Federal incentives accelerate New Mexico's hydrogen economy

Sep. 26—Albuquerque-based BayoTech Inc. expects to build a half-dozen hydrogen hubs in five different states next year, marking the company's first major foray into commercial markets for its compact mobile hydrogen generators.

The company, which launched in 2015, has spent seven years fully developing its generating technology, which it originally licensed from Sandia National Laboratories to provide on-site hydrogen production directly where it's needed for commercial and industrial use. Its mobile units can radically lower costs for end users compared with today's standard production at large, centralized plants, while simultaneously cutting carbon emissions by at least 40% to start, and eventually much more, according to the company.

And now, with new federal incentives in place to encourage widespread production and consumption of hydrogen to help accelerate the country's transition to a carbon-free economy, the market is ripe for BayoTech's technology, said company president and CEO Mo Vargas.

"2023 will be a big year for us," Vargas told the Journal. "We're now working through the permitting process to build hydrogen hubs at two sites in California, and at individual sites in Albuquerque, and in Missouri, Michigan and Oklahoma. We have about 15 sites under development around the country, but those are the first places where we'll deploy our technology."

BayoTech's transition from research and development to full commercial deployment reflects rapidly accelerating momentum in the country's emerging hydrogen economy, propelled forward by today's national focus on achieving net-zero carbon emissions by midcentury.

Those efforts received an unprecedented boost under the Inflation Reduction Act, or IRA, that President Joe Biden signed into law in August, which authorizes $370 billion in new federal incentives and investment in clean energy technologies across the board. That includes substantial tax breaks and funding for hydrogen development — and for carbon capture and sequestration technology — which is critical to lower or eliminate carbon emissions when producing hydrogen from natural gas.

"The IRA has created tremendous tailwinds for us and for the hydrogen industry in general," Vargas said. "It will have a huge impact."

The bipartisan Infrastructure Investment Act approved last year also provides $9.5 billion in direct federal spending on hydrogen development, including $8 billion to build at least four hydrogen hubs around the country, plus $1.5 billion for research and development projects. And that, in turn, has ignited aggressive efforts by New Mexico and three neighboring states — Utah, Colorado and Wyoming — to work together on building a regional hub to win some of the federal money in play.

Those joint efforts are now forging ahead, reinforced by the IRA, said Alex Greenberg, director of the state Economic Development Department's Science and Technology Office.

"Up to now, Europe has had more of a head start in pursuing the transition to hydrogen," Greenberg told the Journal. "But with the IRA, the U.S. has real potential to become the global leader."

New federal incentives

The acceleration in hydrogen development is laden with controversy over just how "clean" hydrogen production really is, and the appropriate applications through which hydrogen can contribute to a low-carbon economy.

The debate largely centers on the methods used to produce hydrogen, because today, production generally relies on extracting hydrogen molecules from methane in natural gas, with significant carbon emissions emitted in the process, which is then vented into the air.

Industry is now working to apply carbon capture and sequestration technology to trap CO2 emissions during the production process and then bury the carbon underground.

But environmentalists say that's still a risky and commercially unproven technology, and even if most carbon is captured when extracting hydrogen, substantial amounts of methane — a potent greenhouse gas — will still escape when mining for natural gas and transporting it to hydrogen production plants.

They advocate instead for electrolysis production, whereby hydrogen molecules are pulled from water rather than natural gas, with no carbon emitted in the process. But that's still an expensive technology, encouraging industry to first pursue natural gas-based hydrogen with carbon capture until further research and development helps lower the costs for electrolysis over time.

Those disputes derailed efforts by Gov. Michelle Lujan Grisham's administration to approve new statutes and incentives to promote hydrogen production in New Mexico during this year's legislative session, impeding the governor's plan to win federal funding for a state-based hydrogen hub.

In response, the governor opted in March to instead jointly pursue federal funding through a new regional initiative called the Western Inter-State Hydrogen Hub. And now, with the IRA in place, that regional initiative is attracting increased investor inquiries.

"The incentives help de-risk investments," Greenberg said. "We're getting a lot of calls from investors and industry interested in hydrogen development."

In particular, two new federal tax credits — plus an increase in government subsidies for underground carbon sequestration — could provide a "huge boon" for developers, Greenberg said.

That includes:

A sliding scale production tax break that offers up to $3 for each kilogram of hydrogen that's produced with near-zero carbon emissions, followed by smaller tax credits for reduced, or low-carbon, emissions, and a maximum cap on the amount of CO2 that can be released.

A 30% tax break on investments in clean hydrogen.

An 89% increase — from $45 to $85 — in the subsidy for each metric ton of sequestered carbon.

Eligibility for tax credits will be based on the full life-cycle process for producing hydrogen, with total carbon emissions measured from the point of natural gas extraction at well heads through the hydrogen conversion process itself and then end-user consumption. That means, to receive tax credits, producers must reduce or eliminate emissions every step of the way to achieve the cleanest hydrogen possible.

