Renewable Hydrogen Projects - Challenges

This is the second in a three-part series about the potential and challenges in bringing hydrogen projects to market. Read the first installment here. The final installment of the series will include our recommendations for successfully bring a project to market.

Compliance Challenges‍

Most clean hydrogen projects are developed by smaller, non-oil and gas companies and rely on government incentives in the Inflation Reduction Act (IRA) and the DOE’s independent clean energy financing program for viability. On paper, the project economic equation seems obvious: meet standards, qualify for credits, offset construction cost, and maximize profit. But the standard for compliance to these programs is high and the reporting requirements are new and cumbersome.  

Signed into law in the fall of 2022, the IRA aims to improve domestic manufacturing investment, encourage domestic supply procurement, and commercialize leading edge technologies. Under the IRA, hydrogen projects can qualify for carbon credits, tax credits and lower interest rates – if they meet prevailing wage and apprenticeship standards, which were only finalized in June 2024.

Prevailing Wage
The IRA sets wage standards based on job classification and requires a ratio of skilled to entry level craft labor which varies depending on the craft type. Even companies with existing labor definitions can struggle with the process of assigning and documenting IRA standard labor classifications: they change on a county-by-county basis with a varying level of specificity. Mismatches between contractor labor definitions and government definitions lead to incorrect bid estimates – and can cause costly change orders. Contractors without labor classifications must develop and document them, down to the individual criteria. Sometimes these classifications aren’t defined until after work has been completed, which means companies must retroactively examine contractors and payments according to new conditions – and forfeit benefits and receive hefty penalties that come with interest.

Apprenticeship Program
Apprenticeship program requirements in the IRA are similar to existing requirements from the Davis Bacon Act (originally enacted in 1931), which are required on federally funded construction projects.  The standard is relatively easy to meet in regions with robust union contractors; Unions have historically provided formal apprenticeship programs, most of which have gone through the qualification and registration process with the U.S. Department of Labor (DOL). Historically, non-union or open shop contractors have not provided apprenticeship programs to the same formal standard.

However, it is possible for open shop contractors to achieve these programs through DOL registered or state approved programs. Large regional and national non-union contractors are typically well versed in the basics for meeting apprenticeship program standards. However, many of the contractors serving smaller companies do not have these programs and must create and document their apprenticeship program or pay penalties and forgo tax credits.

Clean Energy Financing Program
The Clean Energy Financing program, administrated through the U.S. Department of Energy, is another path for financial support. This program arranges federal financing for innovative energy, supply chain, and infrastructure projects, and supports certain state funded energy projects. To qualify for this program, projects must support clean energy deployment and energy infrastructure reinvestment that reduce greenhouse gas emissions and air pollution. Projects that qualify for this program become eligible for direct federal loans or partial guarantees of commercial debt. However, the administrative burden of these programs is high: the DOE requires multiple applications, audits and other formal steps in the loan approval process. After financial close, the DOE monitors the project for the life of the loan (typically 20 years).

Contractual Challenges

Many hydrogen projects rely on project financing from outside the project organization, like banks or equity partners. These financing organizations often prefer to protect themselves from the risk of new technology projects with a Lump Sum EPC contract and a more burdensome requirement called a financial wrap. In a lump sum EPC contract structure, project owners’ typically contract with a single company to manage the engineering, procurement, and construction of a project for a specific fixed price, or ‘’lumpsum,” which also includes a performance risk. This risk is a guarantee that the plant will produce a specific capacity at a specific quality. These contractors typically perform most of these services in house. However, due to a recent history of major cost overages in lump sum EPC projects, large contractors are hesitant to assume this risk. Some smaller contractors without full in-house EPC capabilities will take on the extra liability for some of the services outside their own capabilities, though few will take on liability for construction or technology services.  This challenge can be overcome by forming a joint venture or consortium with several members who together are able to perform or administrate the performance of the project. In this arrangement, all members are responsible and liable for the others, irrespective of fault. It is still a high-risk proposition for contractors, but risk is more evenly distributed. For this arrangement to be possible, owners must source competent contractors amenable to sharing risk and form a rigorous side agreement between the parties appropriating risk failures.

Technical Challenges

Customers choose to invest in blue or green technology based on differences in government incentives, production outcome needs, location and infrastructure availability, and investors’ risk stance. Mature organizations generally opt to invest in blue hydrogen projects on a large scale and will invest in green hydrogen on a smaller or demonstration level.  Developers often opt for green hydrogen projects because of their larger government incentives and to gain the advantage of being first to market.

Government incentives for hydrogen are generated under the inflation reduction act, and different incentives apply to different types of hydrogen.  Section 45v provides $0.60 credit per kg of hydrogen, depending on the amount of CO₂ equivalent generated. If prevailing wage and apprenticeship requirements are met, then the credit can be increased five times, meaning a credit up to $3.00/kg hydrogen.  Blue hydrogen projects often consider the 45Q credit, which is calculated solely on the amount of carbon captured and sequestered. Developers are awarded up to $85 per metric ton of carbon captured and sequestered. However, these credits cannot be applied simultaneously.

