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Canada details tax credits for clean fuels, clean tech, and CCUS

The details were welcomed by the Canadian clean fuels industry, with some caveats.

The Canadian government has released details of the Clean Hydrogen Investment Tax Credit (ITC) announced in the Fall Economic Statement.

The government release also includes details on the ITC for clean technology manufacturing and carbon capture and sequestration.

The ITC includes the following key design features for clean hydrogen:

  • The levels of support will vary between 15 and 40 per cent of eligible project costs, with the projects that produce the cleanest hydrogen receiving the highest levels of support.
  • The Clean Hydrogen Investment Tax Credit will also extend a 15 per cent tax credit to equipment needed to convert hydrogen into ammonia, in order to transport the hydrogen. The tax credit will only be available to the extent the ammonia production is associated with the production of clean hydrogen.
  • Labour requirements will need to be met to receive the maximum tax credit rates. If labour requirements are not met, credit rates will be reduced by ten percentage points. These labour requirements will come into effect on October 1, 2023.
Canada Budget 2023

“The comprehensive ITC announced in the budget sets the stage for Canada to compete on a global level against the backdrop of strong support mechanisms in other jurisdictions, particularly, the US Inflation Reduction Act (IRA),” World Energy GH2, a developer of green hydrogen projects, said in a prepared statement. “The ITC must be coupled with contracts for difference (CfDs) as part of the Canada Growth Fund to make our country truly competitive with the US IRA. CfDs are not just about de-risking investments for project developers, they are also an investment vehicle which can return funds to the Canada Growth Fund as the global market for green hydrogen develops.”

Trade association Renewable Industries Canada called the announcement “a start” but added noted that a significant low-carbon competitiveness gap remains.

“RICanada is urging the federal government to work closely with the biofuels industry in Canada to accelerate its growth. Specifically, RICanada is asking the government to prioritize recommendations made by the biofuel industry and its partners in the agriculture sector in recent years, in relation to the Clean Fuel Regulations announced in 2016,” the group said in a news release. “These recommendations include accurate carbon accounting, incenting capacity building investments, carbon border adjustments and avoiding administrative pitfalls and delays that could prevent true carbon reductions, like biofuels, from being implemented effectively and remaining competitive in light of the incentives offered in the US.”

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Heliogen expecting equity partners for California H2 facility

The company anticipates bringing on additional equity partners to support the project’s construction costs.

Heliogen has signed an MOU with the City of Lancaster, California to develop and provide equity for a green hydrogen generation facility there, according to a press release.

“Heliogen expects to bring on additional equity partners to support the project’s construction costs,” the release states.

The City of Lancaster will assist with site identification, review by City Council and the community as required, support for permitting process, and evaluation of economic development potential.

This relationship is expected to accelerate the use of concentrating solar thermal energy for a commercial hydrogen generation facility and builds upon the existing relationship between the City of Lancaster and Heliogen, which sited its demonstration test facility in the city in 2019.

The facility is expected to leverage Heliogen’s patented technology to use AI and advanced computer vision software to concentrate sunlight and could generate up to 1500 metric tons per year of carbon-free hydrogen.

The Heliogen facility could help support other projects within the city and region, including sustainable aviation fuel for hydrogen-powered aircraft, fueling stations for hydrogen-powered vehicles, and sales and distribution of hydrogen fuel for industrial processes such as vertical agriculture, cement, and mining.

This news follows a recent announcement that Heliogen intends to develop a green hydrogen facility on leased land in the Brenda Solar Energy Zone in Arizona. The company also entered into a letter of intent with sustainable fuels-focused Dimensional Energy to produce sustainable aviation fuel.

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Electric Hydrogen raises $380m

The Massachusetts-based electrolyzer maker has completed a Series C funding round to accelerate manufacturing and deployment.

Electric Hydrogen has completed an oversubscribed $38m Series C financing.

The new capital will accelerate the company’s manufacturing and deployment plans to meet strong customer demand for its power-dense green hydrogen systems, according to a news release.

