today, and it's one of perhaps 28 components in an industrial scale electrolysis plant, without compression, storage, distribution, or chilling to 20° Kelvin. As a result, capital expenditure (capex) will drive the green hydrogen price per ton upward unless they can be amortized across a lot more tons. That requires much higher utilization than a wind or solar farm can deliver by itself, well over 60%. And that means firmed electricity at grid prices.

The average industrial rate for electricity in the USA was $72.60 per MWh in 2021, so those 50 MWh drive a cost per ton of $3,630 or $3.63 per kg just by themselves. The capex will add two or three dollars to that easily. The $3 maximum subsidy per kg for actually low carbon hydrogen will bring the price point down to double or triple hydrogen made from cheap natural gas using steam reformation with no carbon capture.

As for blue hydrogen with carbon capture, well, the only way it qualifies for the $3.00 subsidy is with two separate carbon capture technologies, 35% plus energy consumption for the process and serious sequestration scales beyond anything which exists globally, outside possibly China. Remember, eight tons of highly diffuse carbon dioxide for every ton of hydrogen from the steam reformation process, and add a ton or three more for the extra energy required for the process, which the fossil fuel industry will insist comes from natural gas. For those doubting this, I looked at Carbon Engineering's direct air capture solution back in 2019, and a full 50% of the carbon dioxide it ‘captured’ was from burning natural gas to power the process.

Once again, lots more costs, and given the track record of bolting CCS onto solutions globally, a very low likelihood of actual emissions reductions. At that, while it will still likely be cheaper than green hydrogen, even with the maximum subsidy, it's likely to be more expensive than black or gray hydrogen today.

And to say it again, that's the cost of manufacturing lower-carbon hydrogen. Compression, storage, distribution, and pumping costs for hydrogen are sky high, and won't be going down much. Black or gray hydrogen that costs under $1 to manufacture today costs $15-$20 in hydrogen fueling stations, and $8-10 delivered in bulk in large tube trucks. The regional hydrogen hubs make some sense for industrial users like ammonia plants and green steel plants, but little sense for anything else. Even then, as 85% of hydrogen consumed today is manufactured at the point of consumption and at the volumes and rate required for the processes, it's much more likely that it will be more cost efficient to deploy electrolyzers at the point of consumption to replace steam reformation plants for natural gas.

And guess what? We don't use hydrogen for energy outside of tiny niches that are better served by electrification anyway. Hydrogen is as cheap as it's ever going to get, even with the IRA's massive subsidy per kg (equivalent to US$3.00 per gallon of gasoline, or 83% of the retail price right now). We don't use it or its derivatives for energy despite it being as cheap as it is ever going to get because it's vastly more expensive than fossil fuels, and we won't use it for energy in the future unless we are economic idiots because electrification and biofuels are cheaper.

Let's be very clear. The best blue or green hydrogen might get down to just more expensive than current black or gray hydrogen, but only with the $3.00 IRA subsidy. Once that subsidy goes away in 2034, lower-carbon hydrogen's price will soar. Anyone who locks themselves into lower-carbon hydrogen for energy is locking themselves into massive operational expense increases in a decade. When I talk with my investment fund and transportation clients globally, I make this clear and ensure that they lift their heads up from the next five years to consider 2035 and beyond. Electrification and biofuels won't have this problem.

Okay, still going. Let's look at the legislative language section. It starts to clarify why this is still a broken strategy.

(b)(i) clean hydrogen production and use from natural gas, coal, renewable energy sources, nuclear energy, and biomass;(c)(i) economic opportunities for the production, processing, transport, storage, and use of clean hydrogen that exist in the major shale natural gas-producing regions of the United States;(e) identifying opportunities to use, and barriers to using, existing infrastructure, including all components of the natural gas infrastructure system, the carbon dioxide pipeline infrastructure system, end-use local distribution networks, enduse power generators, LNG terminals, and other users of natural gas, for clean hydrogen deployment;

Yes, the focus is first on clean hydrogen from natural gas and coal and on giving a second life to obsolete infrastructure. Then other stuff comes after that. Is that order likely to be exactly how the framers of the legislation and industry lobbyists positioned it? Yes, in my opinion. Is it an appropriate order? No. Blue hydrogen is going to be a continued climate change problem, not an actual solution. Only best-of-breed, low leakage, high-carbon capture solutions need apply for actually reasonable carbon hydrogen, and those don't exist in the USA. Its upstream methane emissions problem from its shale oil, fracking, and millions of miles of pipes is better than Russia's or Uzbekistan's, but that's like saying that getting hit in the head with a softball bat is better than getting hit in the head with a lead pipe.

