Sparking the U.S. Clean Hydrogen Market

Clean hydrogen will play a pivotal role in decarbonizing emissions-intensive industries and processes that lack other cost-effective abatement alternatives. A federal tax credit established in the Inflation Reduction Act of 2022, the Section 45V tax credit, creates a supply-side support for Department of Energy’s Regional Clean Hydrogen Hubs program. Yet, challenges on both the supply and demand sides of the equation must be addressed.

Avoiding a supply and demand mismatch is critical. Uncertainty about whether clean hydrogen producers will find customers can discourage investment and undermine the impact of supply-side incentives.

To help overcome demand-side barriers, the Department of Energy’s Office of Clean Energy Demonstrations (OCED) is directing $1 billion in federal funding to provide demand-side support for clean hydrogen as part of the Regional Clean Hydrogen Hubs program. This initiative utilizes a portion of Hub funding from the bipartisan Infrastructure Investment and Jobs Act of 2021. The aim is to nurture a healthy market for clean hydrogen by promoting long-term offtake commitments that can help provide certainty for hydrogen producers, lowering barriers for hydrogen end-users, facilitating standardized hydrogen contracts, and enhancing market liquidity and transparency. The Department’s challenge now is to strategically allocate the $1 billion it has set aside for demand-side support to achieve these multifaceted goals.

This issue brief offers a comprehensive overview of the demand-side support tools under consideration and identifies several crucial factors to consider when designing specific demand-side mechanisms and programs.

The discussion that follows is informed by insights from a workshop hosted by the Bipartisan Policy Center (BPC) in July 2023. The workshop brought together a diverse group of experts, including hydrogen industry leaders, end-users, commodity specialists, and representatives from different political backgrounds.

Topics Covered In This Issue Brief:

• Risks currently faced by hydrogen producers and potential offtakers.
• Advantages, disadvantages, and distinct attributes of different demand-side tools.
• Real-world deployment examples for a range of demand-side tools.
• Challenges unique to the U.S. hydrogen market.
• Crucial program design considerations.

Three Key Takeaways

Bipartisan Support is Vital

A program that is viewed as controversial or politically fraught will fail to gain the trust needed to de-risk projects and drive investment decisions. Bipartisan support for demand-side programs will increase private sector confidence that federal support will be available over the long term.

Support Should Not be Spread Too Thin

Making program eligibility overly broad or utilizing certain types of tools will result in limited federal resources being spread too thin across too many entities to drive impact. Rather than providing small subsidies to many possible end-users, support needs to be targeted strategically—for example, by cultivating off takers with high potential demand or finalizing long term contracts.

Administrative Complexity is an Important Consideration in Program Design

The tools available to provide demand-side support for clean hydrogen vary widely in terms of their administrative complexity. Some tools require only the straightforward distribution of funds; others are far more involved because they engage with the complex processes of procuring and reselling hydrogen. Beyond assessing each tool’s effectiveness for addressing particular risks, evaluating whether the complexity of administering the tool necessitates specialized expertise, additional resources, or increased time for implementation is important.