Why is hydrogen important for the energy transition?

Hydrogen can be used as a carrier of energy, and as an input into chemical and industrial processes. Clean hydrogen is, therefore, a crucial decarbonisation tool for a range of industrial activities including steel, aluminium, iron and chemical production. We also see it as an option to decarbonise commercial transportation, and, notably, the energy and utilities sector.

Significant demand will likely initially come from today’s users of grey hydrogen (see hydrogen rainbow on next page), such as oil refiners and chemicals producers. But as the world progresses toward net zero, that usage could eventually be overtaken and then dwarfed by growing demand from heavy industry and energy storage.

The inflation Reduction Act is a game-changer

Clean hydrogen is only produced in small quantities today, but times are changing. Clean energy legislation and government financial support for hydrogen projects will help to establish infrastructure and to meet the high cost of transitioning away from existing fossil fuel solutions.

In the past decade, governments in Europe and Asia have mostly led the way — but now the US is joining the party. The US$369 billion clean energy spending package included in the Inflation Reduction Act will be transformational in both the US and beyond. 

Signed into law in August 2022, this landmark legislation includes massive clean energy-related financial incentives for individuals and businesses. Crucially, clean hydrogen supply and demand should be boosted by a 10-year production tax credit, an investment tax credit for energy storage technologies and a new tax credit for hydrogen fuel cell (and battery-powered) commercial vehicles.

The new measures come on the heels of the US$8 billion earmarked in the 2021 Infrastructure Investment and Jobs Act for creating regional hydrogen hubs.

Hydrogen’s role in the energy transition is still nascent, but has the potential to be a crucial aspect that will work hand in glove with electrification. Hydrogen can serve as a fuel for areas of the economy that are hard to decarbonise, like steel production and trucking. Furthermore, hydrogen offers another way to store energy in much larger capacities for industries such as long-haul transport where current battery technology has limited the adoption of electric vehicles.

Clean hydrogen can be labelled as blue or green within the hydrogen rainbow, an informal naming convention that connotes the relative greenhouse gas emissions arising in production.

“Everyone’s focused on the explicit clean energy hydrogen subsidy, but the 70% jump in the carbon sequestration tax credit may prove even more consequential,” says equity investment analyst, Gideon Spitzer. This specific credit is increasing from US$50 per metric ton of stored CO₂ to US$85 per metric ton. “In effect, blue hydrogen projects have now become financially viable as carbon sequestration becomes a cost-competitive technology on an after-tax basis.”

We note that in several countries across Europe, explicit carbon price and taxing schemes have been deployed in an effort to help incentivise investment in alternative energies, including green hydrogen.