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D. HERNANDEZ, Associate Principal of Energy and Infrastructure, Charles River Associates

H₂Tech (H₂T) sat down with Drake Hernandez (DH), Associate Principal of Energy and Infrastructure at Charles River Associates (CRA) for an exclusive Q&A about the primary drivers of the levelized cost of H₂, renewable energy credits and the geographic and temporal correlation between produced H₂ and the power to fuel the production.

H₂T: What is a renewable energy credit (REC)? And how do they work?

DH: RECs are essentially spun off when a megawatt hour (MWhr) of power is produced via renewable energy or a renewable resource (e.g., wind, solar, etc.). It is a discrete stream of value for these assets. Of course, they are making the sale of the MWhr into the market, but they are also minting a REC or certificate to have other parties in the market purchase the REC to prove that they are consuming renewable energy. This is mandated by statute and a handful of states in the U.S. (e.g., utilities) must procure these RECs to ensure that they are meeting various renewable portfolio standards. In the context of hydrogen (H₂), it has yet to be determined. However, it is possible that these RECs could potentially be used to help a H₂ producer that is producing it via electrolysis cover some of the power they are consuming from the grid during periods when they are the renewables that they are meant to be procuring power from are not producing.

H₂T: What is the geographic and temporal correlation between produced H₂ and the power of fuel?

DH: There are a couple of other constraints that are being talked about by the U.S. Internal Revenue Service (IRS) as far as what can ultimately qualify as clean or green H₂ to qualify for this full production tax credit. A couple of issues that are being actively discussed are that of geographic and temporal correlation. For example, geographic in this context means the power that you are consuming to produce your H₂ is being produced in an area that is relatively near the actual point of consumption vs. temporal correlation, meaning when I'm consuming the power to produce H₂ at 2 pm, the renewable power must be produced at 2 pm to ensure that the power consumed is renewable power. Otherwise, if you are pulling from the grid, there is no guaranteeing that the power you consume is actually clean.

H₂T: What is the purpose of all these constraints? How will they be regulated?

DH: The reason these constraints are being talked about at its core is to ensure that the H₂ being produced via electrolysis is clean and does not have a very high carbon intensity. In an alternative world where these constraints do not exist at all and an electrolyzer is plugged into a generic grid somewhere, the power being consumed to produce the H₂ will have some carbon intensity. There are academic debates as to whether that carbon intensity should be the average carbon intensity of the full fleet of supply at the time of consumption, or if the carbon intensity of the marginal unit must fire up before the power is consumed. Nevertheless, there will be carbon emissions associated with the production of the H₂. The purpose of these constraints is to ensure that these carbon emissions are minimized throughout the production process.

H₂T: How does price sensitivity affect the H₂ economy?

DH: If you look at where H₂ is consumed, it is largely in the refining and ammonia sectors. The H₂ is produced largely in the U.S. from natural gas, which is cheap in the U.S. The resulting H₂ produced is very affordable, but of course, it varies depending on the gas price. The rule of thumb is generally $1/kg of H₂ produced. If we are looking to replace gray H₂ supply with cleaner H₂, it must be price competitive. Why would an entity opt to choose a more expensive feedstock cost without a mandate? Regarding price sensitivity, in this case, we are talking about electrolytic H₂, the cost of electric power is one of the key drivers of the production cost for clean H₂. As that price fluctuates within the market, so will the production costs. This is similar to the natural gas price and gray H₂ production cost. However, the swings in the power market can be substantial and cause challenging economic situations for some electrolytic H₂ projects.H₂T

For more information on this topic, visit: https://h2-tech.com/podcasts/2023/12/exploring-the-factors-affecting-the-levelized-cost-of-h-sub-2-sub-production/