(149a) Federal Regulations at the Interface of Hydrogen Production Pathways: Economic Analysis of Gray, Blue, and Green Hydrogen

Hydrogen production serves as an essential element in the shift towards energy sustainability, playing an important role in the decarbonization strategies of multiple sectors. However, the cost of hydrogen production remains a primary challenge, particularly in the transition to low-carbon or zero-emission methods. This research investigates various hydrogen production technologies and provides an economic analysis of each, with a focus on the implications of federal incentives, specifically those introduced under the Inflation Reduction Act (IRA). By examining steam methane reforming (SMR), autothermal reforming (ATR), partial oxidation (POX), dry methane reforming (DMR), and electrolysis, this study assesses gray, blue, and green hydrogen. The research aims to provide insight into the cost-per-kilogram of hydrogen based on different scenarios, analyzing how federal incentives can impact long-term hydrogen production economics.

The primary incentives considered are the Clean Hydrogen Production Tax Credit, which can provide up to $3 per kilogram of hydrogen depending on carbon intensity, and the Carbon Capture and Sequestration Tax Credit, which provides $85 per metric ton of CO₂ captured and stored. These incentives, which cannot be used simultaneously, not only help reduce the immediate costs associated with blue and green hydrogen production but also encourage investment in cleaner technologies.

Currently, over 95% of hydrogen in the United States is produced via natural gas reforming processes. SMR is the most common method and operates by reacting methane with high-temperature steam, producing hydrogen, carbon monoxide, and carbon dioxide. POX uses oxygen to partially combust methane, generating a mixture of hydrogen and carbon monoxide. This exothermic reaction provides heat that can beneficially be integrated into processes. ATR combines steam reforming and partial oxidation to produce hydrogen in an energy-efficient manner, with the benefit of higher CO₂ concentrations, facilitating carbon capture. DMR operates by reacting methane with carbon dioxide instead of steam. It presents a distinct advantage by utilizing CO₂ as a feedstock, though it remains highly endothermic and energy intensive. These reforming technologies form the foundation of blue and gray hydrogen production. The preliminary findings of this research show that blue hydrogen production, when supported by the Carbon Capture and Sequestration Tax Credit, achieves a production cost that is approximately 30 cents per kilogram lower than gray hydrogen. When applying the Clean Hydrogen Production Tax Credit, blue hydrogen’s production cost aligns closely with that of gray hydrogen, often reaching parity or exceeding it by only about 1 cent per kilogram. This demonstrates that, with the federal incentives, blue hydrogen can become a highly competitive, low-carbon alterative to traditional gray hydrogen production.

Electrolysis is the primary method for producing green hydrogen. It involves splitting water into hydrogen and oxygen using electricity, ideally sourced from renewables such as wind or solar. This process yields hydrogen without direct carbon emissions, positioning it as a promising technology for clean energy applications. However, electrolysis remains costly due to high energy demands and the high equipment costs. Under the Clean Hydrogen Production Tax Credit, green hydrogen production costs are significantly reduced, especially when renewable energy sources are utilized. According to the Inflation Reduction Act, the clean hydrogen production tax credit is structured to promote hydrogen with minimal carbon intensity, potentially driving green hydrogen costs below those of gray hydrogen by the end of the decade as renewable energy costs continue to decrease. This trend aligns with the U.S. Department of Energy's long-term decarbonization strategy, which highlights hydrogen’s role in achieving net-zero emissions, particularly in sectors that are difficult to electrify, such as heavy industry and transportation. While the Clean Hydrogen Production Tax Credit provides the most substantial benefit for green hydrogen, offsetting electricity and operational expenses, green hydrogen production remains more costly than both gray and blue hydrogen even with incentives. This suggests that additional technological advancements or further reductions in renewable energy costs will be necessary for green hydrogen to become cost competitive.

A key aspect of this study is the long-term economic forecast for hydrogen production beyond the lifespan of the Inflation Reduction Act (IRA) incentives, which include a 10 year duration for the Clean Hydrogen Production Tax Credit and a 12 year duration for the Carbon Capture and Sequestration Tax Credit. By modeling production costs with and without these incentives, this research addresses the question of economic sustainability once federal support subsides. The analysis projects that as technologies mature, production costs will decrease due to scale and efficiency improvements. Electrolysis, which relies heavily on electricity prices, shows potential for cost reductions as renewable energy becomes more accessible. This projection suggests that, in the long run, green hydrogen could achieve price parity with blue and gray hydrogen, positioning it as a sustainable, emissions-free option. Furthermore, blue hydrogen technologies are expected to see incremental improvements in cost-efficiency, though not to the same degree as green hydrogen powered by renewables.

Additionally, this research incorporates a sensitivity analysis exploring variables such as natural gas prices, electricity costs, separation costs, labor costs, and other expenses that significantly affect the overall cost of hydrogen production and vary considerably by date and location, providing insight into the reliability of each technology against market fluctuations. For example, blue hydrogen costs are highly sensitive to natural gas prices and carbon capture costs, whereas green hydrogen costs are directly influenced by electricity prices and the cost of technology. The sensitivity analysis highlights the importance of these factors in hydrogen production economics and allows for the identification of key cost drivers that may shape investment strategies.

In conclusion, this research demonstrates the significant impact of federal incentives on hydrogen production costs and highlights their essential role in facilitating the energy transition. Immediate cost reductions are evident for both blue and green hydrogen, but the long-term goal of affordable, low-carbon hydrogen production will rely on advancements of technology and scalability. Nevertheless, the Clean Hydrogen Production Tax Credit and the Carbon Capture and Sequestration Tax Credit are not only short-term solutions; they represent foundational investments that support hydrogen’s potential as an energy carrier across various sectors. As the hydrogen economy evolves, these incentives will help align hydrogen production with national decarbonization goals, contributing to a more sustainable energy infrastructure. This study enhances the understanding of the economic factors shaping hydrogen technology selection and provides a valuable framework for policymakers, industry stakeholders, and researchers.