Executive summary: $7 Billion for clean hydrogen hubs
On Oct. 13, 2023, the Department of Energy (DOE) announced $7 billion in funding for seven regional clean hydrogen hubs nationwide. The funding is part of the 2021 Infrastructure Investment and Jobs Act (IIJA) (Public Law 117-58) intended in part to bolster investment in the advancement, development and implementation of clean energy technologies, including hydrogen.
Hydrogen hubs overview
The 2021, IIJA provided $7 billion funding for the Department of Energy to establish six to 10 regional clean hydrogen hubs across America. These hubs are intended to develop cooperative networks of hydrogen producers, consumers and local infrastructure, thereby enhancing the accessibility of hydrogen as a fuel source.
The initiative aligns with the administration's objective of attaining net-zero carbon emissions by 2050 and achieving a 100% clean electrical grid by 2035. The intention behind establishing these hubs is to shift away from conventional fossil fuels such as coal and oil, opting instead for hydrogen as a cleaner-burning fuel source.
There are seven widely acknowledged classifications for hydrogen: black/brown, gray, green, blue, turquoise, pink and white. The categorization is determined by the carbon intensity of the production process or the volume of greenhouse gases emitted per kilogram of hydrogen produced. Each awarded hub has proposed to use various feedstocks to produce the spectrum of hydrogen including renewables (green hydrogen), nuclear (pink hydrogen), biomass (brown hydrogen) and fossil fuels with carbon capture, utilization and storage (blue hydrogen).
On Sept. 22, 2022, the DOE opened the initial application for the clean hydrogen hub (H2Hubs) program and received over 75 concept papers from applicants for the funding opportunity. Per the IIJA, the selection requirements were to take into consideration the following:
- Feedstock diversity – at least one H2Hub that demonstrates the production of clean hydrogen from fossil fuels, one H2Hub from renewable energy and one H2Hub from nuclear energy.
- End-use diversity – at least one H2Hub that demonstrates the end-use of clean hydrogen in the electric power generation sector, one in the industrial sector, one in the residential and commercial heating sector and one in the transportation sector.
- Geographic diversity – each H2Hub located in a different region of the United States and uses energy resources that are abundant in that region, including at least two H2Hubs in regions with abundant natural gas resources.
In addition, the applicants were expected to include Community Benefit Plans to:
- Support meaningful community and labor engagement;
- Invest in America’s workforce;
- Advance diversity, equity, inclusion and accessibility; and
- Contribute to the President’s goal that 40% of the overall benefits of certain federal investments flow to disadvantaged communities (the Justice40 Initiative).
The DOE gave priority to applicants that are likely to create opportunities for skilled training and long-term employment to the greatest number of residents in the region. Initially, 22 applicants were identified and encouraged to continue their applications. On Oct. 13, 2023, the DOE announced the seven clean energy projects chosen for the $7 billion funding opportunity:
- Mid-Atlantic Clean Hydrogen Hub: ((MACH2) Pennsylvania, Delaware, New Jersey)
- Plans to utilize fossil fuels to produce blue hydrogen to support the transportation and power industries.
- Appalachian Hydrogen Hub: ((ARCH2); West Virginia, Ohio, Pennsylvania)
- Intends to use natural gas as a primary feedstock to produce blue hydrogen to support hydrogen refueling stations in addition to industrial, manufacturing and transportation uses.
- California Hydrogen Hub ((ARCHES); California)
- Plans to produce green hydrogen with renewables and brown hydrogen utilizing biomass in an effort to target the transportation industry.
- Gulf Coast Hydrogen Hub (HyVelocity Hydrogen Hub; Texas)
- The Gulf Coast already utilizes fossil fuels to produce blue hydrogen for oil refining and fertilizer production. With the funding, the hub intends to expand its projects to include supporting the steel, cement and sustainable aviation fuel sectors.
- Heartland Hydrogen Hub (Minnesota, North Dakota, South Dakota)
- Intends to produce hydrogen for electricity generation, fertilizer production and space heating.
- Midwest Hydrogen Hub ((MachH2); Illinois, Indiana, Michigan)
- Plans to produce green hydrogen utilizing electrolysis to accelerate the decarbonization of steel and glass production, for power generation, refining, heavy-duty transportation and sustainable aviation fuel.
- Pacific Northwest Hydrogen Hub (PNW H2; Washington, Oregon, Montana)
- Plans to utilize hydroelectric power to produce green hydrogen for heavy-duty transportation, agricultural and industrial applications.
Although the seven clean energy hubs have been chosen, the entire $7 billion in funding was not disbursed in this allocation. The process will be broken down into several phases. In the primary phase, the Energy Department will provide awardees with initial grants to develop more comprehensive proposals for their hydrogen hubs. Subsequent disbursements of funds over time will be contingent on the agency's assessment of project viability. However, it is important to note that future funding is not assured.
Washington National Tax takeaways
The Department of Energy’s first Energy Earthshot, launched June 7, 2021—Hydrogen Shot—seeks to reduce the cost of clean hydrogen by 80% to $1 per one kilogram in one decade. Clean hydrogen is envisioned to be used in many industries that are hard to decarbonize, including transportation and manufacturing. The announcement of the hydrogen hubs, in combination with new tax incentives under the Inflation Reduction Act of 2022 for producers of clean hydrogen, is expected to facilitate growth for the clean hydrogen industry.
In order for the clean hydrogen industry to grow, not only is it necessary for hydrogen production to increase, but infrastructure for transportation and end user demand is also needed. While each hub is unique, all address these issues by locating producers with users. Additionally, the winning hubs all had strong industry partnerships. Many stakeholders are involved in the development of each project. This includes project developers, hydrogen producers and end users. Additionally, strong backing from state and local governments was a component for most of the seven hubs.
The creation of clean hydrogen hubs and $7 billion in funding announced by the DOE can assist in reaching the Biden administration's clean energy goals. The section 45V credit for the production of clean hydrogen established by the Inflation Reduction Act of 2022 provides further incentives for investment in clean hydrogen production. Together these initiatives support the administration’s objective to drive down the costs of commercial scale clean hydrogen production, transport, storage and utilization in the United States. It is paramount that as the awarded clean hydrogen hubs progress through the phases of the program, they adhere to the rules and regulations of the programs set forth by the DOE. The IIJA provides for a potential second round of funding although no further indication of a second round has been publicized at this time. Although the program is still in its early stages, investor and stakeholder confidence should increase as further guidance from the IRS regarding 45V is expected to be released by the end of 2023.
For more information, please consult with your RSM US tax advisor.