Wall Street analysts quizzed gas utilities on hydrogen investments during quarterly earnings conference calls, seeking guidance on when small-scale pilots would turn into more substantial capital projects.
Gas utility operators warned Wall Street that it could be several years before companies make meaningful clean hydrogen investments, despite a growing list of pilot projects across the subsector.
The latest catalyst for investment was the US Energy Department's selection of seven regional hydrogen hubs to qualify for $7 billion in funding. But gas utilities said it will be years before partners can build out the hubs. Regulatory hurdles and uncertainty around a federal hydrogen production tax credit further clouded the outlook for capital spending.
"We're really excited about our clean fuels program, but it is fairly long-dated," Xcel Energy Inc. Chairman, President and CEO Bob Frenzel told analysts Oct. 27.
Xcel proposed spending about $2 billion on hydrogen production equipment and infrastructure to support the Heartland Hydrogen Hub in Minnesota, North Dakota and South Dakota. Xcel expects to receive a "large portion" of the $925 million the DOE earmarked for the hub, Xcel said in an Oct. 13 news release.
But negotiations with the DOE, final engineering and other processes will likely take two years, Frenzel said. Project partners could activate parts of the hub by 2028 or 2029, though Frenzel did not anticipate deploying capital into the program until the end of Xcel's five-year plan, which runs through 2028.
Midstream giant Enbridge Inc. envisioned a similar timeline for hydrogen opportunities. Asked during its Nov. 3 conference call if the company could reach a final investment decision on hydrogen projects within 24 months, Enbridge President and CEO Greg Ebel said the company would be "real careful on that front," calling the opportunities "late-decade stuff."
Enbridge, which recently purchased a portfolio of US gas utilities, has blended hydrogen into its Ontario distribution systems and is an anchor sponsor for the Mid-Atlantic Clean Hydrogen Hub (MACH2). In March, Enbridge agreed to co-develop a blue ammonia production facility at its Ingleside Energy Center, with startup scheduled for 2027 or 2028, pending design confirmation and project approval.
On a Nov. 3 call, Northwest Natural Holding Co. faced questions about when it would start injecting hydrogen into its Pacific Northwest gas grid after years of blending tests. Northwest Natural Gas Co. expects the fuel to be "more of a solution" for its system in five to seven years, said the utility subsidiary's COO, Kim Rush, though parent company CEO David Anderson said he would be disappointed if it took that long.
After withdrawing a hydrogen blending pilot project in Eugene, Ore., over local pushback, NW Natural has sharpened its focus on working with industrial and commercial customers on specific hydrogen applications and procurement, company leaders said. It has also advanced projects to demonstrate the viability of hydrogen produced through methane pyrolysis.
Regulatory hurdles remain
Despite the long runway, gas utilities saw the selection of DOE-backed hydrogen hubs as a pathway to hydrogen blending in distribution systems, one of the subsector's top strategies for decarbonizing the gas grid.
Xcel not only expected its hydrogen production projects to go into rate base, it also anticipated seeking permission from utility regulators to blend hydrogen into its gas grid and gas-fired power plants, Frenzel said. Xcel included hydrogen projects in its first clean heat plan for its Colorado gas utility and expected to file a natural gas innovation plan for its Minnesota subsidiary by year-end, Frenzel said.
MACH2 anchor partner Chesapeake Utilities Corp. expected to contribute to the Delaware, Pennsylvania and New Jersey hub by facilitating hydrogen training at its Safety Town, which simulates a working gas grid, according to CFO Beth Cooper. The company, which operates regional gas transmission and distribution systems, also anticipated playing a role in transporting the low-carbon fuel within the hub, Cooper said on a Nov. 3 call.
New Jersey multi-utility Public Service Enterprise Group Inc., another MACH2 partner, expected to make use of existing pipelines and storage assets in southern New Jersey to serve regional hydrogen end users, PSEG Chairman, President and CEO Ralph LaRossa said on an Oct. 31 call.
However, regulators recently shelved the company's hydrogen pilot project proposal until they issue findings in a future of gas proceeding in the Garden State. As the state explores strategies to decarbonize heating and other thermal energy end uses, LaRossa told analysts that regulators had concerns about hydrogen and renewable natural gas project proposals.
"Those are fair policy conversations that need to take place," LaRossa told analysts.
Production tax credit delay
PSEG and Xcel are also awaiting guidance on a hydrogen production tax credit included in the Inflation Reduction Act, company leaders said. The Internal Revenue Code Section 45V credit is core to the Biden administration's goal of driving down the cost of hydrogen production, which is critical to the viability of the hubs.
Company executives were specifically eager to hear whether nuclear power will qualify under the 45V tax credit as a zero-carbon power source for hydrogen production. Nuclear power plant operators such as PSEG and Xcel want to pair the $3/kg tax credit for zero-carbon hydrogen output with a nuclear power production tax credit.
Originally scheduled for release in August, the IRS' 45V guidance has been delayed amid a debate over three key pillars of 45V design.
One of these pillars, "additionality," holds that only hydrogen produced with newly built zero-carbon resources should qualify for the credit. The issue has split blocs of Democrats and Independents. One of the architects of the 45V credit, Sen. Tom Carper (D-Del.), argued against additionality in a Nov. 9 letter to the Biden administration, saying it was not the intent of his legislation that informed the Inflation Reduction Act provision.
"The use of nuclear energy and hydropower to produce clean hydrogen is also key to the success of the MACH2 project and other clean hydrogen hubs," Carper said. "Allowing existing nuclear reactors to qualify under 45V will help ensure that clean hydrogen is available and affordable enough to be used by customers across a wide range of industries."
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