Once that decision has been made, owners must make a specific technology selection and evaluate the best vender for supplying that technology.  These decisions must consider production needs, location, power cost and availability, pipeline accessibility, grid compatibility, price, ongoing maintenance and more. Crucially, these factors must amount to an economically feasible project suitable for investment. Many banks and investors also require a technology readiness level rating to quantify the maturity of a project. Recent hydrogen projects have been funded only when the maturity rating has reached seven (see figure), which requires that a system prototype has been demonstrated in an operational environment. ‍

Blue Hydrogen
‍Blue hydrogen uses traditional hydrogen sources and production technologies (reforming) but offsets pollution by capturing CO₂ generated during production. There are three main methods currently utilized to generate blue hydrogen: steam methane reforming (SMR), partial oxidation (POX), and autothermal reforming (ATR).

Steam Methane Reforming
SMR is a proven technology widely applied for conventional hydrogen production, especially in petroleum refining. In SMR, natural gas is exposed to moderate pressure and high temperatures steam and produces H₂, CO and CO₂. SMR technology is widely available, and market teste, however POX and ATR are more cost effective.

Partial Oxidation
‍The POX reaction occurs when fuel-oxygen mixture is partially combusted in a reformer, producing hydrogen rich syngas. Compared to SMR, POX technology can maximize carbon capture efficiency and simplifies the process lineup. This can greatly offset the cost of O₂ production. In addition, since POX does not require steam, it avoid the cost of gas pretreatment.  

Autothermal Reforming
‍ATR is a combination of SMR and POX processes. ATR fires oxygen and natural gas in a refractory lined reactor with a catalyst bed. ATR is more energy efficient than SMR or POX technology. It also has faster startup and response times than SMR. However, ATR systems use costly feed gas pretreatment facilities and oxygen production plants.

* Approximate average, will vary by licensor

‍Green Hydrogen
‍A commercially successful hydrogen project must choose the best technology for the project circumstances, solve renewable power variability issues, and meet requirements to receive federal funding and carbon credits. Common factors to consider when evaluating technology include hydrogen purity, turndown, efficiency, and operating conditions. Facilities collocated with downstream operations must consider plot space availability and integration with downstream units. Other technical challenges include scale-up of electrolyzer technology, risk associated with commercially unproven technology, and inefficiencies in power generation, transmission, rectification and storage.  

Power Variability
Variable power means that owners must invest in energy controls like micro grids and storage infrastructure like batteries or hydrogen storge. Peaks and valleys in energy create an unsteady mode of operation that must be managed in the context of the entire hydrogen production system; while electrolyzers have quick ramp up and down times, other mechanical equipment and downstream units may not. Owners must decide to manage overcapacity on the power or process side.

Power Availability
It is not enough for hydrogen projects to be powered by renewable sources; they must be powered contemporaneously by sources built within the three years prior to the date they start to produce product. The intent of this legislation is to eliminate competition for existing renewable power and ensure hydrogen projects are run by additive renewable power. Because of this requirement, green hydrogen projects become, largely, power projects. They require significant electrical infrastructure, including solar/wind farms, transmission lines, substations, transformers, rectifiers, and battery storage.

Hydrogen Electrolysis
There are three main electrolysis technologies in the market to produce green hydrogen:  Alkaline Water Electrolysis (AWE), Polymer Electrolyte Membrane (PEM), Solid Oxide Electrolysis Cell (SOEC).

Alkaline Water Electrolysis
‍In an AWE electrolyzer, a lye solution is fed into a cathode at high temperatures (80°C), generating hydrogen and hydroxide ions. With slight variability depending on vendor technology, the hydrogen produced is ~99.5% pure. AWE technology currently. Achieves the highest levels of efficiency of electrolysis and is characterized by high long-term stability and comparatively low investment costs. AWE electrolysis is the most mature out of the three electrolysis technologies. The higher maturity comes with more “bankable” OEMs. AWE technology also brings with it the challenges of dealing with KOH lye solution it adds to the operating expense for initial fil and replacement of the lye solution.

Polymer Electrolyte Membrane
In PEM electrolysis, demineralized water feed enters the anode side where it is oxidized into hydrogen protons and oxygen. Then the hydrogen protons cross a polymer membrane to generate hydrogen. PEM technology operates at lower temperatures that AWE but uses higher temperature to generate consistently pure forms of hydrogen (~99.999% purity). This process uses expensive material for construction, which is seen in the higher capital installation cost. PEM technology while technically comparable with AWE, as the less mature technology of the two comes with higher capital expense plus fewer OEMs that are considered traditionally “bankable”.

Solid Oxide Electrolysis Cell
SOEC is the newest electrolyzer technology in the market. At very high temperatures steam is fed into the cathode. When an electrical voltage is applied, the vapor at the cathode-electrolyte interface is reduced to form oxygen ions and nearly atmospheric hydrogen. With high temperatures, the reactions can happen faster which leads to high efficiency. Steam also heats the stacks, lowering the electrical requirement by approximately 20-25%.  SOEC is the newest player to the market and is still in development. The lack of maturity in the technology makes the SOEC electrolyzers seem not bankable w hen compared to AWE or PEM even though the operational flexibility and energy efficiency is better for SOEC.  

*Approximate average, will vary by licensor

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