Decarbonisation Technology - November 2023 Issue

conventional grey hydrogen, thereby incentivising production and, hopefully, consumption. One challenge of this scheme is that the focus is on the production side, and there is limited incentive to spark investment in distribution infrastructure, which is sorely needed to connect producers and consumers on a broader scale. In addition, at the time of the writing, the US Internal Revenue Service (IRS) is just issuing the rules associated with claiming these credits, including clarification of the domestic content requirements (DCR). Making the recovery of these credits clear to investors will help drive the right capital flows and avoid further delays in progressing project engineering and construction. Auctions and other novel schemes Within Europe, one novel approach to help bring producers and consumers together while also closing the gap between production costs and consumers’ willingness to pay is the use of government-backed auctions. Essentially the way these double auctions work is that a government entity agrees to buy a certain amount of low- carbon hydrogen over a given period (typically 10 years) for a predefined pricing arrangement, and then the government entity auctions shorter-term supply contracts under individual tenders. The gap between the cost of hydrogen purchased from producers and sold to suppliers is covered by the government, thereby using taxpayer funds to solve one of the critical limits in expanding the hydrogen economy – providing supply and demand side investors with firm production and supply contracts. This approach also helps to provide supply to those entities with a more significant economic desire to secure low-carbon hydrogen and are willing to pay more for that material. For the longer term, other schemes are being considered to further drive decarbonisation. An example is a carbon take-back obligation, where the carbon generation entities (crude oil producers, refiners, and importers) would be obligated to capture and store a portion of the CO₂ generated by their activities, including the final use of their products. Over time, the emission capture requirement would grow and help drive decarbonisation from a supply side. The challenges with this approach are the ability of the producers to capture and store CO₂

from final usage as well as the practicality of certification and confirmation when compared to more demand-side options. That said, other novel incentives are needed to inspire R&D, investment, and both supply and demand-side low-carbon production and usage. Takeaways and conclusions In summary, to drive hydrogen adoption beyond the supply, demand, and distribution aspects, further clarification of standards, regulations, certification, and economic incentives is critical. As energy firms, governments, and research entities look at converting their hydrogen strategy into reality, the following five critical questions should be asked and answered, risks identified and mitigations developed, and supply chain elements reviewed: • What markets are available, and what points of view exist for that market, both from a supply/ demand and economic perspective? • What are the technology pathways and optionality that should be used? • How are capital costs, economics, and risks being accounted for and mitigated? • What are the critical early impacts and decisions that must be made to increase the probability of a positive outcome on the investment? • Which components of the overall hydrogen supply chain production, distribution, and consumption require further expansion or efficiency improvement to meet technical and economic feasibility? Those hydrogen economy players that can most effectively address these areas will be in the best position to expand the hydrogen economy and meet the overall decarbonisation goals.

Robert Ohmes rohmes@becht.com Nathan Barkley nbarkley@becht.com Mike Annon mannon@becht.com Greg Zoll gzoll@becht.com Jessica Hofmann jhofmann@becht.com