The US Department of Energy has committed $1 billion to support clean hydrogen offtakers to kickstart the hydrogen economy.

By Joshua T. Bledsoe and Kevin A. Homrighausen

On July 5, 2023, the US Department of Energy (DOE) released a Notice of Intent (NOI) to invest up to $1 billion in a mechanism to develop reliable demand for hydrogen at DOE-funded Regional Clean Hydrogen Hubs (H2Hubs). DOE hopes this mechanism will help a diverse range of entities leverage the full potential of clean hydrogen and facilitate the use of clean hydrogen across a variety of economic sectors.

Promoting the Demand for Clean Hydrogen

As we discussed in a prior blog post, clean hydrogen — i.e., hydrogen that can be produced with low or zero carbon emissions — is a key component of the Biden Administration’s goal to reach net zero carbon emissions by 2050. Clean hydrogen is expected to play a particularly important role for hard-to-decarbonize sectors. One of DOE’s flagship programs under 2021’s Infrastructure Investment and Jobs Act (also known as the Bipartisan Infrastructure Law) is the H2Hubs program. With $8 billion in funding, the H2Hubs program will invest in multiple regional hydrogen hubs in order to demonstrate how the production, processing, delivery, storage, and end-use of clean hydrogen can support the Biden Administration’s climate goals.

DOE’s recent NOI states that the agency intends to allocate $1 billion of the funding set aside for H2Hubs toward developing a demand-side support mechanism to advance the nascent clean hydrogen market. This is a novel approach, as most federally funded initiatives focus on hydrogen production. While the details of this program are forthcoming, DOE states that the mechanism will provide multi-year financial support to prospective hydrogen users seeking to obtain clean hydrogen produced by competitively selected projects that are affiliated with H2Hubs. DOE hopes that a diverse set of these hydrogen offtakers will be able to take advantage of the program, including non-profits, local government, and Tribes. The agency aims for clean hydrogen to be used across various sectors of the economy, including industrial processes, manufacturing, and heavy-duty transportation.

Potential Structure of the Program

The NOI offers little detail regarding the structure of its proposed hydrogen demand-side support mechanism. DOE explains that the mechanism could include one or more design factors, such as pay-for-difference contracts that support projects based on the price they can achieve in the market, fixed levels of financial support for projects, funding to support feasibility analysis from potential offtakers near H2Hubs, or a “market-maker” mechanism to provide a ready purchaser/seller for clean hydrogen. Regardless, the NOI confirms that the mechanism will enable private sector financing.

To help develop the structure of the demand-side support mechanism, DOE solicited feedback through the NOI from the public regarding the most effective way to jumpstart demand for clean hydrogen at H2Hubs, the types of competitive processes that should be used to select projects that will receive demand-side support, and how demand-side support should interact with other incentives  (such as tax credits, state and local government incentives, and DOE cooperative agreement funding). DOE also sought feedback regarding which entity or combination of entities should be charged with administering the mechanism.

What’s Next?

DOE intends to issue a Broad Agency Announcement (BAA) entitled “Implementing Entity (or Entities) for Demand-side Support Mechanism for Clean Hydrogen Hub Projects” by early fall. As noted above, this BAA will seek an independent Implementing Entity (or entities) to administer the demand-side support mechanism. We expect that more details regarding the program will emerge after this BAA has been issued.

Latham & Watkins will continue to monitor developments in this area.