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itif.org

The Hydrogen Hubs Conundrum:

How to Fund an Ecosystem

ROBIN GASTER | SEPTEMBER 2022

Recent federal legislation provides $8 billion to develop at least four hydrogen hubs, but little

guidance. DOE should focus its funding on the capital costs of hydrogen production and

infrastructure, while generally eschewing operating expenses and support for end users.

KEY TAKEAWAYS

▪ DOE must fund the hydrogen production plant at the core of each hub at a cost of about

$250 million–$500 million each, with a 50 percent private sector cost share.

▪ Capital expenditures on associated infrastructure, such as hydrogen delivery systems,

should also be supported by DOE, using the same 50 percent cost share.

▪ As the core plant ramps up, DOE may need to support its operating expenses to

accelerate the growth of sustainable end-use markets. But it should be careful not to

extend these subsidies much beyond when the plant reaches full-scale operation.

▪ DOE should also avoid subsidizing infrastructure operations, and it should not subsidize

end users except to seed specific markets temporarily. Ongoing subsidies are inconsistent

with the hubs’ mission of demonstrating sustainable markets.

▪ DOE funding should not flow through each hub’s organizing entity to specific hub

projects. Instead, the organizers should include all related projects in their proposals, but

DOE should fund projects directly, set the terms, and oversee them.

▪ Finally, DOE should explore ways to help de-risk hubs and associated demonstration

projects in other ways. For example, the volatility of energy prices presents a key risk.

DOE should explore ways to insure or hedge against this and other risks.

INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER 2022 PAGE 2

CONTENTS

Key Takeaways ................................................................................................................. 1

Introduction ..................................................................................................................... 2

What Is a Hydrogen Hub? .................................................................................................. 3

The Strategic Challenge for DOE: Fund a Single Project or a Multiproject Ecosystem? ............... 4

The Core Plant Focus ..................................................................................................... 4

The Distributed Funding Model ....................................................................................... 4

What Should DOE Fund? ................................................................................................... 5

Core Plant Capital Expenditures ...................................................................................... 5

Facility Operations ......................................................................................................... 6

Infrastructure ................................................................................................................ 6

End-User Subsidies ....................................................................................................... 7

De-risking ..................................................................................................................... 7

Who Funds What? ............................................................................................................. 8

How to Fund an Ecosystem ................................................................................................ 9

Next Step: The Selection Process ..................................................................................... 10

Endnotes ....................................................................................................................... 11

INTRODUCTION

In November 2021, Congress passed a massive package of direct federal investments in low-

carbon energy systems as part of the Infrastructure Investment and Jobs Act (IIJA, also known as

the bipartisan infrastructure law). The IIJA’s inclusion of more than $20 billion to support pilot

and demonstration projects was particularly noteworthy, a major step toward filling the biggest

gap in the U.S. clean energy innovation ecosystem. The law also established a new office in

DOE, the Office of Clean Energy Demonstrations, to oversee these projects thus address a

significant gap in its management structure.1

The largest program in this portfolio is the Regional Hydrogen Hubs program (known as H2Hubs),

funded at $8 billion over five years. This sum vastly exceeds prior investments in the field. DOE

intends to create at least four and likely eight or even more of these hubs. Given hydrogen’s

versatility as an energy carrier, with the potential to contribute to electric power, transportation,

energy storage, industrial heat, and other uses, H2Hubs represents a bold initiative to accelerate

innovation that would make it a core component of the nation’s energy mix.

This briefing examines the overarching strategic challenge facing DOE as it seeks to implement

the program: defining what a hub is and what elements of it warrant federal support. Future

briefings will explore other aspects of the program.

INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER 2022 PAGE 3

WHAT IS A HYDROGEN HUB?

What is a hydrogen hub, anyway? Section 813(a) of the IIJA defines a “regional clean hydrogen

hub” as “a network of clean hydrogen producers, potential clean hydrogen consumers, and

connective infrastructure located in close proximity.”2 Clearly, Congress understands a “hub” to

be much more than a single major hydrogen production facility: It explicitly included downstream

users and the infrastructure to connect them to the facility. (Similar thinking is also embedded

in the law’s new program for Direct Air Capture hubs.3)

However, the Notice of Intent (NOI) published by DOE in July, which sketches the agency’s

implementation plans, suggests quite strongly that DOE will focus funding on the hydrogen

production facility (which we refer to as the “core plant”), rather than the broader ecosystem

around it. In particular, the NOI offers specific targets for hydrogen production scale (a minimum

of 50 metric tonnes [MT] daily), along with alignment with key metrics embedded in the

ambitious agency-wide “Hydrogen Shot” initiative: production costs of less than $2 per H2 kg,

falling over time to $1; and less than 2 kg of lifecycle CO2 emissions per kg of H2 of produced.4

All these targets are directly relevant for a core plant, and difficult to apply to the wider

ecosystem.

The NOI thus suggests a strategic challenge for DOE. On the one hand, it appears to be seeking

accountability and simplicity by focusing its funding on the core plant. On the other, it has an

obligation to fulfill the congressional mandate to help build a hydrogen-driven ecosystem, which

will depend on a flourishing ecology of end users and an effective infrastructure that links them

to the core plant.