The funding round was led by Fortescue, Fifth Wall and Energy Impact Partners and included new investors bp Ventures, Oman Investment Authority, Temasek, Microsoft’s Climate Innovation Fund, the United Airlines Sustainable Flight Fund, New Legacy, Kajima Ventures and Fatima Holdings USA. Existing strategic investors Amazon’s Climate Pledge Fund, Equinor Ventures, Mitsubishi Heavy Industries, and Rio Tinto continued their participation, as did previous financial investors Breakthrough Energy Ventures, Capricorn Partners, Prelude Ventures, and S2G Ventures.

EH2 has raised over $600 million since its founding in 2020. In a separate release, Fortescue said it had signed a framework procurement agreement to supply 1 GW of EH2’s electrolyzer systems to Fortescue’s green hydrogen projects in the US and globally.

EH2’s electrolyzer systems produce green hydrogen from renewable electricity and water. Green hydrogen is needed for decarbonizing vital industrial processes such as fertilizer production, steelmaking, base chemicals and many others. Until now, switching from fossil-based sources to renewable green hydrogen has been too costly to be implemented at scale. EH2 is manufacturing and plans to deliver and commission 100 MW electrolyzer systems, each capable of producing nearly 50 tons of green hydrogen per day at transformational low cost to help its customers meet their decarbonization goals.

“We’re here to replace natural gas and coal with renewable green hydrogen. To address the global climate challenge, we need new technologies that help critical industries reduce their emissions. Electric Hydrogen’s 100MW electrolyzer systems do that”, said Raffi Garabedian, Chief Executive Officer and Co-founder of EH2. “Today’s hydrogen comes from natural gas and coal and accounts for around 2.5% of global carbon emissions. There has not been a viable solution to this problem because renewable green hydrogen has been too expensive to produce at scale. The Electric Hydrogen team is changing that and the opportunities for decarbonization go far beyond today’s applications”.

The company is currently installing manufacturing equipment in its 1.2 GW factory in Devens, Massachusetts. The factory will begin producing commercial electrolyzer systems in early 2024, with deliveries later in the year including the first customer-sited electrolyzer plant to be installed in Texas for New Fortress Energy. Electric Hydrogen has more than 5 gigawatts (GW) of its electrolysis systems reserved by customers and anticipates strong ongoing demand.

Fortescue, a global metals and green energy company, is both a lead investor and potential customer, having also signed a procurement agreement with EH2. “Fortescue is committed and focused on supporting the creation of green technology to help heavy industry decarbonize and producing green hydrogen at scale globally is integral to that”, said Mark Hutchinson, Fortescue Energy CEO. “Electric Hydrogen, just like Fortescue, is working at the speed and scale necessary to help deliver green-hydrogen projects around the world”.

“bp Ventures invests in game-changing and innovative technology across bp’s transition growth engines and in the energy the world needs today, said Gareth Burns, Vice President of bp Ventures. “Electric Hydrogen’s 100MW green hydrogen systems use advanced technology that could significantly reduce production costs. Investing in technologies that could help to advance green hydrogen production is crucial as we progress our global hydrogen portfolio and work towards our net zero ambition.”

“Scalable and cost competitive access to green hydrogen is key to the production of Sustainable Aviation Fuel – for United and others that seek a transition to clean energy. Electric Hydrogen’s novel electrolyzers have the potential to greatly reduce the capital cost of hydrogen production and their electrolyzers can be powered by a variety of renewable power sources,” said United Airlines Ventures President, Michael Leskinen. “United’s need for sustainable aviation will require scaling the supply of green hydrogen, and we believe Electric Hydrogen’s technology could be game changing.”

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US steelmaker committing to hydrogen offtake

A US steelmaker has made offtake commitments to several hydrogen hubs in development, in an effort to support reliable supply and affordability. The resulting steel will be sold at a premium to the auto industry.

Cleveland-Cliffs, the largest producer of flat-rolled steel in the US, is starting to make commitments to several hydrogen hubs in the Midwest in an effort to advance the supply of clean hydrogen.

