How gas utilities can prepare now for a hydrogen-powered future

Hydrogen power may only represent 2% of all global energy consumption today – but that won’t be the case for long.

In 2020, seven countries and the European Union launched hydrogen strategies and targets. At least $300 billion is expected to be invested in the next decade worldwide, and we project that in California alone hydrogen will make up 30% of total energy demand by 2050.

The push comes as heavy industries like steel, ammonia, concrete, and oil and gas face decarbonization pressures from governments, customers, and the general public. Hydrogen, which has a plethora of end uses (e.g., in transportation, heating, electricity generation, or industrial production) offers one practical solution. There are also many end-use applications where a transition to electrification is difficult, such as 200,000-ton cargo ships and heavy-duty trucking, where weight and space considerations may make batteries impractical. 

But challenges exist. There are numerous methods for producing hydrogen, each with their own advantages and disadvantages (Figure 1). While blue and grey hydrogen may dominate for the next two decades—driven mostly by existing decarbonization demands (largely in Europe)—experts predict that by 2040, green hydrogen will seize market share as the signatories to the Paris Accord push to meet aggressive targets, as demand rises in new markets including the US, and as renewable electricity generation proliferates. 

U.S. utilities face a complete lack of regulatory clarity around blending standards, safety protocols, cost recovery options, etc., and uncertainties about how to store and transmit hydrogen. In addition, a lack of information and familiarity with hydrogen gas have given rise to negative biases among consumers, government officials, and the wider public, compounded by the fact that carbon reduction has become nearly synonymous with electrification, especially in California. 

While the opportunities and challenges associated with hydrogen are being widely discussed, it’s far less clear how utilities can begin developing plans to find their places in the burgeoning hydrogen value chain. They will need to:

• Collaborate more with one another
• Educate and engage local government and regulatory agencies
• Conduct market assessments related to the size and potential opportunities
• Undertake comprehensive investment modeling
• Transform their business models for a hydrogen economy
• Learn lessons from countries further along in hydrogen maturity 

Conduct a market sizing and attractiveness study

Before committing to sizeable investments, utilities must first conduct market assessments that not only take into consideration global hydrogen insights but also opportunities along the value chain in their particular jurisdictions. These opportunities will be predicated on the location of essential infrastructure that requires the least amount of additional assets and/or retrofitting. These could be access to hydrogen production using renewable energy (large scale wind and solar), access to carbon capture, utilization, and storage (CCUS), and access to end-use applications (e.g., transportation hubs, hard to heat industries). 

From there, utilities should focus on identifying the critical policy strategies and levers that must be in place to seize those opportunities. Four key areas of opportunity include: 

Build an investment-grade plan

Decarbonization targets cannot be solely met through electrification alone, creating a significant opportunity for hydrogen. Gas utilities should collaborate to look at a state’s gap in meeting carbon neutrality goals, and whether the shortfall could be met by clean hydrogen technologies. From there it’s essential to develop an investment-grade (bottom-up) model for prioritized investment areas such as production, T&D, storage/CCUS, and transport fueling across the hydrogen value chain. Identifying partnerships and developing financial plans to define sources of funding are also essential elements.

Feasibility studies and key demonstration pilots help to build confidence and test the technical and economic viability of hydrogen across key investment areas, particularly for end-use applications. 

They should build hydrogen scenarios into their asset planning and update their capital plans to include hydrogen-ready assets rather than focusing on replacing existing natural gas assets such as seals, governor values, and compressors that are required for both blending purposes and for pure hydrogen. And they should continue funding hydrogen-related studies and pilot programs through GTI’s Hydrogen Technology Center—along with their own hydrogen-specific initiatives—to better understand how natural gas utilities might transition to a clean-energy and hydrogen-fueled future. 

Develop a regulatory strategy

The still-nascent U.S. hydrogen market leaves little opportunity for movement without policy and regulatory changes. In California, the Low Carbon Fuel Standard incentivizes the use of hydrogen and electricity. But the current renewable portfolio standards (RPS) only mention hydrogen fuel cells (and only because of pressure created by the unfortunate electricity-related wildfires); to incentivize investment they would need to be modified to include green hydrogen production, carbon-capture, and hydrogen applicable solutions (e.g., hydrogen blended for generation). The state still lacks existing mechanisms for utilities to recover costs from regulators (though some recovery may be permitted if utilities can show costs were prudently incurred), incentives to scale up hydrogen demand (e.g., industrial end-use conversion), and innovation grants that support diverse end-user hydrogen technologies.  

California’s carbon neutrality plan also doesn’t define a role for hydrogen in the broader sense, and the California Air Resources Board (CARB) has identified limited roles for hydrogen and renewable gas in their scenarios for carbon neutrality. Given the length of time required to make necessary legislative and policy changes (that can take years) it’s crucial that utilities start collaborating to develop regulatory strategies – now. 

To help utilities begin defining policies and managing risks effectively with the aim of scaling hydrogen, we’ve outlined five areas that must be addressed in the public sphere.

