The hydrogen economy is having its moment.
The Department of Energy’s (DOE) recent announcement of $8 billion in funding for developing Hydrogen Hubs (H2Hubs), is the latest key investment the federal government is making to expand the U.S. clean hydrogen industry. This funding, on top of the previously passed Inflation Reduction Act (IRA), which offers tax and credit incentives for hydrogen projects and production, is likely to create more opportunities for private investment.
Of the $8 billion in funding announced for the H2Hubs, the DOE plans to distribute $7 billion in grants to seven recently selected regional hubs. The remaining $1 billion in funding will go to “demand-side support” to drive innovative uses of clean hydrogen. So far, the DOE has said that this demand-side initiative will help ensure H2Hub producers and end users “have the market certainty they need during the early years of production to unlock private investment” and allow “private sector partners [to] address bottlenecks and other project impediments.”
Investors and the startups they back could become a major part of the private sector demand-side partnerships the government is seeking for the H2Hubs.
Startups have made technological advancements in producing hydrogen that could be applied to sectors that are challenging to decarbonize. The new technologies being developed cover a wide range of production methods, storage, distribution and utilization and target a wide variety of end-uses.
Producers continue to increase efficiency and reduce costs for hydrogen production. Engineering firms are tackling the issues associated with the storage and transportation of hydrogen. And project developers sedulously attempt to produce products that will achieve the promise of a low-carbon hydrogen economy—including traditional uses of hydrogen and new ones, such as clean long-term energy storage, low-carbon ammonia, e-fuels and a source of industrial heat.
Investor-backed startups can also develop innovations that allow clean hydrogen and related technologies to be deployed at a large scale in sectors that are practically new to hydrogen, such as transportation, steelmaking and industrial process heating.
Private investors were bullish on the potential for a clean hydrogen economy even before the latest federal incentives were announced. Through most of 2022, private equity (PE), venture capital (VC) and corporate ventures invested $5.7 billion in hydrogen-related companies, according to PitchBook, which notes that these figures represent record highs.
So far in 2023, those investors have kicked in $9.4 billion in hydrogen-related companies, according to PitchBook. This is remarkable considering the various financial and geopolitical headwinds private investors have faced this year. With the tailwinds from continued growth in demand and public and private investments, the hydrogen sector is expected to continue to grow.
The federal government’s commitment to provide market certainty at this early stage of the clean hydrogen industry will help startups’ innovations become marketable and bankable, and in turn, make it feasible for clean hydrogen to accelerate and scale and go mainstream.
Besides VC and PE firms, many of the top investors in hydrogen are industrial companies, including traditional energy industry leaders. These companies have an interest in diversifying their businesses and see a future for hydrogen as an important part of the energy mix. Such corporate investors are critical to the development of the hydrogen industry. They bring unparalleled technical expertise, know-how and experience in solving complex engineering challenges, commercializing products and scaling businesses. They also provide resources and access to markets. Many of these corporate players are participants in the H2Hubs and potential partners for hydrogen startups.
Investments in hydrogen can be made across a portfolio, from hydrogen production and infrastructure (such as storage tanks and geological storage and distribution such as hydrogen liquefication, liquid organic hydrogen carriers or synthetic hydrocarbon fuels) to utilization.
Questions still remain as to how exactly both the H2Hubs and IRA could help bring startups’ hydrogen projects to fruition. On the H2Hubs front, clarification is required on how and when the “demand-side” funds will be distributed, what the demand-side support mechanisms will be and what role vendors may play in contracting to provide those services. Likewise, the next step for the seven regional H2Hubs will be entering into agreements with vendors, such as startups, to realize those projects. On the IRA front, guidance on how the different tax incentives and credits apply is also needed.
Once these issues are clarified, investors will have a clearer picture of how to allocate more funds, resources, and partnerships in the clean hydrogen space and help take technological innovations to a large-scale commercial level.
Michael Torosian, partner in the Corporate Practice of Baker Botts.Thomas Holmberg, partner in the Global Projects Practice of Baker Botts.Diane Evans, associate in the Global Projects Practice of Baker Botts.
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