In remarks last week, Cleveland-Cliffs CEO Lourenco Goncalves said his company is seeking to break the hydrogen industry’s chicken-and-egg dilemma by committing to offtake from proposed hubs in Ohio and Northwest Indiana.

As it stands, industrial gas producers don’t produce hydrogen at scale to reduce costs because there’s no demand, Goncalves said. And there’s no demand, he added, because there’s no supply.

“We are breaking this chicken-and-egg conundrum by committing with offtakes to the hubs,” he said, noting his company will take half of the offtake from the Toledo, Ohio hub being developed by Linde and other partners.

“The footprint [of the project] is 100 tons per day,” Goncalves said. “Our offtake there is 50 tons per day,” with the additional 50 tons per day likely taken up by other industries like automotive, he added.

Meanwhile, Cleveland-Cliffs has made an offtake commitment to a Northwest Indiana hub being developed by Constellation and bp, Goncalves said.

Cliffs recently conducted a trial use of hydrogen in steelmaking at its Middletown Works blast furnace, and is set to launch another trial at its Indiana Harbor facility, which is near the proposed Northwest Indiana hub.

Due to the proximity of the company’s steelmaking facilities using hydrogen, Cleveland-Cliffs has committed to 200 tons per day of offtake from the Northwest Indiana hub, which is expected to produce 1,000 tons per day. Cliffs made further commitments for offtake with bp for hydrogen produced elsewhere in Northwest Indiana, Goncalves said.

According to Goncalves, the hydrogen production could turn the region into a producer of hydrogen cars.

“So that would make for us to be the enabler of having the automotive industry building stuff in Northwest Indiana to produce hydrogen cars if the OEMs really pursue this route,” he said.

He added that he is hoping that the hydrogen trial at its Indiana Harbor No. 7 facility will be done with a permanent pipeline.

Steel premiums

Cliffs is already charging a premium of around $40 per ton to automotive clients for steel produced using lower carbon feedstock from the company’s HBI facility. Goncalves estimates that this cost gets passed on to the ultimate buyer of a new car, raising the window sticker MSRP price of a car by around 0.1%.

“As one of the largest suppliers of steel to the automotive industry in the world, Cleveland-Cliffs wants to continue to invest in green initiatives,” Goncalves said. “And therefore, we need to be paid for that. That’s not unreasonable and should actually be expected and universally accepted.”

The current HBI steel product, called Cliffs H, will become Cliffs H2 – and become even more expensive – once hydrogen is available in larger and more affordable amounts, according to the executive. And when hydrogen completely replaces natural gas, the product will be called Cliffs H Max, where the steelmaking process has reached minimum theoretical coke rates – likely around 2029 or 2030, he said.

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Renewable hydrogen developer to launch series A round next month

A Colorado-based renewable hydrogen developer has hired an advisor and will launch a series A funding round next month.

NovoHydrogen, the Colorado-based renewable hydrogen developer, will launch a series A capital raise in the middle of March to take on a new investor for project development and hiring, CEO Matt McMonagle said in an interview.

The company has hired GreenFront Energy Partners to run the process, McMonagle said.

NovoHydrogen builds its projects onsite with customers, as close to end use as possible, he said. The company serves transportation (heavy road transport, shipping and aviation), industrial (cement, glass, metal, steel, food, etc.) and power (peaking power and diesel generator replacement). Most of Novo’s customers are users of grey hydrogen looking to decarbonize. In the case of cement, they are looking to replace diesel for their trucks and coal and natural gas for their kilns.

“We first look to see if we can put our projects on our customer sites and make it there,” McMonagle said. “If we can’t do that, we’ll do offsite, but we still try to be as close to customers as possible to minimize that midstream component or distribution component.”

About 30 projects are in development in the US, ranging from a few megawatts to hundreds of megawatts, McMonagle said. NovoHydrogen’s most active markets are the West coast, Northeast, Appalachia, Texas and the Rocky Mountains, though the company is not geographically constrained.

The company aims to begin construction on its first projects by the end of this year, possibly early next year, McMonagle said. The first project could reach COD in 2024.