Renewable electricity gets mentioned exactly once in the legislation. The laws are mostly about getting hydrogen out of fossil fuels, with more focus on nuclear hydrogen than renewable hydrogen.

Does this mean that what will actually happen will be a lot of fossil-derived hydrogen in the USA? Most likely.

The foreword continues in this vein, but at least leans into electrolysis.

"… if over 90 percent of hydrogen is produced via electrolysis, in 2030, this production could require up to 200 GW of new renewables or use of about 50-70 GW of nuclear power."

This assumes a massive increase in hydrogen demand by 2030 for transportation and storage, and makes it sound as if throwing away two-thirds or more of low carbon electricity that could be used directly at much greater efficiencies is a good idea, as opposed to economic suicide, antithetical to actual climate action, and unachievable.

I’ll reiterate. Hydrogen is a climate change problem, and job one is eliminating that. The USA will see an increase in low-carbon steel manufacturing, the only real growth market for hydrogen, but already gets 70% of its annual demand from scrap, not brand-new steel, and has massive amounts of rusting steel lying about the country on or just under the surface, so that's likely to edge up to 75% in the coming years. Getting renewables and nuclear energy powered electrolyzers into that problem space makes a great deal of sense. That said, there's been only one good use case for nuclear-powered electrolysis that I’ve found, and that's to siphon a tiny percentage of a reactor's generation to make hydrogen on-site as a turbine lubricant instead of trucking hundreds of kilograms of black or gray hydrogen to the reactor every day.

But diverting existing clean electricity to bad uses cases makes no sense, and the USA's nuclear fleet is going to be mostly sunset by 2035, not expanded by 50-70 new reactors at a cost approaching a trillion dollars.

Moving on. Still not out of the preambles, believe it or not.

Grants and loans for auto manufacturing facilities to manufacture clean vehicles, including fuel cell electric vehicles (FCEVs);Competitive tax credits for facilities that manufacture hydrogen and fuel cell technologies, including fuel cell vehicles and fueling infrastructureGrants for clean heavy-duty vehicles, including FCEVs;

Yup, let's give money to domestic manufacturers to make fuel cells and fuel cell cars no one will buy or drive. That's pure pork. And it's not like hydrogen trucks will be a thing. As David Cebon of the Centre for Sustainable Road Transportation at Cambridge points out, hydrogen trucks from major vendors are still much more expensive than their battery-powered alternatives, and the fuel costs would be three times more expensive than just using electricity. Higher capex and opex means no fleet buyer will consider them as alternatives. Wright's Law will apply vastly more to electric trucks due to being able to exploit batteries, motors, and power control systems from light vehicles, while hydrogen trucks will get few benefits of scaling by numbers.

As a reminder, there's a country which has already gone far down the path to decarbonizing transportation, and the USA should pay attention to the lessons from it. That country has 1.1 million electric buses and trucks on its roads, buys 60% of the electric light vehicles sold annually, builds the majority of them as well, built 25,000 miles of high-speed electrified freight and passenger rail in the past 16 years, is building 6,000 miles more, and has fewer than 10,000 fuel cell vehicles on its roads. That the country is China shouldn't make the clarity of the natural experiment and empirical reality any less compelling, in fact it should make it more compelling. If the USA wants to compete in the 21st century with China, it has to do so with pragmatic choices that make sense, not economic dead ends that satisfy only the fossil fuel industry.

Loans to help retool, repower, repurpose, or replace energy infrastructure to avoid, reduce, utilize, or sequester air pollutants or anthropogenic emissions of greenhouse gases;

Some of those are good, but a lot of that will be thrown away on failed carbon capture attempts on fossil fuel generation stations, an approach that's been proven time and again in the USA and outside of it to be a failure. Any money spent on carbon capture and sequestration would go a lot further by building more renewables.