That will help lower costs for the "greenest" hydrogen processes, making electrolysis and other carbon-free technologies much more cost-competitive with natural gas-based production. Hydrogen pulled from methane would still be eligible for tax breaks using carbon-capture technology to cut emissions. But hydrogen produced by electrolysis or other non-carbon methods would receive the maximum tax offsets.

Lingering environmental concerns

Some environmentalists are optimistic that the incentives could accelerate adoption of electrolysis, reducing investor interest in natural-gas based production, said Noah Long of the Natural Resources Defense Council.

"The IRA provides a significant bump in incentives for truly 'green' hydrogen compared with other technologies," Long told the Journal. "With the biggest tax breaks going to the greenest hydrogen, it could help electrolysis beat out fossil-fuel technology."

But in general, environmentalists remain adamantly opposed to natural gas-based hydrogen. And they're united around the need to prioritize solar, wind and battery-storage development, said Tom Singer of the Western Environmental Law Center.

"There are significant costs to focusing heavily on hydrogen," Singer told the Journal. "It can lead to neglect in promoting policies and expenditures to speed the build out of renewables."

Local renewable development is, in fact, moving rapidly, with massive wind-farms under construction in central New Mexico, and huge solar arrays planned for the state's northwest region and other areas.

But Lujan Grisham's administration is also determined to build a local hydrogen economy, which the state and private sector consider critical for transitioning to low-carbon fuels while simultaneously promoting economic development and job creation.

As a clean-burning fuel, hydrogen can help to decarbonize fossil-fuel dependency in things like heavy industry — swapping out natural gas or diesel for hydrogen in heat-intensive processes like steel and cement production — or switching from diesel to hydrogen in long-haul transportation, including tractor trailers, maritime shipping and even trains and aviation. It can replace natural gas-based generation, using hydrogen to fire up power plants as needed to back up intermittent output from solar and wind. And it can be stored and shipped for use as needed.

New Mexico has vast infrastructure already in place to rapidly build a hydrogen economy, giving it competitive advantages over many other states and creating huge economic development opportunities, said New Mexico Chamber of Commerce president and CEO Rob Black. That includes a mature natural gas industry to readily supply hydrogen plants, unique geology for underground carbon sequestration, huge wind and solar resources now under development to supply power for green electrolysis production, and an experienced fossil fuel-based workforce that can easily be retrained for jobs in the hydrogen industry.

"We're already a mature energy state, which helps immensely in the logistical transition to hydrogen," Black told the Journal. "New Mexico has a lot of opportunities to lead in local and national efforts to build a hydrogen economy."

It also has abundant engineering and technical expertise to assist in the transition through its research universities and two national laboratories, which are now providing direct assistance to build a state and regional hydrogen hub, Greenberg said. In fact, Lujan Grisham's administration signed a memorandum of understanding last January with Los Alamos National Laboratory and Sandia National Laboratories to secure laboratory assistance.

"The labs and our research universities are all participating," Greenberg said. "We have a great statewide collaboration underway to develop strategies and best practices to fully develop our hydrogen vision."

Regional initiative

The four-state collaborative initiative is steadily progressing on efforts to win federal funding for a regional hydrogen hub, which could include $1 billion or more for each hub project selected by the U.S. Department of Energy.

About 75 representatives from the states are directly participating in more than half a dozen working groups now to identify infrastructure, assets and opportunities to build the hub, which the Colorado-based Rocky Mountain Alliance for Next Generation Energy, or RANGE, is helping to coordinate through a new website set up to support the initiative.

The four states released a "request for expression of interest" in late August inviting industry, public officials, community groups, tribes and the general public to provide input on the regional efforts, which will be posted on the RANGE website and considered when developing concrete funding proposals to the DOE.

An initial "concept paper" must be submitted in early November by each aspiring hydrogen hub, laying out their goals, initiatives and timelines, which the DOE will use to select potential funding recipients, Greenberg said. Those selected will then submit a full proposal by next spring or summer to flush out their entire vision for a first round of funding.

"We're selecting a prime contractor now to engage all the groups involved in the regional initiative and write the concept paper," Greenberg said. "We expect to sign that contract by the end of September or early October."

In New Mexico, cabinet secretaries from the Economic Development, Environment, and Energy, Minerals and Natural Resources departments are working together under an executive order from the governor to coordinate statewide strategies to jumpstart the local hydrogen industry in cooperation with the other states. The governor's order made building a hydrogen economy an integral part of all state economic development strategies going forward.

Apart from contributing to the regional funding proposal to the DOE, the inter-agency taskforce will provide recommendations to the governor by early January identifying new policies to promote local hydrogen development that will need legislative approval in the 2023 session. That foreshadows another potential fight in the upcoming session with environmental groups, which are closely following the development of state and regional hydrogen strategies.

