Woodside Energy, one of Australia’s leading energy companies, has chosen to defer a final investment decision (FID) for its ambitious clean hydrogen project in the United States.
This decision, as outlined in the company’s third-quarter earnings report, is primarily driven by the lack of clarity concerning federal tax incentives and the finalization of customer offtake agreements.
The project, known as H2OK, represents Woodside’s venture into the realm of clean hydrogen. It’s an initiative of paramount importance as nations across the globe commit to reducing carbon emissions and transition toward cleaner energy sources. However, this delay highlights the complexities involved in realizing such projects, particularly when navigating intricate tax incentives and securing partnerships.
Woodside, in its report, noted that the technical groundwork necessary for the FID is progressing as planned, with completion expected by the end of this year. The focus has been on contracting, defining the construction scope, and addressing other crucial aspects. However, the actual investment decision has been postponed due to the uncertainty surrounding federal tax incentives and the need to finalize customer offtake agreements.
The ambiguity largely arises from the “45V” production tax credits, a key component of the Inflation Reduction Act. These credits offer up to $3 per kilogram of hydrogen produced, contingent upon the carbon intensity of production. Aspiring hydrogen producers, including Woodside, have eagerly awaited official guidance from the U.S. Treasury Department regarding how emissions in the production of electrolytic hydrogen will be considered. There is also uncertainty about whether projects must be linked to dedicated renewable power generated simultaneously and in the same region as the hydrogen production.
Woodside CEO Meg O’Neill expressed her frustration, stating that the awaited clarity had been anticipated for about ten months. The Inflation Reduction Act holds immense potential, but without a well-defined framework for the implementation of tax credits, investment decisions become challenging. This scenario underlines the critical importance of a clear regulatory environment for fostering investment in clean hydrogen projects.
The issue of additionality and “hourly matching” has been a point of contention among proponents of clean hydrogen in the United States. The ongoing debate can be framed as a “quest for perfection versus a quest for progress.” Those advocating for “perfection” push for a strict definition of clean hydrogen, aiming to significantly reduce carbon intensity. However, this could jeopardize the viability of numerous proposed projects. O’Neill emphasized the need to prioritize progress, focusing on “annual matching,” which would allow the use of grid power, renewable certificates, and the proof of low-carbon power driving electrolysis over the course of a year.
Woodside’s H2OK project, located in Ardmore, Oklahoma, is designed to produce approximately 60 tons per day of liquid hydrogen in its initial phase, targeting the ground transportation market, primarily in California. The project will benefit from additional incentives for low-carbon fuels in California. Woodside has secured an agreement with equipment manufacturer Nel to supply around 200 megawatts of alkaline electrolyzer capacity at H2OK.
However, the reliance on renewable energy credits (RECs) to offset electrons not derived from wind or solar power makes the project particularly susceptible to guidance from the U.S. Department of the Treasury. The Treasury’s anticipated announcement closer to the end of the year is a crucial factor that has introduced uncertainty into the equation. This uncertainty is hampering the ability of hydrogen projects across the United States to secure firm offtake agreements due to the potential impact of the rules on pricing.
Meg O’Neill acknowledged the business opportunity and growing demand for hydrogen but highlighted the challenge as the “chicken-and-egg” dilemma. Before making substantial investments in a plant, companies like Woodside need confidence in offtake agreements, and that’s where the complexity lies.
Woodside’s delay in the FID for the H2OK project is emblematic of the intricate challenges facing clean hydrogen initiatives in the United States. While the demand for hydrogen as a clean energy source is unquestionable, navigating regulatory intricacies, tax incentives, and carbon intensity definitions requires clarity and a well-defined roadmap. This delay emphasizes the significance of a clear regulatory framework to promote investment and drive the hydrogen revolution forward.