NovoHydrogen recently announced that it has closed its seed funding round and appointed four executives to its board of directors. Each of those executives represent an investor that participated in the seed round, McMonagle said.

The new board appointees are: Jeremy Avenier, an active investor at Ohmium International; Peyton Boswell, managing partner at Woodfield Renewable Partners; Bruno Franco, partner at Pacífico Energia and managing partner at PWR Capital; and Joseph Malchow, a managing partner at Hanover (a Silicon Valley VC), board member and investor in Enphase and board member and investor in Archaea.

More money

“We will certainly need more money as our projects mature,” McMonagle said. “I do not have the hundreds of millions of dollars on my balance sheet to build these projects.”

An ideal investor will bring accretive capabilities in hydrogen, in a field like value chain equipment or delivery, to the table, McMonagle said.

NovoHydrogen plans to be a long-term owner-operator of its projects, McMonagle said. That is an important point for customers: that the company is not going to sell the project and not care how the next owner operates.

“We want to earn future business from these customers,” McMonagle said, adding that most of them are transitioning piecemeal.

NovoHydrogen and TigerGenCo in November said they would advance development of green hydrogen capacity to reduce reliance on natural gas at the Bayonne Energy Center located in New Jersey. NovoHydrogen will develop and operate the hydrogen production facility to reduce Bayonne’s carbon emissions.

TigerGen owns the power plant and is the offtaker in that project. Ohmium International is providing the PEM electrolyzers in that project. McMonagle said the company may use other electrolyzer providers for future projects.

The company is also a partner in the Aliance for Clean Hydrogen Energy Systems (ARCHES) for the California DOE Hydrogen Hub submission.

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AIMCo-backed midstream infrastructure firm in refi

The company, whose asset footprint includes Gulf Coast hydrogen production, today priced a debt refinancing transaction with an 8.875% coupon.

Howard Energy Partners today priced $550m of senior unsecured notes to refinance amounts outstanding on its revolving credit facility.

The company, which is majority owned by the Alberta Investment Management Corporation (AIMCo), will pay 8.875% on the notes, inside of price talk of between 8.75% – 9%, according to sources familiar with the matter.

RBC Capital Markets and TD Securities are joint active bookrunners on the deal, the sources said.

Howard in 2021 closed on the acquisition of the Javelina Facility in Corpus Christi, Texas — a treating and fractionation plant that extracts olefins, hydrogen, and natural gas liquids from the gas streams produced by local refineries.

Starting in Jan of 2023, a strategic technology partner began producing a low-carbon diesel substitute using Javelina’s hydrogen and CO2 as feedstocks, making it one of the first merchant “clean” hydrogen facilities on the US Gulf Coast, according to the company. HEP is also pursuing carbon capture and sequestration opportunities with its Javelina assets through a joint venture with TALOS Energy and the Port of Corpus Christi.

AIMCo acquired an initial 28% stake in HEP in 2017, and brought its ownership stake to 87% last year following the purchase of Astatine Investment Partners’ stake in the company.

Howard operates in two key segments in the US and Mexico: natural gas and liquids. The natural gas segment includes 1,175 miles of pipelines and approximately 4.3 Bcf/d of throughput capacity and 600 MMCf/d of cryogenic processing capacity.

The liquids segment includes terminalling and logistics services for refined products as well as refinery-focused off-gas handling, treating, processing, fractionation and hydrogen supply services.

Spokespersons for the company, RBC, and TD did not respond to emails seeking comment.

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Analysis: Premium for clean hydrogen unlikely

A group of hydrogen offtakers say they have every intention of decarbonizing their fuel intake, but barring the implementation of a carbon-pricing mechanism, paying a premium for it is unrealistic.

Passage of the Inflation Reduction Act ignited investor interest in the global market for clean hydrogen and derivatives like ammonia and methanol, but offtake demand would be better characterized as a flicker.

And while many questions about the nascent market for green hydrogen remain unanswered, one thing is clear: offtakers seem uninterested in paying a “green premium” for clean fuels.

That doesn’t mean offtakers aren’t interested in using clean fuels – quite the opposite. As many large industrial players worldwide consider decarbonization strategies, hydrogen and its derivatives must play a significant role.