This report argues that DOE should resolve the challenge by making good on the NOI,

primarily

funding the core plant at the center of the hubs, as such a plant provides the most direct means

of providing long-term benefits to the regional hydrogen ecosystem. But DOE should

also

fund

critical infrastructure improvements on a case-by-case basis, removing important roadblocks to

the adoption of hydrogen. The core plant will inevitably soak up a large percentage of the

available funds, but it’s important to ensure that other critical pieces are supported as needed.

Once this broad strategy is approved, DOE will have two further issues to resolve. First, there is

the question of who selects and funds specific projects. The NOI states DOE’s plans to fund a

single entity in each region. Presumably, those entities would then fund projects (possibly even

the core plant, although DOE could also fund that directly). We believe this delegated approach

to be risky for both DOE and the hub entity. We recommend a hybrid approach in which all

fundable projects are included in the hub proposal, but with DOE making the formal selection

and directly funding selected projects. The process would then be supported by DOE’s project

selection expertise (which the hubs don’t have) and by federal acquisition regulations (which

hubs don’t use).

Second, there is the question of identifying the projects to support beyond the core plant. We

anticipate that construction of the core plant will utilize on the order of $250 million to $500

million in DOE funding for each hub.5 This leaves a pool of funding that could reach hundreds of

millions of dollars for each hub, depending on the eventual number of hubs. Those dollars could

be spent on three areas: 1) ongoing operational funding for the core plant, 2) infrastructure

(primarily for delivering hydrogen to end users), and 3) supporting end users of hydrogen, such

as industrial plants or transportation systems. We accept that operational funding would be

