Exxon warns Baytown, other hydrogen projects might stall
Federal draft rules trim tax incentives to create cleaner fuel hubs across the U.S.
WASHINGTON – A year after Exxon Mobil announced it would be part of a team planning to build the largest clean hydrogen facility in the world, executives are warning the project at its Baytown refining and petrochemical complex along the Houston Ship Channel might no longer happen.
At issue are draft rules issued by the Treasury Department late last year, which include no incentive to produce clean hydrogen fuel using natural gas with reduced methane emissions. That would limit Baytown and other proposed blue hydrogen projects, which convert natural gas to hydrogen fuel and store the resulting carbon emissions underground, to the lowest tier of hydrogen tax credit, making them less economic, said Mark Klewpatinond, global business manager for hydrogen at Exxon Mobil.
“If were not able to differentiate natural gas production, it’s highly unlikely Baytown would proceed,” he said. “It needs to compete for capital against other projects we have.”
Exxon is part of the HyVelocity Hub, a coalition of energy companies and nonprofits seeking to develop a clean hydrogen hub in Houston through $1.2 billion in funding from the Department of Energy. Representatives of HyVelocity declined to comment.
The warning from Exxon and other hydrogen developers comes as cities such as Houston and Los Angeles move to develop large-scale clean hydrogen projects despite questions about whether the tax credit included in 2022’s Inflation Reduction Act will be enough to get the nascent industry off the ground.
Following failed efforts by former President George W. Bush and former California Gov. Arnold Schwarzenegger, the Biden administration is moving to shift the industrial
sector, along with heavy duty transportation like trucks and cargo ships, to clean hydrogen fuel in line with their goal of net zero greenhouse gas emissions by 2050.
But producing hydrogen fuel is hugely energy intensive, and the Biden administration is seeking to ensure it doesn’t mistakenly incentivize the construction of a raft of hydrogen facilities with high greenhouse gas footprints.
As the tax credits are currently written, critics say, green hydrogen projects, which rely on electricity to convert water to hydrogen, will likely need to get all their power directly from wind and solar farms to be eligible for the highest $3 per kilogram tax credit. Projects using electricity from the power grid would need to be able to document their electricity came from renewable sources to claim any of the credit. Socalled blue hydrogen projects would likely have to settle for tax credits worth up to 60 cents per kilogram – even if their overall emissions are lower than some green hydrogen projects.
“If you can’t count upstream and midstream emissions, that is going to push a significant amount of production out of the most lucrative bands,” said Brian Murphy, an analyst with S&P Global Commodity Insights. “That’s going to mean fewer projects in the near term.”
A spokesperson for the Department of Treasury said the agency is looking for more information on certain, “key issues” and would “consider all comments in developing final regulations.”
Not all clean hydrogen developers are worried about the tax rules.
British industrial firm Linde announced early last year, months before the draft tax credit rules were released, that it was going to start construction on a $1.8 billion blue hydrogen facility in Beaumont. And Pennsylvania-based Air Products said in November it would go ahead on building a $4.5 billion blue hydrogen plant in Louisiana.
But the majority of clean hydrogen projects, of which there are dozens in the works around the country, are on hold waiting to see if the Treasury Department loosens up the rules around claiming the hydrogen tax credit, said Frank Wolak, president of the Fuel
Cell & Hydrogen Energy Association.
“Companies with captive customers who want to get ahead of the curve are building” he said. “But most projects are waiting for the final guidance to see if they’re economic. Right now theres a lot of things proposed and planned but not a lot of (final investment decision).”
The Biden administration has come under increasing pressure from environmentalists around hydrogen fuel, with groups like the Sierra Club advocating for only hydrogen facilities that build their own renewable energy facilities — not using existing ones — to receive federal subsidies.
But companies like Exxon, which is slated to make a final investment decision on its Baytown project this year, are pushing them to allow some flexibility in the early stages, lest this hydrogen energy push suffer the same failures as past efforts.
“When we look at the market it’s blue hydrogen. It’s what is available today to deliver those clean energy goals,” Klewpatinond. the Exxon executive said. “Green hydrogen may play a part in the future, but it has challenges to scale up. Blue hydrogen is expensive but green hydrogen is even more expensive.”
So far, the Biden administration has indicated some willingness to negotiate, with Energy Secretary Jennifer Granholm saying at an event in Washington Wednesday the administration was, “asking sincerely for input.”
And they’re feeling pressure from more centrist Democrats, including Senators Sherrod Brown of Ohio, Joe Manchin of West Virginia and Bob Casey of Pennsylvania.
“When developing the Inflation Reduction Act, we intended for the clean hydrogen incentives to be flexible and technology-neutral. Treasury’s draft guidance does not fully reflect this intent,” Sen. Tom Carper, D-Del., said in a statement late last year.
The administration last year released a roadmap projecting 10 million tons of clean hydrogen production a year by 2030, enough to replace most existing carbon-polluting hydrogen plants. And it has committed to distributing $7 billion to seven hydrogen hubs around the country, including the one in Houston.
But energy analysts are projecting the clean hydrogen market will take longer to develop, likely a decade or more, beginning with existing hydrogen customers such as refineries and chemical plants and only later expanding into transportation.
“It’s only the last couple years we’ve been doing this. Its important to remember that,” John Larsen, a partner at the research firm Rhodium Group, said at an event in Washington earlier this month. “Hydrogen wasn’t a real option before (the tax credit) and now it is.”