Carbon pricing tools such as the Carbon Border Adjustment Mechanism in Europe could introduce a structural pricing premium for clean products. And industry participants have called for carbon levies to boost clean fuels, most recently Trafigura, which released a white paper today advocating for a carbon tax on fossil-based shipping fuels.

But the business case for clean fuels by itself presents an element of sales risk for potential offtakers, who would have to try to pass on higher costs to customers. Even so, there is an opportunity for offtakers to make additional sales and gain market share using decarbonization as a competitive advantage while seeking to share costs and risks along the value chain.

“It’s a very difficult sell internally to say we’re going to stop using natural gas and pay more for a different fuel,” said Jared Elvin, renewable energy lead at consumer goods company Kimberly-Clark. “That is a pickle.”

Needing clean fuels to reach net zero

Heavy-duty and long-haul transportation is viewed as a clear use case for clean fuels, but customers for those fuels are highly sensitive to price.

“We’re very demand focused, very customer focused,” said Ashish Bhakta, zero emission business development manager at Trillium, a company that owns the Love’s Travel Shop brand gas stations. “That leads us to be fuel-agnostic.”

Trillium is essentially an EPC for fueling stations with an O&M staff for maintenance, Bhakta said.

As many customers consider their own transitions to zero-emissions, they are thinking through EV as well as hydrogen, he said. Hydrogen is considered better for range, fueling speed and net-payload for mobility, all of which bodes well for the clean fuels industry.

One sticking point is price, he said. Shippers are highly sensitive to changes in fuel cost – and asking them to pay a premium doesn’t go far.

Alessandra Klockner, manager of decarbonization and energy solutions manager at Brazilian mining giant Vale, said her employer is seeking partnerships with manufacturers, particularly in steel, to decarbonize its component chain.

In May Vale and French direct reduced iron (DRI) producer GravitHy signed an MoU to jointly evaluate the construction of a DRI production plant using hydrogen as a feedstock in Fos-sur-Mer, France. The company also has steel decarbonization agreements in Saudi Arabia, the UAE and Oman.

In the near term, 60% of Vale’s carbon reductions will come from prioritizing natural gas, Klockner said. But to reach net zero, the company will need clean hydrogen.

“There’s not many options for this route, to reach net zero,” she said. “Clean hydrogen is pretty much the only solution that we see.”

Elvin, of Kimberly-Clark, noted that his company is developing its own three green hydrogen projects in the UK, meant to supply for local use at the source.

“We’re currently design-building our third hydrogen fueling facility for public transit,” he said. “We’re basically growing and learning and getting ready for this transition.”

The difficulty of a “green premium

The question of affordability persists in the clean fuels space.

“There are still significant cost barriers,” said Cihang Yuan, a senior program officer for the World Wildlife Fund, an NGO that has taken an active role in promoting clean fuels. “We need more demand-side support to really overcome that barrier and help users to switch to green hydrogen.”

Certain markets will have to act as incubators for the sector, and cross-collaboration from production to offtake can help bring prices down, according to Elvin. Upstream developers should try to collaborate early on with downstream users to “get the best bang for your buck” upstream, as has been happening thus far, he added.

Risk is prevalently implied in the space and must be shared equitably between developers, producers and offtakers, he said.

“We’ve all got to hold hands and move forward in this, because if one party is not willing to budge on any risk and not able to look at the mitigation options then they will fail,” he said. “We all have to share some sort of risk in these negotiations.”

The mining and steel industries have been discussing the concept of a green premium, Klockner said. Green premiums have actually been applied in some instances, but in very niche markets and small volumes.

“Who is going to absorb these extra costs?” she said. “Because we know that to decarbonize, we are going to have an extra cost.”

The final clients are not going to accept a green premium, she said. To overcome this, Vale plans to work alongside developers to move past the traditional buyer-and-seller model and into a co-investment strategy.

“We know those developers have a lot of challenges,” she said. “I think we need to exchange those challenges and build the business case together. That’s the only way that I see for us to overcome this cost issue.”

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