California's multi-billion dollar bet on clean hydrogen to meet climate goals

Last month, California became the first state to win funds from the Department of Energy's prominent program to create a series of regional hydrogen hubs to kickstart a new national energy economy.

The California Hydrogen Hub received an initial $30 million to begin planning and design phase and will eventually receive up to $1.2 billion from the program, created under the Infrastructure Investment and Jobs Act.

That $1.2 billion will help leverage another $11.4 billion of public and private matching funds, according to the Alliance for Renewable Clean Hydrogen Energy System, or ARCHES, the public-private partnership leading California's hub.

Hyundai Motor

The tranche of funding marks a big step toward the Golden State's years-long effort to build a clean hydrogen industry nearly from scratch. Advocates say the energy source is needed to reach the state's aggressive goal of carbon neutrality by 2045.

"California didn't just start investing in hydrogen, we've been at this for about a decade now," said Teresa Cooke, a lobbyist and executive director for the California Hydrogen Coalition. "California had its foot in the hydrogen door a lot earlier than anyone else," she said.

"Our European and Asian climate colleagues are further ahead than us," Cooke added. "We may be besting the other six hubs but we're not anywhere close to keeping up with our international friends."

But California, like all seven regional hubs under the DOE program, faces myriad challenges. They include skepticism from environmentalists who warn hydrogen production could drive up emissions, proposed strict guidance for federal tax credits that advocates say are necessary to development, and a tight timeline to set up production and win federal dollars.

Of the $11.4 billion non-federal ARCHES funding, about 17% of that could come from the state and another 4% from transit fees, said Jack Brouwer, director of the Clean Energy Institute at the University of California, Irvine who helped craft the ARCHES application. Municipal bonds may be part of the equation, Brouwer said.

"Then there's cash from the industry, which is the biggest percentage, like 30%, which includes in-kind and real money support from the industry," he said. The rest is expected to come from private bank financing.

ARCHES declined to comment for the story. A spokesperson for the Los Angeles Department of Water and Power, one of the hub's participants, said the department currently has "no specific debt offerings planned for hydrogen projects," which "may change in the future based on updated strategic plans."

The universe's most plentiful element can be used as clean burning fuel, a medium to store energy, or a feedstock for manufacturing.

It is rare in its pure form on Earth and therefore must be refined out of molecules in energy-intensive processes that often rely on fossil fuels. While it can be produced with little to no emissions, that's more costly. Environmentalists are wary of the production process, warning it could easily add to overall greenhouse gas emissions instead of reducing them.

As of 2020, more than 99% of the country's annual supply of hydrogen was sourced from fossil fuels, according to a DOE "hydrogen strategy" report. Production now accounts for 2% to 3% of all U.S. greenhouse gas emissions, Jesse Jenkins of Princeton University told state lawmakers in March during an Assembly committee hearing on building a zero-carbon hydrogen economy. Producing clean hydrogen would mean "massively increased demand" on the electric grid, Jenkins said.

In California, the emphasis remains on the development of clean hydrogen capacity, using renewable energy to power the process.

Meeting the state's climate goals will require adding four times the solar and wind capacity by 2045 and about 1,700 times the amount of current hydrogen supply, according to the California Air Resources Board's 2022 scoping plan. ARCHES plans to focus on hard-to-electrify sectors in transportation and industry, such as heavy-duty trucking.

The Biden administration has allocated billions to the hydrogen effort with the IIJA and the climate-focused Inflation Reduction Act to meet the administration's own goal of carbon neutrality by 2050.

To incentivize the production of clean hydrogen, the IRA features generous production and investment tax credits for projects that meet certain requirements.

Those requirements are now the topic of heavy debate in Washington. Treasury in December released much-anticipated guidelines for the so-called 45V tax credits. The guidance included a strict "three pillar" framework, designed to ensure that hydrogen producers rely on renewable energy sources — which can be difficult to determine on the grid — and don't use up all the grid's renewable power. The guidance sparked more than 30,000 comments, both pro and con.

