Green hydrogen produced from industrial hubs on the US Gulf Coast would have been cheaper than grey hydrogen made from fossil gas for over half of trading days over the past 12 months had President Joe Biden’s new maximum $3/kg production tax credit (PTC) been in place, according to new calculations.
Figures from from S&P Global Commodity Insights reveal the immediate impact that the tax credit – announced as part of the breakthrough US climate bill on 27 July – could have on the overall economics of green hydrogen generation in the US and how the PTC could facilitate scale-up in production that would lead to further cost-reductions.
The S&P model pitched the price of green hydrogen produced from a polymer electrolyte membrane (PEM) electrolyser operating at a facility on the US Gulf against grey production from fossil gas using the steam methane reformation (SMR) process, also located on Texas’ “chemical coast”, from 2 August 2021 to 12 August 2022.
The PEM electrolyser would have been able to produce hydrogen more cheaply — with the maximum $3/kg tax credit — than SMR on 138 days out of a possible 258, around 54% of the time.
The minimum price of subsidised green hydrogen would have been below $0.10/kg, which is “directly competitive with natural gas”, noted Brian Murphy, senior analyst of hydrogen and low carbon fuels at S&P Global Commodity Insights.
The PTC was introduced as part of the Biden administration’s Inflation Reduction Act, arguably the single most important piece of legislation in the world for green hydrogen in so far, which is now signed in to law.
The full $3/kg PTC will be available to hydrogen manufactured with lifecycle emissions of 0.45-1.5kg, by producers which meet the federal government’s wage standards.
Power price variable
However, the market price of grey hydrogen production in the Gulf Coast region would have actually been $0.44/kg cheaper than subsidised green hydrogen when taken as a yearly average, S&P’s figures indicated.
The average market price of hydrogen from the PEM electrolyser would have been $4.81/kg without the tax credit, knocked down to $1.81/kg when the tax credit was included, compared to $1.37/kg for SMR.
Prices for green hydrogen would have been significantly affected by a price spike in the Texas electricity market in July 2022, caused by a heatwave. The stand-alone regional Ercot power market has suffered high levels of price volatility in recent years as a result of extreme weather events and poor system resilience — a variable that green H2 producers will need to factor into their economics.
And S&P’s model for hydrogen production in California, a major centre for US hydrogen production, makes for more sobering reading. Even with the full $3/kg tax credit, production from a PEM electrolyser would have been consistently more expensive than SMR hydrogen over the past 12 months, S&P’s figures indicated, averaging $2.55/kg for the year against grey hydrogen’s $1.79/kg.
In total, the market price of Californian green hydrogen with the full PTC would have been cheaper than equivalent grey hydrogen only 11% of the time, as a result of high electricity prices in the state.
But the immediate pricing effect of the tax credit will push cash into the sector, leading to long-term cost reductions, predicted Murphy.
“The PTC is a strong incentive that makes the cheapest clean hydrogen production from renewables-powered electrolysis immediately cost-competitive with traditional SMR,” he explained. “This cost reduction opens up new demand sectors and should stimulate investment in the near-term, leading to reduced costs through industry scale-up in the long run.”
Greening of the US Gulf?
The immediate availability of competitive electrolytic hydrogen could be especially significant for the US Gulf Coast, especially Texas and Louisiana, which both host H2-guzzling refineries and account for a significant portion of the US’s current (almost all grey) hydrogen production of 10 million tonnes a year.
Texas alone produces 3.6 million tonnes per year and, according to consultants McKinsey, is well positioned to develop a “clean” hydrogen industry producing 21 million tonnes per year of green and blue hydrogen – made from fossil gas with carbon capture and storage – by 2050.
However Louisiana, which with Arkansas and Oklahoma is bidding for federal cash to become a clean hydrogen hub, is betting on blue hydrogen, and Texas has yet to put its hat in the ring at all.
Nevertheless, Murphy remained optimistic about the prospects for green hydrogen investment in the US — a view borne out by comments made last week by the CEO of electrolyser manufacturer Nel, which indicated the company would increasingly focus on the US market.
“The PTC… combined with direct investments from last year’s bipartisan infrastructure law and expanded use of the US Department of Energy’s loan programs office is expected to stimulate immense investment in clean hydrogen production through the rest of the decade,” Murphy noted.