In the media

Hydrogen can fill a critical gap in decarbonizing, but can utilities make the business case?

Leah Kunkel Wesley Miller Jessica Wright

By Leah Kunkel, Wesley Miller, Jessica Wright

Utility Dive

24 July 2023

PA Consulting energy markets and advisory experts Leah Kunkel, Wesley Miller and Jessica Wright authored an article for Utility Dive explaining how US utilities can make the business case to incorporate hydrogen.

Read the Utility Dive article

As electric and gas utilities transition away from fossil fuels, hydrogen has emerged as a promising and versatile energy carrier to decarbonize their systems. However, incorporating hydrogen into their systems demands more than just technical expertise and requires the development of robust business plans that showcase not only hydrogen’s technical viability and environmental benefits, but also addresses regulatory and safety concerns.

Electric and gas utilities face unique challenges to incorporating hydrogen into their systems, including:

  1. The nascent market and sustainability of hydrogen,
  2. The evolution of technology and safety advancements, and
  3. The future economic viability of this alternative fuel.

These challenges, coupled with unsettled hydrogen policy, create a difficult landscape for utilities to navigate as they consider decarbonization pathways and hydrogen implementation. However, utilities can still be active today to incorporate hydrogen successfully in their future.

As of June 2023, at least 26 electric and gas utility-led hydrogen pilot programs are underway across the U.S. aimed at assessing the technical viability of integrating hydrogen into existing systems. Notable projects include Constellation Energy’s record-setting 38% blend at the Hillabee Generating Station, a 753-MW combined-cycle natural gas plant in Alabama, and Hawai’i Gas’ introduction of a 12-15% hydrogen blend into its customer-serving distribution pipeline, the highest blending threshold achieved at scale to date.

The success of early pilot projects represents important steps towards U.S. hydrogen adoption. However, as gas and electric utilities seek approval from regulators, they will need to demonstrate an understanding of long-term hydrogen economics and sustainability, in addition to safety, in the form of defendable business plans that directly address stakeholder concerns and ensure ratepayer protection.

Key challenges of hydrogen implementation

Challenge 1: Hydrogen use as fuel is nascent

Despite hydrogen’s widespread usage in certain sectors, most hydrogen production remains heavily reliant on fossil fuels. The availability of low- and zero-emission hydrogen sources is currently limited, and its production needs to significantly increase for utilities to be able to rely on hydrogen as a key component of their sustainability efforts. The utilization of hydrogen holds significant potential for gas and electric utilities as a decarbonization pathway. However, these goals can only be achieved with the adoption of low-carbon hydrogen, specifically blue and green hydrogen.

In addition to production cost obstacles, technical hurdles can render hydrogen a more expensive fuel, particularly in the short term, as efforts are made to overcome these barriers for the first time. Hydrogen’s low volumetric energy density necessitates large storage spaces to accommodate substantial energy volumes, making long-distance transportation both cumbersome and costly. Moreover, hydrogen’s small molecular size facilitates easy diffusion through materials, thereby requiring effective mitigation measures to address potential hazards. Innovative thinking beyond existing hydrogen usage models will be essential to overcome these challenges successfully.

Challenge 2: Safety must be addressed

Many gas utilities are planning to blend hydrogen, at increasing ratios, with natural gas into existing infrastructure to deliver to customers in coming decades. Utilizing existing infrastructure is appealing for gas utilities, as it would limit stranded assets and justify investments into improving existing infrastructure. In the short term, hydrogen blending can reduce carbon emissions and in the longer term, pleases investors as it enables capital expenditure increases, rate base expansion, and asset optimization. As gas utilities navigate the future blending of hydrogen into their systems, and seek regulatory support of such plans, the safety of gas customers is of the utmost concern. Gas utility acknowledgment of the uncertain safety of hydrogen for end-use consumption and the incorporation of incremental blending ratios over decades in business plans could demonstrate to regulators the utility’s deep understanding of the impacts of hydrogen to gas customers.

Blending hydrogen presents uncertainties about end-use application, especially for the residential customer class, as research is still developing as to how high a ratio of hydrogen modern residential end-use appliances can safely handle. Utilities need to ensure safe gas delivery to customers and safe end-use in appliances. Presenting the blending of hydrogen, at slowly increasing ratios that are aligned with emerging technological and consumer safety research, will demonstrate that a gas utility prioritizes the safety of their customers and understands the incorporation of hydrogen into their system will take years.

Commercial, industrial and transport gas customers present an opportunity for gas utilities to further research hydrogen blending at a larger scale. Examining demand for hydrogen blending among these customer classes could allow utilities to further understand hydrogen blending at incremental ratios, while limiting risk and maintaining customer safety. Despite these efforts, hydrogen blending thresholds only get gas utilities so far in their decarbonization efforts and acknowledging this limitation demonstrates an understanding to stakeholders that other decarbonization efforts may need to be pursued.

Additional safety concerns associated with hydrogen blending are due to differences in the chemistry of hydrogen and traditional natural gas. Fatigue cracking, gas leaks and concerns about infrastructure compatibility (hydrogens interaction with compressors, valves, storage facilities and other non-pipe components) require ongoing research and technological advancements.

Challenge 3: Economic viability must improve

The relatively high cost of low-carbon (blue and green) hydrogen, compared to existing fuels, and uncertainty around the supply must be addressed. Utilities often communicate hydrogen use in their future plans, but the ones active in incremental project investment, development, and procurement will be the most successful when convincing regulators that their decarbonization strategy contains costs and supply numbers that are grounded in reality.

As part of their business case, utilities should outline the financial benefits of hydrogen compared to decarbonization alternatives (like electrification) while outlining the potential risk involved. The costs of hydrogen vary depending on the production method, scale of production, and location of production. Utilities need to carefully assess these costs before making financial benefit claims, to ensure ratepayers are protected. Utilities should also be engaging other stakeholders such as hydrogen producers, consumers and government agencies, to develop partnerships, invest in projects and gain market familiarity. Partnerships may help reduce costs and risks, and significant engagements can help influence the hydrogen investment and regulatory environment in their favor.

Fortunately for many utilities, regional clean hydrogen hubs are under development with support from the federal government, connecting hydrogen producers, consumers and infrastructure to accelerate hydrogen development and deployment. Expanding infrastructure to support large-scale hydrogen production requires substantial investments. Moreover, establishing a reliable and extensive distribution network is crucial for widespread hydrogen energy system integration. However, the prospect of describing the massive investment needed may diminish regulators’ enthusiasm for the hydrogen investments. The introduction of regional clean hydrogen hubs addresses these concerns by fostering connectivity among multiple stakeholders. These hubs reduce first-mover risks and costs, allowing for the incremental and flexible investment that paves the way for a more tenable path for success.

Well developed hydrogen strategies and business cases are critical for utility implementation

Key challenges remain surrounding hydrogen that gas and electric utilities must address before incorporating hydrogen into their future. Well-developed business plans will help utilities address the concerns of their regulators and other stakeholders who are interested in ensuring that utility services are provided to ratepayers in a safe, reliable, sustainable and affordable manner. Variations in regulatory approach, policy, current infrastructure status and cultural differences, among other items contribute to significant uncertainties for utilities, as they approach regulators with the prudency of their hydrogen-related plans. Utilities that recognize these complexities and demonstrate a well-developed strategy that carefully considers risks from the near to long term, will be successful in meeting both their business and decarbonization objectives.

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