Project finance

Why 45V may knock one green hydrogen project off the map

Developer Ambient Fuels is prepared to shelve a project targeting refineries that doesn’t pencil out under Treasury guidance.

February 26, 2024
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Refineries in Paris

Photo credit: Brandon Bell / Getty Images

Refineries in Paris

Photo credit: Brandon Bell / Getty Images

Late last year, green hydrogen developer Ambient Fuels was deep in the process of getting a new project on the Gulf of Mexico interconnected and permitted.

The project was to become part of the Port of Corpus Christi’s massive hydrogen infrastructure, selling to the refineries located there. The property was being engineered, the company was in talks with local partners, and costs were being ironed out.

Now, however, the project is on an indefinite pause. And, according to Ambient CEO and founder Jacob Susman, it's unlikely to ever get off the ground at all if current proposed tax credit guidance comes into effect.

  • The top line: Ambient’s current situation in Texas suggests that planned green hydrogen projects targeting the refinement sector may be particularly hard hit by 45V guidance requiring hourly matching, meaning electrolysis powered by renewable energy produced the same hour, as opposed to the same year. With green hydrogen potentially out of price reach, many refineries will likely turn to blue hydrogen instead.
  • The current take: Ambient CEO and founder Jacob Susman said the guidance has made it impossible to offer planned offtakers of the Corpus Christi project low enough prices. “The move from annual matching to hourly matching is dramatic enough that it chokes off many of those conversations,” he said. “A lot of these folks are going to say, ‘to heck with the green stuff.’”

As even the Department of Energy DOE describes it, the current policy environment makes it challenging to convince companies to take up the extra cost to go green. 

Accordingly, many in the still-nascent green hydrogen industry are worried the proposed requirements for projects to qualify for an Inflation Reduction Act tax credit are too strict, and will hold back development. Hourly matching is one of their top concerns, and is likely to impact certain types of projects more strongly, depending on their geographic location and target offtake customers.

Refining and chemical production present a major opportunity for green hydrogen. The combined sectors accounted for around 11% of energy-related carbon emissions in 2021, and refining itself is one of the top markets for hydrogen, making up around 20% of global demand in 2020, per Wood Mackenzie.

However, it’s a sector that is particularly vulnerable to the challenge of transitioning to green hydrogen, and especially to hourly matching. 

Most refining companies are looking for a 10% to 25% return on capital projects, and there aren’t many incentives for them to make the extra investment for the higher-priced green hydrogen. Plus, refining facilities tend to be concentrated at industrial ports like Corpus Christi, which means they often face land constraints with no space for large battery or clean energy installments.

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The Nueces case

A major debate in the green hydrogen industry, Susman said, has been whether to site production near sources of green energy, or near offtakers. And in the case of the Corpus Christi project in Texas' Nueces County, Ambient went with the latter. 

“We wanted to be the billboard for the next generation of carbon-free hydrogen, right in the middle of all that heavy industry, all that refining,” Susman said. “In making that choice, we put ourselves at risk. If you were required to have this hourly matching, it might make more sense to be sitting right next to the solar plant or the wind farm.”

The Nueces project would sit, in Susman’s words, “smack dab in the middle” of six refineries currently running on gray — or fossil fuel-derived — hydrogen. There isn’t enough physical space in that particular location to add batteries big enough to allow refineries to run 24/7, nor is there space to build generation.

“These are razor-thin margin, commoditized global businesses that are not in a position to pay big [premiums] for decarbonization,” Susman said. “I believe in my heart of hearts they will pay some premium to lower their carbon, but it’s not a limitless budget. The world in which they live is hypercompetitive and we respect that.”

Susman declined to share exact prices negotiated with Corpus Christi customers, but said that the premium Ambient was asking them to pay under an annual matching assumption was “still meaningful.” Susman estimates the price increase for the Nueces project with hourly matching to be at least 20%.

We wanted to be the billboard for the next generation of carbon-free hydrogen, right in the middle of all that heavy industry, all that refining.
Jacob Susman, CEO and founder Ambient

Getting those companies on board in the first place, given the slightly higher cost and the lack of federal offtake incentives, was no small feat.

Crucial to those conversations was a narrative of technological pioneership. Ambient led with the fact that early purchasers of even a little bit of green hydrogen will be ahead of the curve — and as equipment and delivery methods get better, they won’t have to pay such a large premium, and can shift to a larger quantity of green hydrogen.

“That story was selling,” Susman said. 

But with the potential for hourly matching, everything gets harder. Power purchase agreements would have to be restructured for hourly matching, and project design and tech choices change.

“All of those inputs combined — plus the most important one of all, the utilization point — have an outsized impact on the price we have to charge in order to make our project financeable,” Susman said. So if need be, Ambient is ready to cut its losses on this refinement-focused project.

“A developer who is worth their salt has to be ready to pump the brakes and occasionally step back from a project altogether,” he said. “We’re prepared to do that here if we need to.”

And that could very well be the result, barring a major change in the finalized 45V guidance.

Unfortunately, Susman said, many refineries, including those which Ambient planned to sell to in Corpus Christi, were weighing their choices between green hydrogen and blue, which is produced using natural gas and often paired with carbon capture. In light of the 45V guidance, he assumes that many of them will opt for blue. 

While Susman said he’s wholly on board with eventually requiring hourly matching, he’s pushing for the guidelines to allow “grandfathering” of annual matching for early projects, like the one in Corpus Christi. That would be a small number of projects, he said, amounting to a single-digit number of gigawatts nationwide. Without that, he’s skeptical refining will develop into the buzzing green hydrogen market many have predicted.

“It’s really scary to me to think that the whole refining industry, which is one of the two largest users of gray hydrogen today, and is a prime candidate for switching to green, could go permanently in the direction of blue now,” Susman said. “I don’t know if we’ll ever get them back.”

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