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itif.orgTheHydrogenHubsConundrum:HowtoFundanEcosystemROBINGASTERSEPTEMBER2022Recentfederallegislationprovides$8billiontodevelopatleastfourhydrogenhubs,butlittleguidance.DOEshouldfocusitsfundingonthecapitalcostsofhydrogenproductionandinfrastructure,whilegenerallyeschewingoperatingexpensesandsupportforendusers.KEYTAKEAWAYS▪DOEmustfundthehydrogenproductionplantatthecoreofeachhubatacostofabout$250million–$500millioneach,witha50percentprivatesectorcostshare.▪Capitalexpendituresonassociatedinfrastructure,suchashydrogendeliverysystems,shouldalsobesupportedbyDOE,usingthesame50percentcostshare.▪Asthecoreplantrampsup,DOEmayneedtosupportitsoperatingexpensestoacceleratethegrowthofsustainableend-usemarkets.Butitshouldbecarefulnottoextendthesesubsidiesmuchbeyondwhentheplantreachesfull-scaleoperation.▪DOEshouldalsoavoidsubsidizinginfrastructureoperations,anditshouldnotsubsidizeendusersexcepttoseedspecificmarketstemporarily.Ongoingsubsidiesareinconsistentwiththehubs’missionofdemonstratingsustainablemarkets.▪DOEfundingshouldnotflowthrougheachhub’sorganizingentitytospecifichubprojects.Instead,theorganizersshouldincludeallrelatedprojectsintheirproposals,butDOEshouldfundprojectsdirectly,settheterms,andoverseethem.▪Finally,DOEshouldexplorewaystohelpde-riskhubsandassociateddemonstrationprojectsinotherways.Forexample,thevolatilityofenergypricespresentsakeyrisk.DOEshouldexplorewaystoinsureorhedgeagainstthisandotherrisks.INFORMATIONTECHNOLOGY&INNOVATIONFOUNDATIONSEPTEMBER2022PAGE2CONTENTSKeyTakeaways.................................................................................................................1Introduction.....................................................................................................................2WhatIsaHydrogenHub?..................................................................................................3TheStrategicChallengeforDOE:FundaSingleProjectoraMultiprojectEcosystem?...............4TheCorePlantFocus.....................................................................................................4TheDistributedFundingModel.......................................................................................4WhatShouldDOEFund?...................................................................................................5CorePlantCapitalExpenditures......................................................................................5FacilityOperations.........................................................................................................6Infrastructure................................................................................................................6End-UserSubsidies.......................................................................................................7De-risking.....................................................................................................................7WhoFundsWhat?.............................................................................................................8HowtoFundanEcosystem................................................................................................9NextStep:TheSelectionProcess.....................................................................................10Endnotes.......................................................................................................................11INTRODUCTIONInNovember2021,Congresspassedamassivepackageofdirectfederalinvestmentsinlow-carbonenergysystemsaspartoftheInfrastructureInvestmentandJobsAct(IIJA,alsoknownasthebipartisaninfrastructurelaw).TheIIJA’sinclusionofmorethan$20billiontosupportpilotanddemonstrationprojectswasparticularlynoteworthy,amajorsteptowardfillingthebiggestgapintheU.S.cleanenergyinnovationecosystem.ThelawalsoestablishedanewofficeinDOE,theOfficeofCleanEnergyDemonstrations,tooverseetheseprojectsthusaddressasignificantgapinitsmanagementstructure.1ThelargestprograminthisportfolioistheRegionalHydrogenHubsprogram(knownasH2Hubs),fundedat$8billionoverfiveyears.Thissumvastlyexceedspriorinvestmentsinthefield.DOEintendstocreateatleastfourandlikelyeightorevenmoreofthesehubs.Givenhydrogen’sversatilityasanenergycarrier,withthepotentialtocontributetoelectricpower,transportation,energystorage,industrialheat,andotheruses,H2Hubsrepresentsaboldinitiativetoaccelerateinnovationthatwouldmakeitacorecomponentofthenation’senergymix.ThisbriefingexaminestheoverarchingstrategicchallengefacingDOEasitseekstoimplementtheprogram:definingwhatahubisandwhatelementsofitwarrantfederalsupport.Futurebriefingswillexploreotheraspectsoftheprogram.INFORMATIONTECHNOLOGY&INNOVATIONFOUNDATIONSEPTEMBER2022PAGE3WHATISAHYDROGENHUB?Whatisahydrogenhub,anyway?Section813(a)oftheIIJAdefinesa“regionalcleanhydrogenhub”as“anetworkofcleanhydrogenproducers,potentialcleanhydrogenconsumers,andconnectiveinfrastructurelocatedincloseproximity.”2Clearly,Congressunderstandsa“hub”tobemuchmorethanasinglemajorhydrogenproductionfacility:Itexplicitlyincludeddownstreamusersandtheinfrastructuretoconnectthemtothefacility.