Many in the industry, joined by senators and governors, including of California, Washington and Oregon, warned restrictive rules would drive up costs and eliminate the benefit of the tax credits.

On the other side, environmentalists like the Climate Action Campaign, Natural Resources Defense Council and the Sierra Club supported the guidance, They argue that the three pillars are necessary to ensure hydrogen production doesn't "dirty" the grid and that federal subsidies don't prop up an industry that falls apart when the tax credits expire after 10 years.

The three pillars require hydrogen projects to use energy attribute certificates that are generated from newly built clean electricity generators; generated in the same hour as the hydrogen producer uses the electricity to produce hydrogen; and generated in the same region as the hydrogen production facility. That's a "relatively strict form of three pillar compliance for facilities using electricity to produce hydrogen in order to qualify for the [investment tax credit] or [production tax credit]," notes law firm Morgan Lewis in an April newsletter.

The proposed guidance may already have claimed one victim. Australian-based mining and energy company Fortescue said in July that it would pause its plans for a green hydrogen facility in Centralia, Washington, that was part of the Pacific Northwest Clean Hydrogen Hub. The hub, which will include projects in Washington, Oregon and Montana, did not respond to a request for comment.

"Some companies did their balance sheet calculations on the basis of getting the [production tax credit] and if that's not going to happen they may start dropping out," said Brouwer.

"I don't call them the three pillars, I call them constraints," he said. "These three pillars are something that we must do and that we are already beginning to do in some markets, but to burden the new kid on the block — hydrogen — with those burdens without burdening everyone else with it is not fair but it also was not what was anticipated when the legislation was passed."

The industry is pushing for more flexibility because the three pillars could create significant complications for regional hubs and bifurcate the market, said Frank Wolak, a Washington, D.C.-based lobbyist and president of the Fuel Cell and Hydrogen Energy Association. He noted that all seven hydrogen hubs asked Treasury to relax the guidance.

Fuel Cell and Hydrogen Energy Association

In July, a group of 12 Democratic senators sent a letter to Treasury Secretary Janet Yellen urging the department to ease the "burdensome and unnecessary restrictions" on the tax credits. "Treasury's guidance would jeopardize billions of dollars of investment in clean hydrogen projects, render the cleanest forms of hydrogen uneconomical, and imperil efforts to decarbonize hard-to-abate sectors of our economy," the letter said.

Treasury has not said when it would release the final rules but speculation is they will come before the end of the Biden administration, said Wolak.

"It becomes a legacy question for this administration," he said. "Do they take the bird in hand now versus running the risk that the final determination of a major piece of legislation under the Biden administration gets defined by another administration?"

If Treasury does finalize the three pillars, many expect the rules will be challenged on the basis of the U.S. Supreme Court's recent ruling overturning the Chevron doctrine.

November's presidential election brings another uncertainty to the fledgling market. Former President Donald Trump has repeatedly said would cut parts of the IRA. But advocates like Brouwer and Wolak and even some Congressional Republicans note that hydrogen has the potential to be a bipartisan issue, as it generates jobs and many of the producers are fossil fuel companies.

Back in California, ARCHES has announced several initial projects that include the ports of Los Angeles, Long Beach, and Oakland; major power plants in Northern and Southern California; the city of Lancaster; and on the reservation of the Rincon Band of Luiseño Indians.

State lawmakers who are set to adjourn Aug. 31 are taking up a pair of hydrogen-related measures. The assembly could take up a key measure, SB 1420 for a full vote as soon as Thursday, according to Cooke, whose group helped write the original bill. Sponsored by Sen. Anna Caballero, who represents the Central Valley, where many of the projects would be located, the bill would streamline the state and local permitting process for ARCHES projects.

Passage of the bill is "mission critical" for the industry because of another challenge facing the industry: the tight deadline built into the DOE program, which requires that states build up their production of clean hydrogen by 2030.

If the legislation is passed and takes effect next year, "that gives us five years to site, design, permit, build and get production up and running in these industrial facilities," Cooke said. "That's a very, very tight turnaround, but it's a requirement for us to unlock this DOE funding."