Australia’s Woodside Energy has put off a final investment decision (FID) on its proposed clean hydrogen project in the US until it gains more certainty on federal tax incentives and finalizes offtake agreements with customers.
Woodside said in its third-quarter earnings report Wednesday that “technical work to support readiness” for FID at the H2OK project is on track to wrap by the end of this year, while it makes progress on contracting, construction scope “and other critical packages.”
However, “a decision itself has been delayed, pending clarification of government tax incentives and the finalization of offtake agreements.”
‘A Bit Frustrating’
The lack of clarity stems from the “45V” production tax credits for hydrogen in the Inflation Reduction Act (IRA), which offers up to $3 per kilogram of hydrogen produced, depending on the carbon intensity.
Aspiring hydrogen producers have been waiting most of the year for formal guidance from the US Treasury Department on how it will account for emissions in the production of electrolytic hydrogen, and whether projects must be tied to dedicated renewable power that is generated at the same time and in the same region as the “green” hydrogen is produced.
“This is something that’s been coming in a month or two months’ time … for probably about 10 months now,” Woodside CEO Meg O’Neill told the Energy Intelligence Forum in London on Wednesday.
“It is a bit frustrating,” she said. “The IRA has huge potential, but until you get to that level of defining exactly how things are going to be implemented, it makes it very hard to make an investment decision when you don’t really know how those tax credits will be available.”
Perfection vs. Progress
This question of additionality and “hourly matching” has divided proponents of clean hydrogen in the US.
O’Neill described it as “a quest for perfection versus a quest for progress,” with advocates for “perfection” calling for a strict definition of clean hydrogen that would reduce overall carbon intensity but could threaten the economics of many proposed projects.
“Our advocacy has to start with something that is progress, which is ‘annual matching,’ where we are able to use the power off the grid, use renewable certificates and prove over the course of the year that it is low-carbon power that is driving the electrolysis,” O’Neill explained to the Forum crowd.
The H2OK project in Ardmore, Oklahoma would produce about 60 tons per day of liquid hydrogen in the first phase targeting the ground transportation market, primarily in California, where there are additional incentives for low-carbon fuels. Woodside has contracted with equipment maker Nel to supply around 200 megawatts of alkaline electrolyzer capacity at H2OK.
O’Neill said the Oklahoma grid, which would power the plant, has access to a “fantastic wind resource” and “good solar,” although Woodside would have to offset the grid electrons not derived from wind or solar with purchases of renewable energy credits (RECs).
The planned reliance on RECs makes the H2OK project especially susceptible to unfavorable guidance from the US Department of the Treasury, which insiders now expect to be announced closer to the end of this year.
The uncertainty around Treasury’s guidance is making it difficult for hydrogen projects across the country to secure firm offtake agreements due to impact the rules could have on pricing. Offtake agreements for these types of projects are another critical piece of getting to FID.
“We see a great business opportunity here, and we see the demand growing,” O’Neill said. “The challenge is the ‘chicken-and-egg’ of, before we make a significant investment into a plant, we want to have confidence in the offtake. So we’re working through those challenges.”
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