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06.13.22

DOE nudges clean hydrogen hubs toward funding

By , Ben Reiter

The Department of Energy (“DOE”) got one step closer—albeit a small one—toward the funding of at least four regional clean hydrogen hubs (“H2Hub”) last week with its Notice of Intent (“NOI”) to award at least part of the $8 billion appropriated under the Infrastructure Investment and Jobs Act’s (“IIJA”) Clean Hydrogen Hubs Program (“H2Hub Program”). The NOI follows up on DOE’s February 15, 2022 Request for Information on Regional Clean Hydrogen Hubs Strategy (“RFI”). But what is perhaps most noteworthy of the NOI is what it doesn’t do: “solicit proposals for regional clean hydrogen hubs” as the IIJA required it to do by May 14 of this year.

Instead the NOI announced that DOE anticipates issuing a Funding Opportunity Announcement (“FOA”) in September or October of 2022 with requests that concept papers or project summaries be submitted within six to eight weeks of the FOA. DOE expects that it will provide feedback to potential H2Hub funding recipients encouraging or discouraging full applications approximately four weeks later. Full applications will be requested four months after DOE provides feedback on concept papers or project summaries. While this timeline, if met, would put DOE in-line with IIJA’s requirement that it select H2Hubs within “one year after the deadline for the submission of proposals” (i.e., May 14, 2022), DOE’s delay in rolling out the H2Hub Program application process is nevertheless likely to come as a disappointment given the Biden administration’s ambitious clean hydrogen goals, not to mention the DOE’s Loan Programs Office’s recent announcement that a clean hydrogen project would receive its first clean energy loan guarantee since 2014.

That being said, the NOI does provide some additional information regarding the H2Hub Program and what it expects to see from competitive H2Hub Program applicants.

Prepare Concept Papers Now. DOE’s delay in soliciting clean H2Hub proposals provides potential H2Hubs with additional time and information to prepare their initial concept papers. The NOI makes clear that these initial concept papers—which it describes as “project summaries submitted by applicants that describe the proposed project and are used to evaluate if an application would likely meet the objectives of the FOA”—will be key to a potential H2Hubs chances of receiving a portion of the $8 billion of IIJA appropriated funds. Although there is limited guidance on what DOE expects to see from a concept paper, there is enough information provided by DOE in the RFI and this NOI to begin preparing this key document. Additionally, DOE has recommended that potential H2Hub applicants register and create an account with its OCED Exchange, the System for Award Management, and FedConnect. Given that H2Hub applicants will only have four to six weeks to respond to the FOA with their concept paper, now is the time to begin preparing those papers, which should include explanations of how they expect to finance the H2Hub Program’s minimum 50% cost share.

Designate a Lead Entity. Since the passage of IIJA there have been a significant number of H2Hub partnership announcements. These announcements include multi-state partnerships, private entity partnerships, and public-private partnerships. But it has not been clear how these partnerships—some of which feature multiple states and over thirty public and private entities—would make their way through what is presumably a single H2Hub application process. The NOI addresses this issue by stating that it will award funding to “H2Hub teams that are led by a single entity and may include numerous key partners or sub-recipients.” Selecting a lead entity will thus be a critical early decision point that shapes how these H2Hub partnerships or “teams” present themselves and interact with DOE. According to the NOI, DOE is still interested in seeing these recently formed partnerships apply as partnerships (as its multiple references to its H2 Matchmaker tool suggest) but it is also clear that DOE expects to be dealing with a single entity that can act on behalf of a broader H2Hub coalition. Potential H2Hubs should begin the process of selecting this lead entity now and developing governance procedures that will provide the lead entity with both the flexibility and accountability necessary for navigating a still unknown, but likely highly competitive H2Hub Program application process.