(Similarthinkingisalsoembeddedinthelaw’snewprogramforDirectAirCapturehubs.3)However,theNoticeofIntent(NOI)publishedbyDOEinJuly,whichsketchestheagency’simplementationplans,suggestsquitestronglythatDOEwillfocusfundingonthehydrogenproductionfacility(whichwerefertoasthe“coreplant”),ratherthanthebroaderecosystemaroundit.Inparticular,theNOIoffersspecifictargetsforhydrogenproductionscale(aminimumof50metrictonnes[MT]daily),alongwithalignmentwithkeymetricsembeddedintheambitiousagency-wide“HydrogenShot”initiative:productioncostsoflessthan$2perH2kg,fallingovertimeto$1;andlessthan2kgoflifecycleCO2emissionsperkgofH2ofproduced.4Allthesetargetsaredirectlyrelevantforacoreplant,anddifficulttoapplytothewiderecosystem.TheNOIthussuggestsastrategicchallengeforDOE.Ontheonehand,itappearstobeseekingaccountabilityandsimplicitybyfocusingitsfundingonthecoreplant.Ontheother,ithasanobligationtofulfillthecongressionalmandatetohelpbuildahydrogen-drivenecosystem,whichwilldependonaflourishingecologyofendusersandaneffectiveinfrastructurethatlinksthemtothecoreplant.ThisreportarguesthatDOEshouldresolvethechallengebymakinggoodontheNOI,primarilyfundingthecoreplantatthecenterofthehubs,assuchaplantprovidesthemostdirectmeansofprovidinglong-termbenefitstotheregionalhydrogenecosystem.ButDOEshouldalsofundcriticalinfrastructureimprovementsonacase-by-casebasis,removingimportantroadblockstotheadoptionofhydrogen.Thecoreplantwillinevitablysoakupalargepercentageoftheavailablefunds,butit’simportanttoensurethatothercriticalpiecesaresupportedasneeded.Oncethisbroadstrategyisapproved,DOEwillhavetwofurtherissuestoresolve.First,thereisthequestionofwhoselectsandfundsspecificprojects.TheNOIstatesDOE’splanstofundasingleentityineachregion.Presumably,thoseentitieswouldthenfundprojects(possiblyeventhecoreplant,althoughDOEcouldalsofundthatdirectly).WebelievethisdelegatedapproachtoberiskyforbothDOEandthehubentity.Werecommendahybridapproachinwhichallfundableprojectsareincludedinthehubproposal,butwithDOEmakingtheformalselectionanddirectlyfundingselectedprojects.TheprocesswouldthenbesupportedbyDOE’sprojectselectionexpertise(whichthehubsdon’thave)andbyfederalacquisitionregulations(whichhubsdon’tuse).Second,thereisthequestionofidentifyingtheprojectstosupportbeyondthecoreplant.Weanticipatethatconstructionofthecoreplantwillutilizeontheorderof$250millionto$500millioninDOEfundingforeachhub.5Thisleavesapooloffundingthatcouldreachhundredsofmillionsofdollarsforeachhub,dependingontheeventualnumberofhubs.Thosedollarscouldbespentonthreeareas:1)ongoingoperationalfundingforthecoreplant,2)infrastructure(primarilyfordeliveringhydrogentoendusers),and3)supportingendusersofhydrogen,suchasindustrialplantsortransportationsystems.WeacceptthatoperationalfundingwouldbeINFORMATIONTECHNOLOGY&INNOVATIONFOUNDATIONSEPTEMBER2022PAGE4appropriateforthecoreplantuntiltheyreachfulloperatingcapacity,butatthatpoint,subsidiesmusttaperoff.WealsostronglybelievethatDOEfundingshouldsupportcapitalexpenditureonselectedinfrastructureprojects,especiallythosethatconnectthecoreplanttoanchorendusers.However,inprinciple,DOEshouldnotbeusingdemonstrationprojectfundstosubsidizeendusersdirectly,anditshouldnotsubsidizetheongoingoperationsofinfrastructureproviders.THESTRATEGICCHALLENGEFORDOE:FUNDASINGLEPROJECTORAMULTIPROJECTECOSYSTEM?TheCorePlantFocusFocusingfundingonasinglecoreplantwithineachhubhassignificantadvantagesforDOE.Thehardmetricsdescribedearliercanbeapplieddirectlyduringtheselectionprocess.DOEisalsomoreexperiencedinmanagingindividuallargeprojects—whichithasdonebefore—thanmultiprojectecosystems.Further,singleprojectsalignbetterwithotherDOEprograms,suchasthoseadministeredbytheLoanProgramOffice,thatmightalsobeengagedincreatingthehydrogeneconomy.Milestonesforthecoreplantwillbemucheasiertodesign,andprogressagainstthemwillbemoreeasilymeasured.Thisinturnmeansthatgo/no-godecisionsforfurtherfunding,whilestillpotentiallydifficult,willbemoretransparentandeasiertodefend.ButthecoreplantfocuscarriespotentialdownsidesforDOEaswell.Notably,itmakesaportfolioapproacheffectivelyimpossible:Thesheerscaleofthefundingandlimitednumberofinvestments(fourtoeight)meanthatnearlyeveryprojectwillbe“toobigtofail.”Thecoreplantfocuscouldalsoundervaluedownstreamdevelopment,specificallytheendusersthatarecriticaltotheeventualemergenceofthehydrogeneconomy,aswellastheinfrastructureneededtodeliverhydrogentothem.Investmentsinhydrogentransportinfrastructure,forexample,maybecriticalforprojects’successbutwouldneedfundingfromelsewhere.ThisapproachmightalsorequireDOEtoignoremanyrelevantcriteriaforecosystemsuccess,leavingitwithoverlynarrowprojectobjectives.Forexample,Congressexplicitlyincludedwell-payingjobsasaprogramobjective.Butwhatmattershereisnotjustjobswithinthecoreplant,butwell-payingjobsacrosstheentirehydrogeneconomyintheregion.Thecoreplantapproachimpliesthatalltheancillaryworkofbuildingaregionalhydrogeneconomy—andfundingit—willfallonthehubsthemselves.Keypiecesoftheinfrastructuremightthereforebeleftunfunded,whilebetterfundedormoreinfluentiallocalplayerscantiltregionaldevelopmenttowardtheirstrategicneeds.Thisapproachalsodeniesthehubsakeyleverinbuildingouttheecosystem:controlovertheflowoffunding.Finally,thecoreplantfocusmeansthatgo/no-godecisionswillbehardertomake.ItisverydifficulttoimagineDOEacceptingthefalloutfromendingahugeprojectinNewYorkthatissupportedbySenatorSchumeroranenormousprojectinCaliforniabackedbyGovernorNewsom.Thosearethepoliticalrealities.TheDistributedFundingModelAlternatively.DOEcoulddistributeitsfundingacrosstheregionalecosystemratherthanfocusingonlyonthecoreplant.ForDOE,adistributedapproachmeanstheveryhighstakesoffundingafewhugeprojectswouldbereduced,andtheportfoliomanagementapproachrecommendedbytheInformationTechnologyandInnovationFoundation(ITIF)andothernongovernmentalINFORMATIONTECHNOLOGY&INNOVATIONFOUNDATIONSEPTEMBER2022PAGE5organizations(NGOs)wouldbefeasibletoimplement[ref].6Underthismodel,DOEwouldbeabletofundmanyprojectsthatcarrydifferentriskprofiles,anditcouldassesstheirsuccessoveramuchbroaderrangeofoutcomes.AdistributedmodelwouldalsoallowDOEtodevelopmilestonesandmetricsthataresimplerandeasiertoimplement,againbeingfocusedaroundmanysmallerandsimplerprojects.Forthehubs,amultiprojectapproachwouldhelpdirectDOEresourcesintosegmentsofthedownstreaminfrastructurethatcouldbehardtofundotherwise,andwherelackofinvestmentcouldbadlydamagetheecosystemitself.However,thedistributedfundingmodelalsocarriessignificantrisksforDOE.Breakingupthefundingintomultipleprojectscouldmeanthecoreplantdoesn’tgetenoughfundingtoreachscale,while—dependingonwhomakesfundingdecisions—increasinglythepotentialforinternalconflictsofinterestatthehubs.Fundingmultipleprojectscouldmakeithardtodeterminewhethertheoverallhubecosystemwasachievingitsobjectives,andwouldmakego/no-godecisionsatthehublevelalmostimpossible(although,asnotedearlier,suchadecisionwouldeffectivelybeimpossibleanyway).MultipleprojectswouldalsoriskdilutingDOE’strackingandassessmentcapability.WHATSHOULDDOEFUND?Asidefrominitialfundsforplanningandcommunityoutreach,thereare,broadlyspeaking,fiveelementsoftheproposedregionalhydrogenecosystemDOEcouldfund:1.Thecoreplantbuildoutandcloselyrelatedinitiatives2.Coreplantoperations3.Infrastructure(including,forexample,relatedlong-durationstorage,pipelines)4.Endusers5.De-riskingWebelievethatDOEshouldfundnumbers1and3,andbepreparedtosubsidizecoreplantoperationsuntilitreachesfullproduction.Number5shouldbeexplored,asDOEmaybebetterpositionedthanindividualhubsaretoaddresscertainrisks.Pumpprimingforendusersshouldbeavoidedwhereverpossible.CorePlantCapitalExpendituresWhateverDOEdecidesaboutfundingadditionalelementsoftheecosystem,itwillfundthecoreplantandmostoftheprogram’sfundingwillsupportcoreplantcapitalexpenditures(CAPEX).Howmuchwillthatcost?Ausefulreferencecanbedrawnfromtheworld’slargestalkalineelectrolyzer(AE)plantinChina,whichcameonlineinlateDecember.Baofengclaimsthatits150megawatt(MW)projectcanproduce27,000tonsofhydrogenperyear.7Atcurrentcosts,then,productionof50MTofhydrogenwillthereforerequireabout278MWofcapacity.AECAPEXiscurrentlyestimatedat~$1,000perkilowatt(kW).8TheCAPEXrequiredtoproduceatthatscalecanbecurrentlyestimatedatabout$278million.Buildingfor100MTwouldcostontheorderof$500million.Thesefiguresroughlyapproximatetheannounced$250millioncostofAirLiquide’s30MTgreenhydrogenplantinNevada.9INFORMATIONTECHNOLOGY&INNOVATIONFOUNDATIONSEPTEMBER2022PAGE6Thesecostswillfallovertime,assupportedbyGlenketal.,themostcomprehensiveestimateofcostdeclinetrajectoriestodate.10Drawingonawiderangeofsources,GlenkarguesthatAEcatalyzercostsareexpectedtofallatarateof2.96percent(+/-1.23percent)annually;thecostofprotonexchangemembrane(PEM)catalyzersisexpectedtofallfaster,at4.77percent(+/-1.88percent)annually.CatalyzersareamajorcostelementforCAPEXforelectrolysis-basedhydrogenproductionplants.ThisadmittedlyinexactanalysissuggeststhattheCAPEXforthecoreplantonthescalerequiredbyDOEwillbeontheorderof$250millionto$500million.FacilityOperationsDOEsuggestsintheNOIthatthehubsshouldbecomeself-sustaining,andthatanyoperatingsubsidieswillthereforebetaperedoff.However,afirmerlimitmaybeneeded,asthecoreplantwilllikelyseekfurthersubsidiestoreducecostsandhenceimprovetheircompetitivepositiondownstream—andDOEwillbepoorlyplacedtoresistthesedemandsonceithassunklargesumsintoagivenproject.TheH2Hubsaresupposedtodemonstratethecommercialreadinessofexistingtechnologyviaascale-upjumpheavilyfundedbyDOE.Thatreadinessneedstobedemonstratedbythesuccessfulrolloutofaself-sustainingbusinesswhentheplantreachfulloperation.Atthatpoint,nofurthereconomiesofscalecanbederivedfromthatplant,sothereisnopointinsubsidizingoperationsinthehopethatcostswillfallfurther.Marketsforhydrogenareregional—theseare“regionalhubs”—andhencetheyneedtobecomeself-sustainingonaregionalbasis.Theactualmarkettestbeginswhentheplantreachfull-scaleoperations