1. Negative bias towards hydrogen: Certain policymakers, regulators, and end users may continue to have a preconceived negative bias toward hydrogen, which could slow the creation of incentives for development and cost recovery and also stifle demand. Green hydrogen is, at present, significantly more expensive than electrification. However, electrification alone will not meet aggressive state carbon targets.
2. No blending standards: Setting year-over-year standards for additional hydrogen in the fuel mix can aid in bringing hydrogen to scale. Today, blending a small proportion of hydrogen can be done safely without any changes to end-use appliances.
3. Safety guidelines and compliance protocol: New pipeline safety regulations are being developed by the Pipeline & Hazardous Materials Safety Administration (PHMSA). But other private sector and trade association agencies, and standard-creating entities such as the American Petroleum Institute (API), American Gas Association (AGA), and Interstate Natural Gas Association of America (INGAA) should be incentivized to collaborate on research and development efforts to prove out hydrogen.
4. Uncertainty around hydrogen storage: It’s crucial to address uncertainties around the ability for in-state storage, particularly in the absence of underground salt caverns or access to depleted oil fields for storage; above-ground storage is more expensive and more susceptible to leaks. A solution requires a coordinated approach, and different levels of blending require different storage needs.
5. Cost recovery and regulatory role in distribution of costs: Regulators and government entities often don’t see a role or see a limited role for utilities within the hydrogen market, restricting options for cost recovery. It’s crucial to engage with all the relevant parties and have a sustained outreach and education program.

In other parts of the world, regulatory and legislative support for hydrogen initiatives have stimulated hydrogen production and increasing adoption. For example, in the UK hydrogen was the second point in the Prime Minister’s Ten Point Plan for a Green Industrial Revolution; they are targeting 5 GW of low-carbon hydrogen production capacity by 2030 and 80GW by 2050 using offshore wind . Aided by a host of other initiatives, the government’s aim is to scale production, creating low-cost hydrogen for domestic use and for export to continental Europe by 2030.

Aiming to be a national and international exporter of clean power, the Australian government has pledged $2 billion to develop a hydrogen hub in the state of South Australia, where it has extensive carbon storage reservoirs. The government also plans for a $240 million project at Port Bonython utilizing a 75MW electrolyzer at a nearby steel town. The Port Bonython hydrogen project will be the world’s largest green ammonia plant, with a capacity 60 times larger than Australia’s current largest hydrogen plant, in Adelaide.

Adjust your business model accordingly 

Readying a shift toward hydrogen won’t only require investment, market collaboration, and lobbying for regulatory change—it will also necessitate a transformation of a utility’s business model and its operations in the next three-to-five years. 

Utilities should consider reviewing the following key areas:

Determining new capabilities

Identify the capabilities required to support a new hydrogen business model, including which capabilities the utility already provides and which will need to be established for hydrogen. This involves analyzing the capabilities an organization has and how it can pivot for including those in hydrogen business models, identifying necessary net new capabilities, and how to source (or outsource) those capabilities.

Leveraging existing expertise

The goal is to build a hydrogen business that complements existing efforts, so utilities should leverage the knowledge and skills on both sides of the electric and gas businesses in order to provide a more integrated approach to solving the challenges that impact both sides of the business.

Defining organization

It can be difficult to run a new hydrogen business while running a natural gas business at the same time. Thus, critical decisions arise: whether to nominate a head of hydrogen alongside the national gas business to drive hydrogen strategy; determining who they should report to; understanding how the organization can ensure that new hydrogen initiatives move smoothly; gaining buy-in at the highest levels; and ascertaining how the impact will differ for regulated vs. non-regulated entities.

Developing partnerships

Define and secure public-private partnerships for market entry, as required. Given the necessity for collaboration with government agencies and other utilities, it’s vital to have a plan in place for identifying who those partners will be, what their goals and associated roles are, and how stakeholders will work together efficiently. 

Conclusion 

State-level decarbonization targets – along with the Biden administration’s executive order which, among other things, directs federal agencies to procure carbon-free energy, and the United Nations’ call to reduce world carbon emissions by 45% this decade – should serve as a rallying cry for utilities. They must begin laying the groundwork for a carbon-free future today or risk ceding the market to disruptive new entrants backed by formidable investment capital. 

The capital landscape is also shifting, with increased spending by corporations on clean energy technologies. And the green financing market is growing—through green bonds, sustainability-linked loans, green securitization etc.—as the race for hydrogen begins. Delays could be costly as we have seen on the electric side of the business, where decreasing demand caused significant revenue erosion until policymakers finally created demand-reviving incentives. Policy changes take time, as do significant infrastructure investments, so mapping out a clear path and developing robust plans is critical.       

All this must be done while maintaining safe operations and keeping on top of gas safety pipeline regulations. That is challenging in itself—as is everything associated with the shift to carbon-neutral energy.

But if utilities don’t do it, someone else will. And if they don’t start today, it could be too late.