Make Measureable Environmental Justice Commitments. As was clear in the RFI and in the rollout of other programs under the Biden administration, DOE is taking environmental justice seriously. A successful H2Hub applicant must not only demonstrate that the proposed H2Hub will mitigate environmental or community impacts and that it has meaningfully engaged disadvantaged communities, Tribal communities, and labor unions, but that it will actually “advance equity for all, including people of color and others who have been historically underserved, marginalized, and adversely affected by persistent poverty and inequality.” To this end, the H2Hub Program will require any H2Hub that receives funding to track and report outcomes related to environmental justice, air quality, consent-based siting, and diversity, equity, and inclusion. While DOE expects that guidance on these reporting requirements will be provided in a future FOA, potential H2Hubs would be wise to begin developing their own internal environmental justice standards and tracking mechanisms. After all, the NOI indicates that pursuant to the Biden administration’s Justice40 Initiative, 40 percent of the H2Hub Program’s overall benefits must flow to disadvantaged communities.

Go Big or Go Home. The term hydrogen hub, despite how ever-present it has become in the low-carbon fuels discourse, has never been well-defined. A hydrogen hub could refer to a central trading and pricing point such as Henry Hub is for natural gas or it could mean an extremely broad geographic area (one H2Hub partnership suggests 408,394 square miles) featuring overlapping hydrogen production and markets with connective infrastructure in between. The NOI, however, makes clear that the H2Hubs DOE will support will not be minor one-off projects. The H2Hubs receiving funding must be significant projects capable of generating a minimum of 50 to 100 metric tons per day. Preference will be given to H2Hubs capable of producing larger quantities of clean hydrogen. While DOE “may consider smaller H2Hubs” and H2Hub funding will ultimately be negotiated on a project-by-project basis, potential H2Hub applicants should recognize that large projects will be more likely to receive the $400 million to $1.25 billion DOE anticipates providing for each successful H2Hub applicant.

Blue Hydrogen Hubs Are Likely to Feature Prominently. The text of the IIJA arguably gave blue hydrogen a leg up on other colors of the hydrogen rainbow by requiring that at least two of the minimum four H2Hubs be located in regions with abundant natural gas resources. Some have suggested that the NOI’s proposed decision to apply the minimum lifecycle greenhouse gas intensity threshold established in IIJA of 2 kg of CO2 for every 1 kg of hydrogen produced further increased the likelihood that blue H2Hub’s will receive IIJA funding. While the 2-to-1 CO2e to H2 kg standard was set forth in IIJA, it was established as a minimum standard that the DOE Secretary could, in consultation with the administrator of the Environmental Protection Agency, make more exacting. The NOI indicates that the H2Hubs will not be subject to a more exacting standard, suggesting it will be easier for blue H2Hubs to qualify. However, DOE will be evaluating the full lifecycle greenhouse gas emissions (as opposed to just the production emissions) of each potential H2Hub and giving preference to those applicants that can demonstrate a reduction in lifecycle greenhouse gas emissions compared to current industry standards.

Demonstrate Demand. One of the more important considerations for any H2Hub (regardless of whether it is applying for the H2Hub Program or not) is whether the H2Hub has an offtaker for its hydrogen or readily accessible market to sell its hydrogen into. The US simply does not currently have the infrastructure to affordably transport large amounts of clean hydrogen from remote locations—where there are often abundant renewable resources and storage reservoirs—to developed hydrogen demand centers. In recognition of this current reality, the NOI requires H2Hub applicants to demonstrate not only plans for the production of clean hydrogen but the demand, connective infrastructure, and a plan to be financially viable after the IIJA funding concludes. A competitive H2Hub Program applicant will thus want to demonstrate that there is a market for its hydrogen or, even better, designated offtakers that are part of its H2Hub partnership.

The NOI is only a “high-level draft plan,” which DOE emphasizes is “a preliminary plan that will likely be refined and evolve.” But it is generally in-line with DOE’s earlier RFI, including the multi-phased application and funding process we previously described. While the NOI does not yet solicit proposals as is called for in the IIJA, it provides enough information for H2Hub applicants to begin preparing their concept papers, designating lead entities, and making structural decisions regarding the authority a lead entity will have in what will be key interactions with DOE over the course of the H2Hub Program’s application and funding process.

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Ellen S. Friedman

Partner

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Ben Reiter

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