Investors not sold on hydrogen hype

Amount of financing in cleaner fuel fails to match enthusiasm for future projects

WASHINGTON — Earlier this year, investment bank Goldman Sachs published a newsletter titled “The hydrogen revolution accelerates,” predicting the clean-hydrogen sector was set to explode over the next seven years as companies turned to the low-carbon fuel to store electricity and power hard-to-electrify vehicles like trucks and ships.

“Many of the projects for the second half of this decade still have not yet been announced, and are therefore not captured here, implying further upside,” an analyst at the firm predicted.

The hype around clean hydrogen, which had been building for years, has gone into overdrive since the passage of the climate-focused Inflation Reduction Act last summer. The measure includes tax credits for clean hydrogen that by some estimates could be worth $100 billion over decades to come.

But for all the project announcements along the Gulf Coast and commitments from large companies like Exxon Mobil and Air Liquide, the amount of actual investment in the sector remains relatively small, raising questions about when construction on hydrogen facilities will actually begin.

Of the $80 billion that privatesector investors have sunk into the U.S. clean-energy sector since Biden signed the Inflation Reduction Act into law, $725 million, less than 1 percent, has gone to hydrogen projects, according to analysis by S&P Global Commodity Insights, compared with $5.7 billion for batteries and more than $25 billion for wind and solar projects.

And with banks under increasing scrutiny following the collapse of Silicon Valley Bank and First Republic Bank, getting loans, as is the norm for largescale energy projects, is getting much harder, said Peter Gardett, executive director of research and analysis at S&P Global Commodity Insights.

“Energy transition projects — such as hydrogen, offshore wind and carbon capture — that rely on significant debt financing from traditional lenders are increasingly challenged as they approach financial close and final investment decision despite

significant funding included in the Inflation Reduction Act,” Gardett wrote.

For all investors’ desire to get in on the ground floor of the next big thing, it remains unclear to many who would buy the hydrogen once projects are built.

The Biden administration’s plans for rolling out clean hydrogen rely on existing

hydrogen users like oil refiners and fertilizer plants making the switch, driving down costs on the technology.

But in a report this year by Energy Futures Initiative, a nonprofit founded by Ernest Moniz, energy secretary during the Obama administration, analysts found a substantial “cost gap” between what industrial users that make up more than 90 percent of the existing hydrogen market currently pay and what they are likely to pay

for clean hydrogen.

“Right now that switch is going to be tough,” said Alex Kizer, senior vice president for research at the nonprofit Energy Futures Initiative. “A demand signal (for existing hydrogen customers) doesn’t exist in the United States right now and that’s what everyone is working through.”

There is a belief in some corners of the energy industry that the trucking sector might be the first mover, replacing diesel

fuel with clean hydrogen. Cummins, the Columbus, Ind.-based trucking giant, is developing a hydrogenfueled engine, with plans to start rolling it out in the next few years.

But betting on that sort of shift is risky, and without banks stepping in to offer loans, clean hydrogen developers will likely need to rely on the federal government to put up money, Gardett said.

“The more likely (scenario) is that the (Department of Energy) will be

pressured to replace banks in financing of big projects with relatively low technology risk but high levels of stakeholder and regulatory complexity,

as well as a long time lag before first cash flow,” he wrote.