Hydrogen & Ammonia Primer, A Two Phase Process
Insight by Marc Bianchi, CFA, Jeffrey Osborne, Matt Elkott, John Miller, James Schumm and Esteban Albarracin
The TD Cowen Insight
In this insight, we introduce a framework to compare costs of various colors of hydrogen production. We see the Inflation Reduction Act (IRA) driving blue hydrogen project announcements as part of a two-phase process of decarbonizaton with hydrogen. We expect Phase 1 to perhaps happen sooner, and Phase 2 perhaps later than consensus expectations.
The Two Phases of Transition to Low Carbon Hydrogen (H2)
Transitioning to low carbon hydrogen (H2) is a necessary step to achieve climate goals. We see this occurring in two phases:
Phase 1 (the 2020s): Phase 1 involves decarbonizing existing H2 use, which accounts for 2-3% of global CO2. Initially this would be done with natural gas based H2 and carbon capture, which are economically competitive following the IRA.
Phase 2 (late 2020s and 2030s): Phase 2 involves adding clean H2 and decarbonizing other heavy industry and mobility.
Industrial gases, fertilizer companies and oil & gas have the most apparent benefit from Phase 1. Phase 2 beneficiaries are harder to identify as competitive dynamics are still evolving. We think investor expectations for Phase 1 may be too low, while expectations for Phase 2 may be too high.
Low Carbon Hydrogen (H2) and Ammonia Production Costs
We introduce a framework to estimate costs across various methods of low carbon H2 and ammonia production, along with policy support to evaluate project economics. We also present a summary of major projects to compare strategies and cost structures. Our analysis also includes a deep dive on electrolyzer manufacturers and cost reduction plans, the key piece of equipment in clean H2 production.
Impact of Falling Electrolyzer Cost
Our analysis finds that IRA tax credits have essentially made H2 with carbon capture in the U.S. profitable, supporting the near-term buildout of projects. Electrolyzer capacity plans may be leading to oversupply. This helps progress toward necessary system cost reduction but may create a challenging competitive environment. Provided electrolyzer costs fall, clean H2 export may be viable, even without a reduction in ammonia conversion cost.
What to Watch
With low carbon H2 supported by the IRA subsidy, we expect to see more project announcements; however, some worry about an eventual oversupply of transferrable tax credits (45Q). The IRS is also expected to clarify how grid electricity for electrolytic H2 will be treated in the IRA’s H2 production tax credit (45V). If less restrictive it could spur a buildout of grid supplied electrolytic H2, but some argue would slow grid decarbonization.