Introduction and Summary

The Center for Clean Energy Innovation (CCEI) at the Information Technology and Innovation Foundation (ITIF) appreciates the opportunity to provide comments to the U.S. Department of Energy (DOE) Office of Clean Energy Demonstration (OCED) in response to DOE’s use of demand-side support for H2Hubs. ITIF is an independent 501(c)(3) nonprofit, nonpartisan research and educational institute that has been recognized repeatedly as the world’s leading think tank for science and technology policy. ITIF’s CCEI formulates, evaluates, and promotes policy solutions that accelerate innovation to make energy both clean and competitive.

Compared to grey hydrogen, clean hydrogen is significantly more costly—about three times for blue hydrogen and six times for green hydrogen.[1] Demand-side support measures can help offset the price differential. Clean hydrogen is also an example of first-of-a-kind production, with costs that cannot be mitigated by supply-side policies alone. Demand-side support can help accelerate development and reach Nth-of-a-kind stages, supporting DOE’s mission by providing a predictable commercial market for clean hydrogen.

In addition to the questions raised in this NOI, we encourage DOE to be vigilant on other potential issues that may arise during the implementation process. On the issue regarding antitrust and competition, for example, since the H2Hubs are regional in nature, how does a captive market affect demand stimulus? If consumers continue to use these hydrogen hubs (because it is difficult to switch to an alternative) after DOE no longer provides stimulus to generate demand, then demand stimulus in a captive market could limit competition.

Category A: Most effective demand-side support measure to Support H2Hubs

Question 1: What is the most effective way DOE could catalyze durable, bankable demand for clean hydrogen at DOE-funded H2Hubs? Which of the following potential mechanisms would be most impactful?

a) Pay-for-difference contracts that provide support to projects based on the price they can achieve in the market.

b) Fixed level of support for projects (e.g., fixed $/kg amount) that stacks on top of other sources of revenue.

c) Funding to support feasibility analysis from potential offtakers near H2Hubs.

d) “Market-maker” for clean hydrogen to provide a ready purchaser/seller for clean hydrogen.

e) Other (please specify).

An effective demand-side support measure depends on the production pathways, which have varying technology readiness levels (TRL) and commercial readiness levels (CRL). Each support measure has strengths and weaknesses, and there is no one-size-fits-all approach to support scale-up. This question presents four options, however, several other measures exist. The following table lists additional mechanisms not specified in this NOI (OCED-NOI-23-1) that are typically appropriate for technologies at TRLs 6-9.

Table 1: Summary of other demand-side support mechanisms[2]

The funding opportunity announcement issued in September 2022 (DE-FOA-0002779) specifies that H2Hubs are expected to have completed TRL 6 or higher at the time of application and TRL 8 or higher by the completion of Phase 4.[3] It is not clear from this NOI at what phase(s) DOE plans to initiate and provide demand-side support for the H2Hubs. DOE should consider the appropriate mechanism depending on which phase (and hence the TRL) of the hubs.

Question 2: For eligible projects, what competitive process should be used to select projects that will receive demand-side support?

a) Reverse auction in which projects compete to bid the lowest level of support they need to make their project viable.

b) Request for proposal-like process in which projects apply and are selected based on a variety of factors.

c) Eligibility-based process in which all projects that meet certain threshold requirements receive some form of support.

d) Other (please specify).

Clean hydrogen is an important tool for decarbonizing the global economy. Hydrogen and hydrogen-derived fuels have many potential use cases spanning multiple emission sectors. Currently, hydrogen is not used or has little use in many use cases since other fuels are simply cheaper and/or have better performance. Even in the long run, hydrogen might not be competitive in many use cases, especially if other clean alternatives are already underway (e.g., battery-electric vehicles for the light-duty vehicle segment, power system balancing, and metro trains and buses.)[4]

To maximize the impact of this demand-side support measure, DOE should avoid “throwing good money after suboptimal use cases.” DOE should prioritize high-value sectors that are hard to abate without clean hydrogen, such as shipping and steel, as well as general applications such as desulphurization and chemical feedstock.