The questions and criticisms that deadlocked the state Legislature this year still remain valid, particularly the need for emissions standards and careful accounting of the entire lifecycle of natural gas-based hydrogen when measuring those emissions, said Long of the Natural Resources Defense Council.

"My hope is that any proposed policies and programs specifically promote the cleanest hydrogen possible," Long said. "As a state, we've made big strides in regulating methane emissions in the oil and gas industry, but we still need to understand the full lifecycle of emissions in hydrogen production, and we don't yet have that. To pretend we have a full accounting process in place is hubris, and we need to get it right to fully regulate the industry."

Apart from addressing the potential environmental impacts from hydrogen and not neglecting promotion of renewable development, activists will insist on direct community participation in decision-making on all projects and programs that affect them, while also seeking to limit state funding for hydrogen development, Singer said.

"Projects that are backed by private risk capital — let them go forward in competing for DOE funding," Singer said. "But DOE funding requires significant matching funds, and will hydrogen promoters look for state money to cover that in the next session?"

Industry surging forward

Environmental concerns aside, industry efforts to develop hydrogen production and consumption is surging forward across the country, now boosted by the IRA and the federal government's commitment to building a robust hydrogen economy, said Adam Penque, BayoTech's senior vice president of sales and hydrogen hubs.

"The federal commitments in the infrastructure bill and the IRA clearly signaled to the market that hydrogen will be an important part of decarbonizing the economy," Penque told the Journal. "Industry and investors are becoming comfortable that hydrogen is here to stay."

Large-scale projects are cropping up everywhere. In August, for example, Amazon formed a new partnership with hydrogen fuel cell maker Plug Power to supply 11,000 tons per year of green hydrogen produced through electrolysis for its transportation and building operations starting in 2025. Amazon expects Plug to provide enough green hydrogen to power 30,000 forklifts or 800 long-haul trucks.

And Air Products, a publicly traded leader in hydrogen supply and distribution, announced earlier this year that it will build a 10 metric ton per day green liquid hydrogen production facility in Casa Grande, Arizona, to come online next year to supply California's clean-fuel transportation market.

In New Mexico, new projects are emerging and previously-announced endeavors are pushing forward.

This month, for example, Libertad Power LLC unveiled a partnership with Hyundai Motor Co. and the national diesel distribution firm Diesel Direct to construct a continuous "Southwest Clean Freight Corridor" stretching from the Port of Los Angeles to West Texas. Libertad plans to supply green, electrolysis-based hydrogen from a new plant it will build near Farmington, which Diesel Direct will then deliver to trucking fleets through fueling centers it will install across the four border states.

And in March, Universal Hydrogen — an international firm with operations in the U.S. and Europe — announced plans to invest $254 million in a green hydrogen production facility in Albuquerque to supply aviation fuel and drop-in hydrogen retrofit technology for turboprop aircraft, backed by $10 million in Local Economic Development Act funding.

Tallgrass Energy is also still pursuing conversion of the coal-fired Escalante Generating Station near Grants — which shut down in 2020 — into a natural gas-based hydrogen production plant and generating facility, said Tallgrass Vice President for Power and Transmission Justin Campbell. The company plans to source natural gas from the San Juan Basin in northwestern New Mexico and bury carbon captured in the hydrogen production process in underground geological formations there.

"The new $85 per ton federal credit for sequestering carbon will be very helpful," Campbell told the Journal. "It will reduce the cost of hydrogen and electricity we sell out of the plant and help the Escalante project move forward."

BayoTech, however, is by far the most advanced in developing its hydrogen business, with rapidly-growing demand for its compact mobile generators that reflects today's surge in hydrogen markets. On Sept. 13, it announced its newest hydrogen hub contract to establish a production and distribution network in the Detroit region in partnership with the American Center for Mobility, which provides product testing, development and evaluation infrastructure for transportation technologies.

And it expects to break ground on its first commercial hydrogen hub this fall near a General Motors plant in Wentzville, just west of St. Louis, Missouri.

It's initial mobile generating units are now rolling off the production line at Farmington-based Process Equipment & Service Co., a manufacturing firm that BayoTech partnered with to build its production units. And the company is flush with capital to deploy its technology nationwide.

It previously raised nearly $200 million in private equity. Now, new investor commitments — including an undisclosed amount of equity last year from global manufacturing firm Caterpillar Inc.'s investment arm, Caterpillar Venture Capital — has pushed the company's direct financial backing into the "hundreds of millions," BayoTech CEO Vargas said.

BayoTech used that monetary muscle in summer 2021 to acquire Oklahoma-based IGX Group — which makes and sells hydrogen transport vehicles and storage and fueling equipment — turning the company into a full service hydrogen supply firm from production to end-user delivery. In fact, the only thing slowing the roll out of its hydrogen hubs across the country is the cumbersome site-permitting process, which can take from eight to 18 months, depending on location, Vargas said.

"We're seeing tremendous demand for hydrogen, especially with the IRA and last year's infrastructure bill," he said. "We're operating now in a very big-growth environment."