A tax credit for producing sustainable aviation fuels and a technology-neutral tax credit for clean fuels, which can include hydrogen feedstock in the production process;

Good, as sustainable aviation biofuels currently include some pathways which involve hydrotreating to improve outputs. Bad in that when the grants go away, sunk costs will be skewed toward pathways that require expensive hydrogen. My expectation is that globally, all hydrogen for upgrading biofuels will only amount to about four million tons a year in 2100, but the USA expects more than that in the next few years.

Grants to reduce emissions at ports, which could fund deployments of fuel cells

Ports are already massively electrified, with most of the huge cranes electrified, as a key example. Everyone is running toward electric port ground vehicles too, just as airports are running fast in that direction for ground service equipment. There's no role for a fuel cell in a port.

Incentives for the deployment of carbon dioxide capture, utilization, and storage

Of course.

In addition to its chemical properties, hydrogen can support decarbonization by displacing natural gas in sectors that require high-temperature heat, an application that is difficult to electrify.high-temperature heat (>550°C)

The DOE continues to make this erroneous statement that burnable substances are required for industrial heat, although they’ve nudged the temperature point up from the frankly embarrassing 300° Celsius statement in September's strategy to the less but still embarrassing 550° Celsius. It's unclear why.

There are no industrial heat requirements that can't electrify. Where it is capital intensive to electrify, it would also be capital intensive to shift to hydrogen. As an example, the 10-meter-long, 5-meter-wide jet of natural gas flames inside a cement clinker drum would require either a shift to electric plasma with a new drum and process or to hydrogen with a new drum and process and vastly higher operational costs. Those use cases where the capital expenditure and value of an existing asset exist which make replacement in the next 20 years are better served by capturing a lot more of the anthropogenic biomethane we currently force into the atmosphere and burning it in the clinker drum instead of natural gas. But those use cases are rare, and electrification use cases will dominate.

So, what's the net on this updated version of the US hydrogen strategy? Well, it's clearly a document the fossil fuel industry will love. Lots of governmental money for use cases for hydrogen and carbon capture that will fail, perpetuating their business model for another decade or two at the expense of the planet. Transportation, industrial heating, and energy storage projections are clearly economic suicide. Any organizations which believes promises of unsubsidized $1 per kilogram hydrogen and invests a lot of capital money based on it are going to be limping at best with much higher delivered prices, and are going to be bankrupt when the IRA's PTC disappears.

But it's an improvement over the original. More stakeholders are clearly called out, and there's a clear all-of-government approach that was lacking in the original. The DOE is the leader of the charge, and while I think it's still the wrong positioning for the strategy and as a result it is misguided, it's somewhat mitigated.

There's more focus and clarity on the actual use cases for lower-carbon hydrogen, ammonia, and steel prominent among them. And the entire residential and commercial heating potential for hydrogen has disappeared. That's a good thing. They finally got that memo.

As a living document, the strategy is still deeply flawed, but less flawed than the first one. If the DOE updates it every nine months, and there's as much movement each time, then by 2026 or 2027, it could be a good strategy. But that would take hamstringing the fossil fuel lobby, looking at the broader solution set, and looking realistically at leading practices globally, something that the USA is apparently loathe to do.

is a member of the Advisory Boards of electric aviation startup FLIMAX, Chief Strategist at TFIE Strategy and co-founder of distnc technologies. He hosts the Redefining Energy - Tech podcast (https://shorturl.at/tuEF5) , a part of the award-winning Redefining Energy team. He spends his time projecting scenarios for decarbonization 40-80 years into the future, and assisting executives, Boards and investors to pick wisely today. Whether it's refueling aviation, grid storage, vehicle-to-grid, or hydrogen demand, his work is based on fundamentals of physics, economics and human nature, and informed by the decarbonization requirements and innovations of multiple domains. His leadership positions in North America, Asia and Latin America enhanced his global point of view. He publishes regularly in multiple outlets on innovation, business, technology and policy.He is available for Board, strategy advisor and speaking engagements.

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