Reverse Auction

Although not explicitly specified in the NOI, it seems the demand-side support that DOE intends to provide is meant only for the six to 10 H2Hubs selected instead of a clean hydrogen market at a commercial scale with many sellers. Based on this, a reverse auction is not appropriate since it works best when there are many sellers in the market. Furthermore, price is the deciding factor in a reverse auction. Bidders (projects) are at risk of placing a bid that is too low for their businesses. As ITIF has argued, DOE must prioritize the economic sustainability of the H2Hubs. Without that, the hubs will fail and any other objectives will fail with them.[5]

Finally, the H2Hubs FOA states that,

“The BIL H2Hubs statutory provisions require that to the maximum extent practicable, DOE select proposals that cover the following characteristics:

▪ Feedstock diversity – at least one H2Hub shall demonstrate the production of clean hydrogen from fossil fuels, one H2Hub from renewable energy, and one H2Hub from nuclear energy.”[6]

Given that clean hydrogen from fossil fuels is currently cheaper than hydrogen produced from renewable and nuclear energy, and will remain cheaper for the foreseeable future, a reverse auction may inevitably lead to supporting an offtake for hydrogen produced with fossil fuels at the expense of hydrogen produced from other pathways. In other words, subsidizing blue hydrogen might block the market entry of green hydrogen. Depending on the cleanliness of the hydrogen from fossil fuels, such a scheme might lead to lower GHG emission reductions than desired or originally intended.

Request for Proposal-like Process

In a request for proposal (RFP)-like process, bidders document all the project’s requirements, timelines, details, and deliverables, and ultimately the winning bid is selected based on various criteria. An RFP-like process provides a level player field to all interested vendors and may be appropriate if DOE is focused on specific criteria (e.g., economic sustainability, emission reduction potential, etc.).

One of the drawbacks of an RFP-like process is the lengthy selection process, especially if an RFP receives several submissions. However, given that there will be only six to 10 H2Hubs, the demand-side support provided could still be in a timely manner.

Most importantly, for an RFP-like scheme to be successful, DOE must be clear and transparent in its selection criteria, and these criteria and the weights assigned to these criteria should be most conducive to supporting the goals of the H2Hubs program and the future clean hydrogen market.

Eligibility-based Process

In an eligibility-based process, all projects that meet certain threshold requirements receive some form of support. Despite the small number of H2Hubs, DOE should avoid spreading the funding too thin. The goal of demand-side support is not to support as many projects as possible, but rather to ensure both producers and end users in the H2Hubs have the market certainty they need during the early years of production to unlock private investment and realize the full potential of clean hydrogen.[7]

Question 4: How can DOE structure demand-side support for H2Hubs to best catalyze the formation of a mature commodity market for clean hydrogen?

a) How can DOE structure demand-side support for H2Hubs to best catalyze the development of standard contract terms for clean hydrogen?

b) How can DOE structure demand-side support for H2Hubs to best catalyze the development of price transparency for clean hydrogen?

DOE should embed strong transparency practices into whichever competitive process(es) DOE decides to use. Previously, ITIF expressed concern regarding the “Rights in Technical Data” subsection in the H2Hubs FOA.[8] Specifically, FOA states that DOE will not assert any special rights over data or information, and that the public at large—or even other stakeholders—should have no additional rights to that information, despite the enormous investment from U.S. taxpayers. Given the need for rapid acceleration of low-carbon markets and technologies, such a long period of secrecy is unacceptable and counter-productive to the H2Hubs’ mission.

Likewise, DOE is considering investing a substantial amount of taxpayer money (up to $1 billion) in this NOI for demand-side support mechanisms. DOE should push for maximum transparency to mitigate the risks of failures. Furthermore, DOE must ensure that critical data on cost, performance, production volumes, and other parameters are widely shared, given that the H2Hubs are designed to pave the way for future ecosystems.

Endnotes