.Inrarecircumstances,acoreplantmaybewaitingforthefinaldeploymentofanimportantoff-taker(e.g.,completionofapowerplantthatutilizestheplant’sH2production).DOEmayfinditprudenttoprovidesomeadditionalsupportinthosecircumstances.Butingeneral,DOEsubsidiesforfacilityoperationsshouldendatthepointafacilitybecomesfullyoperational.InfrastructureWell-establishedeconomicargumentslineupbehindpublicfundingforinfrastructure.Thelikelihoodthatprivateentitiescannotcapturethefullsocialbenefitofinfrastructuredeploymentunderpinstheconceptualframeworkthatsupportspublicinvestmentsinsociallybeneficialinfrastructure.However,DOEshouldbewaryofover-committinghere.ItsinfrastructurefundswillbelimitedbecausemostfundingwillbecommittedtocoreplantCAPEX.Inaddition,manyinfrastructureprojectswillbecommerciallyfeasible,sotherearerisksthatDOEfundingcouldbeusedtode-riskprojectsthatwouldbebuiltanyway,therebyartificiallyimprovingreturnsforprivateinvestors.DOEshould,therefore,developamethodologythatmeetstwocorerequirements:First,itshouldidentifyinfrastructureprojectsthataresystemicallyimportantforagivenregionalhydrogenhubthatareinparticularnecessaryforconnectingthecoreplanttoimportantend-usermarkets.Second,itshouldevaluateproposalstightlywithaviewtowardscreeningoutprojectsthatdonotrequireaDOEcontribution.Thelatterisnotasimpletask,thoughitwouldbecomeeasierovertimeassimilarprojectsaredeployedatdifferenthubs.INFORMATIONTECHNOLOGY&INNOVATIONFOUNDATIONSEPTEMBER2022PAGE7However,DOEshouldinprincipleavoidsubsidiesforongoingoperationsforinfrastructureoncetheitisfullyoperational.Whilestart-upsupportforinfrastructureoperationsisappropriateastheplantandinfrastructurerampuptofullcapacity,ongoingsupportatthatpointshouldnolongerbenecessary.SufficientongoingfundingshouldbeavailableviasubsidizedCAPEX.Furthersubsidieswouldbeanunwarrantedblankcheck,andwouldinfactdemonstratethattheregionalhubsarenotself-sustainingovertime.End-UserSubsidiesDOEshouldinprincipleseektoavoidend-usersubsidies.Thesehavebeendefendedinothercircumstancesasawayto“primethedemandpump,”whichcanleadtofurthersupplyandhenceavirtuouscircleofgrowingscale,decliningcosts,andincreasingdemand.ButthatisnotthepurposeoftheH2Hubsdemonstrationprogram,whichisprimarilydesignedtodemonstratethataregionalhubcanbeself-sustainingonceascaleof50–100MTdailyinH2productionhasbeenachieved.ThatscaleshouldcuttheresultingpriceofH2substantially,andDOECAPEXsubsidieswillcutthemfurther.Ifthatdoesbuildasufficientvolumeofenduserdemandtodemonstratethatthehubisself-sustaining,thentheprogramwouldhavesucceededinestablishingthatfact.Notethatenduserswillreceiveanindirectsubsidybecausehalfofthecoreplant’sconstructioncostsandsomeofthehubs’infrastructurecostswillhavebeenpaidbyDOE.Thatreducestheamountofcapitalexpendituresthatmustberecoveredfromendusers,whichisanongoingsubsidy,evenbeyondtheendofDOE’sdirectfunding.De-riskingOneofthemostimportantlessonsfrompreviouslarge-scaleenergydemonstrationprojects—suchastheSyntheticFuelsCorporationofthelate1970sandearly1980s,forexample—isthatwhenmarketsturnagainstthem,innovativeprojectsmaynotbeabletorideoutthestorm.Whileitisprobablyimpossibletocompletelyinsulatedemonstrationprojectsfrommarketforces,itisworthconsideringwaysriskscouldbemitigated.Therearethreecriticalmarketrisks:▪Essentialinputssuchasfeedstocksorelectricitycouldbecomemuchmoreexpensive.▪Coreplantcomponentscouldbecomemuchmoreexpensive(e.g.,criticalmineralsandcomponents).▪Downstreamsalescouldbeaffectedbysignificantcostdeclinesinmarketsforsubstitutes(e.g.,abreakthroughinelectric-vehiclebatteriescouldundercuttheeconomicsofhydrogeninthetransportationsector).Whilethelasttworisksarerealenough,itisupstreaminparticularwhereDOEorthefederalgovernmentmorebroadlycouldhavearoletoplay.TheshockcausedbytheRussianinvasionofUkrainehasalreadyrippledintonaturalgas(NG)markets,asEUcountriesseektoreplaceRussiangaswithliquifiednaturalgasfromelsewhere,causingasharppricesurgeglobally.Isthisapermanentshiftinthecostcurveforgas?Noonereallyknows.However,theNGshockalreadyhasclearimplicationsforhubsthatplantouseNGasafeedstock—andalsoforthosewithplanstodeployhydrogenmixedwithNGforpowergenerationorotherdownstreamuses.INFORMATIONTECHNOLOGY&INNOVATIONFOUNDATIONSEPTEMBER2022PAGE8BecauseH2isaninfantindustry,itispoorlyplacedtorideouttheseshocks.Accordingly,DOEshouldconsiderhowitcanbestprotectthehubs.Onewayissimplytosubsidizethecostofinputsoncetheymovebeyondaspecifiedbenchmarklevel.Alternatively,itmaybepossibletohedgeagainstcertainshifts(e.g.,inthepriceofNG)usingforwardcontracts.DOEcouldhelpbyfundingthesepriortohubcompletionsotheeconomicsofthehubscanbedefinedforasignificantperiodinthefuture.Finally,DOEcouldalsoeitherprovideorperhapsorganizeinsuranceagainstshocks,asitislikelybetterpositionedthananysinglehubtoaddresstheserisks.Inallthesecases,DOEshouldprovidefundingmoreasaloan—orevenagainstequity—ratherthanasasimplegrant,whereverpossible.Ifinvestorsareprovidedwithshockinsuranceofsomekind,fundedbyDOE,theyshouldbepreparedtopayforthatinsuranceatsomepointtobedetermined.WHOFUNDSWHAT?IntheNOI,DOEclearlystatesthatitplanstofundhubsviaasingleentity.Anyadditionalfundingbeyondthecoreplantwouldpresumablycomeviasubcontractsselectedandmanagedbythehubs.Thisapproachhassomeobviousadvantages,asthehubsarepresumablybestplacedtounderstandwhichinvestmentswillprovidethebestbangforthebuck.TheywillalsobeabletoactmorequicklythanDOE,astheywillnotbeconstrainedbycumbersomefederalprocurementrules.AndDOE,ofcourse,willnothavetheburdenofselectionorevenclosemonitoringandsubsequentgo/no-godecisions.Buttheremaybesubstantialdownsidesforthehubsaswell.Theywouldbeleftwiththechallengingtaskofpickingwhichdownstreamprojectstofund.Thatcouldbeproblematicforcoalitionsthatareonlynowemergingandhavenoinstitutionalhistoryonwhichtorely,andalsohavenotechnicalcapacitytomakefundingdecisions.AndthosedecisionswouldbemadeoutsidetheproceduralprotectionsofFederalprocurementrules.Hubswouldlikelyalsohaveahardtimeenforcinggo/no-gomilestonesforsubcontracts.Regionalhubstaffershaveobservedininterviewsthathubscouldevenbesplitupbyinternalconflictsifforcedtomakethesedecisions.Giventhesecompetingcostsandbenefits,itmakesmostsenseforsubprojectfundingdecisionstobemadejointlybyDOEandthehubs.Ratherthanmakingasinglegranttohubsthatthenselectsubcontractors,thehubsshoulddefinesubprojectsofvaluetotheregionalecosystem,andDOEshouldthenmakefinalfundingdecisionswithinabudgetshapedbytheoverallamountawardedtotheoriginalhubproposalminusDOEfundscommittedtothecoreplant.Thatwouldensurethatallsubprojectsnationwidearecoveredbyaunifiedsystemoftrackingandevaluation,realgo/no-gomilestonesareinplace,andappropriatedecisionswillsubsequentlybeimplemented.OnewaytoimplementshareddecisionswouldbeforthehubstoincludeintheirproposalsinfrastructureprojectsthatareimportantfortheregionalecosystemandmeettheDOEfiscaltestforsubsidy.ThiswouldhelpDOEchoosebetweencompetinghubproposalsandsetthestageforasubsequentphasewhereinthoseinfrastructureprojectswouldcompeteforfundswithineachINFORMATIONTECHNOLOGY&INNOVATIONFOUNDATIONSEPTEMBER2022PAGE9hub’soverallbudget,usingnormalDOEfundingprocedures.TheseprojectswouldbesubjecttoDOEmonitoringandevaluation,andDOEgo/no-godecisions.HOWTOFUNDANECOSYSTEMWhatCongresswantsfromthehydrogenhubsprogramisclearenough:athrivingregionalhydrogeneconomythatcutsemissions,createsjobs,andopensapathwayintoabiggerhydrogensector.Thequestionishowtogetthere,andspecificallytheroleofDOEandOCEDhydrogenhubsprogram.Ourconclusionsareasfollows:1.Focusingsolelyonasingleproductionfacilityistoonarrowanddisregardscongressionalintent.Itplacestoomuchemphasisonthecoreandnotenoughonthespokesandnetwork.ItmakesaportfolioapproachtoDOEinvestmentimpossible,andover-emphasizesproductionattheexpenseofdistributionandmarketdemand.2.DemonstratingH2productionatscaleisexpensive.Asignificantpercentageofhubfundingwillstillneedtogotothecentralproductionentity.ThatentityisalsothefocusforhardtargetsforH2production,costs,andCO2emissions.3.Ahybridmodelcouldworkbest.DOEshouldconsiderdeterminingthefundingneededforcoreplantCAPEXandanoperatingexpense(OPEX)subsidyuptomaximumproductioncapacityandthenallocatetheremainderofthehubs’proposedbudgettoaddressspecifickeyroadblocksfacingtheregionalnetworksandpossibleactionstoreducesystemicrisk.TheamountavailablewoulddependontheresidualfundsremainingafterDOEpaysitsshareforthecoreplant.4.Residualfundingcouldatleastinprinciplealsorequireadifferentmatch:Asinfrastructureisfurtherdownstreamthanhydrogenproduction,andhenceclosertothemarket,DOEcouldseekanon-DOEmatchhigherthantheproposed50percent,therebystretchingDOEdollarsfurther.5.Preliminaryidentificationofresidualfundingprojectsshouldbeincludedinthehubselectionprocess.ThatwouldensurethatDOErunsallselectioncompetitions,whilethehubsretainanimportantvoiceinfundingdecisions.6.DOEfundingshouldfocusprimarilyonCAPEXforboththecoreplantandinfrastructure-relatedprojects.OPEXfundingshouldbelimitedinprincipletotheperiodbeforetheplantandinfrastructurereachfulloperatingcapacity(DOEshouldbeabletowaivethisinexceptionalcases).7.End-usersubsidiesshouldinprinciplebeavoided.Theywillbeexpensiveovereventhemediumterm,andoncestarted,willbedifficulttoend.8.DOEshouldexploreoptionsforinsulatinghubsagainstvolatileenergyprices.Underthishybridmodel,DOEwouldseekhubproposalsthatexplicitlyallocatefundingtoboththecoreplantandregionalinfrastructure.Thecoreplantwouldneedtomeetthehardtargets,whiletheresidualfundingelementscouldensurethatthehydrogenecosystemasawholeisviable.INFORMATIONTECHNOLOGY&INNOVATIONFOUNDATIONSEPTEMBER2022PAGE10NEXTSTEP:THESELECTIONPROCESSOncethesestrategicchoiceshavebeenmade,DOEwillneedtodevelopanappropriateselectionprocess.ThenumerousdetailedrequirementsoutlinedintheNOImakethisespeciallychallenging:Thereare24differentpotentialselectioncriteriamentionedinthepaper.Bluntly,aselectionprocesswiththatmanycriteriaoffersnoobjectivecriteriaatall;itwillalwaysbepossibletoselectanygivenproject.ThenextreportinthisserieswillarguethatDOEmustcreateaselectionprocessthatisfair,effective,timely,andhighlytransparent.AcknowledgmentsTheauthorwouldliketoacknowledgetheextensivehelphereceivedonthispaperfromDavidHartandHannahBoyles.Itwasinvaluable.AbouttheAuthorRobinGasterispresidentofIncumetricsInc.andavisitingscholaratGeorgeWashingtonUniversity.Between2004and2017,Dr.GasterwasleadresearcherontheNationalAcademiesmultivolumestudyofSmallBusinessInnovationResearchawards.Hewasresponsiblefordrafting10interrelatedvolumesofreports,aswellasconductingtheunderlyingprimaryresearch.HewasalsoleadresearchertheNationalAcademies’studyoftheManufacturingExtensionPartnershipsandbuiltadataanalysisenginefortheNationalInstituteofStandardsandTechnologyforcomparingtheinnovationcapacityofstatesandregions.Dr.GasterreceivedaPh.D.fromUCBerkeleyin1985,anM.A.fromtheUniversityofKent(UnitedKingdom)in1978,andaB.A.fromOxfordUniversity(UnitedKingdom)in1976.Hisdoctoralthesiswonanationalacademicprize.HealsowonacongressionalfellowshipattheOfficeofTechnologyAssessment,andhasbeenafellowattheEconomicStrategyInstitute.AboutITIFTheInformationTechnologyandInnovationFoundation(ITIF)isanindependent,nonprofit,nonpartisanresearchandeducationalinstitutefocusingontheintersectionoftechnologicalinnovationandpublicpolicy.Recognizedbyitspeersinthethinktankcommunityastheglobalcenterofexcellenceforscienceandtechnologypolicy,ITIF’smissionistoformulateandpromotepolicysolutionsthataccelerateinnovationandboostproductivitytospurgrowth,opportunity,andprogress.Formoreinformation,visitusatwww.itif.org.INFORMATIONTECHNOLOGY&INNOVATIONFOUNDATIONSEPTEMBER2022PAGE11ENDNOTES1.InfrastructureInvestmentandJobsAct,42U.S.C.§18861.2.InfrastructureInvestmentandJobsAct,42U.S.C.§16161a(a).3.InfrastructureInvestmentandJobsAct,42U.S.C.§16298d(j);“Regionaldirectaircapturehubmeansanetworkofprojects,potentialCO2utilizationoff-takers,connectivecarbondioxidetransportinfrastructure,subsurfaceresources,andsequestrationinfrastructurelocatedwithinaregion.”4.U.S.DepartmentofEnergy,“DE-FOA-0002807:NoticeofIntenttoIssueFundingOpportunityAnnouncementDE-FOA-0002792,‘FundingOpportunityinSupportoftheHydrogenShotandaUniversityResearchConsortiumonGridResilience’”(2022),https://eere-exchange.energy.gov/Default.aspx#FoaIddddc3466-5d8d-4092-8a9b-269d2bda3629;“Inadditiontomeetingorexceedingthecleanhydrogenproductionstandard,H2HubswillalsocontributetoachievingorexceedingthecleanhydrogenproductioncosttargetsforelectrolyzerscalledforintheBIL(lessthan$2perkilogramofhydrogenby2026),andsupportachievingDOE’sHydrogenShotTMgoalof$1per1kilogramofcleanhydrogenin1decade(“111”).”U.S.DepartmentofEnergy,“DE-FOA-0002768:NoticeofIntenttoIssueFundingOpportunityAnnouncementNo.De-Foa-0002779—BipartisanInfrastructureLaw:AdditionalCleanHydrogenPrograms(Section40314):RegionalCleanHydrogenHubs”(2022),https://oced-exchange.energy.gov/Default.aspx#FoaId4e674498-618c-4f1a-9013-1a1ce56e5bd3;“Inadditiontomeetingorexceedingthecleanhydrogenproductionstandard,H2HubswillalsocontributetoachievingorexceedingthecleanhydrogenproductioncosttargetsforelectrolyzerscalledforintheBIL(lessthan$2perkilogramofhydrogenby2026),andsupportachievingDOE’sHydrogenShotTMgoalof$1per1kilogramofcleanhydrogenin1decade(“111”)”;U.S.DepartmentofEnergy,“NoticeofIntentNo.DE-FOA-0002807:NoticeofIntenttoIssueFundingOpportunityAnnouncementNo.DE-FOA-0002792”(2021),https://eere-exchange.energy.gov/FileContent.aspx?FileID=0f0993b8-efce-439e-9e4b-3e35436d1275;Allprojectsmustmeetthatminimumcleanhydrogenproductionstandard,butDOEalsointendstoevaluatefulllifecycleemissionsforeachapplication,andwillexplicitlygivepreferencetoapplicationsthatreduceGHGemissionsacrossthefullprojectlifecycle.5.AirLiquiderecentlycommissionedagreenhydrogenplantinNevadathatwillcost$250millionandproduce30MTofhydrogendaily.DOErequireshubstoproduceatleast50MTto100MT,sothisplantwillbetwotothreetimesasexpensive,thecostofwhichDOEwillprovidenomorethan50percent.6.DavidHartetal.“FirstofItsKind:MakingDOE’sNewOfficeofCleanEnergyDemonstrationsaSuccess”(ITIF,April2022),https://itif.org/publications/2022/04/18/first-of-its-kind-making-doe-office-of-clean-energy-demonstrations-a-success/.7.DamonEvans,“ChinaStartsupWorld’sLargestGreenHydrogenPlant—NewsfortheEnergySector,”EnergyVoice(blog),February3,2022,https://www.energyvoice.com/renewables-energy-transition/384813/china-starts-up-worlds-largest-green-hydrogen-plant/.8.AdamChristensen,“AssessmentofHydrogenProductionCostsfromElectrolysis:UnitedStatesandEurope”(InternationalCouncilonCleanTransportation,2020),https://theicct.org/wp-content/uploads/2021/06/final_icct2020_assessment_of-_hydrogen_production_costs-v2.pdf.9.“AirLiquideLaunchesGreenLiquidHydrogenProductionFacilityinNevada,”IHSMarkit,May24,2022,https://cleanenergynews.ihsmarkit.com/research-analysis/air-liquide-launches-green-liquid-hydrogen-production-facility.html.10.GuntherGlenkandStefanReichelstein,“EconomicsofConvertingRenewablePowertoHydrogen,”natureenergy,February25,2019,https://doi.org/10.1038/s41560-019-0326-1.

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