UC Davis Institute of Transportation Studies

Hydrogen is emerging beyond its conventional role as an additive component for gasoline production, chemical and fertilizer manufacture, and food production to become a promising fuel for transportation and stationary power. Hydrogen offers a potentially unmatched ability to deliver a de-carbonized energy system, thereby addressing global climate change concerns, while simultaneously improving local air quality and reducing dependence on imported fossil fuels. This "trifecta" of potential benefits is sometimes missed by narrow "cost-effectiveness" analyses that examine any one of these benefits but ignore the others.

The emergence of a broader "hydrogen economy" can best be thought of as a transition that will take many years to unfold. Natural gas is a reasonable source of hydrogen in the near term, as it offers modest benefits and lower costs than most other sources. However, as the costs of hydrogen technologies such as fuel cells and electrolyzers decrease through mass production and technological learning, and costs of primary solar and wind power sources continue to slowly decrease, renewably-produced hydrogen will become more competitive.

Moreover, hydrogen costs will be relatively stable due to a diversity of feedstock base, with far more stable prices than the volatile oil and natural gas markets can offer. These reasons, coupled with the environmental benefits that hydrogen can offer if produced renewably and cleanly, have led most environmental advocates and states that are working to commercialize clean energy technologies to envision one articulated long-term scenario—a clean energy future that relies on fuel cells powered by renewably produced hydrogen.

Many states, particularly New York, Massachusetts, Connecticut, Florida, Michigan, Ohio and California, are providing research and project deployment funds, tax breaks for new industry, and other measures to encourage hydrogen and fuel cell developments in their states. These program incentives are based on the assumption that fuel cells and related hydrogen infrastructure development are likely to be important to a long-term, sustainable energy future, and that these technologies hold out hope for increased economic development in American industry. In fact, while the belief is hardly unanimous, many analysts and advocates have become convinced that fuel cells are one of the few "emission-free" technologies capable of fully transforming our energy system in a way that is urgently needed to stabilize greenhouse gas emissions and address climate change in the decades ahead.

In order to further explore the potential benefits that hydrogen can offer, we recommend a continued research and development effort, along with strategic demonstration and initial deployment efforts. Specifically, we offer the recommendations outlined in this report for consideration as a starting point for in-depth discussions that can lead to state-specific action plans and stakeholder engagement processes.

* Dedicate Significant Funding: State clean energy funds that currently support a broad suite of renewable energy technologies can commit significant, dedicated funding to develop action plans and programs that address the very real economic and technology barriers facing the production of hydrogen from renewable energy sources. In addition, there are significant opportunities to establish federal-state funding partnerships with agencies such as DOE, DOD and DHS that can leverage limited funding for hydrogen projects using renewable energy technologies. * Demonstrate the Viability of Hydrogen Storage and Production for Critical Applications: State clean energy funds and other public interest organizations have the opportunity to support projects that can demonstrate the viability of using hydrogen storage and energy conversion in critical applications, such as telecommunications and backup power, where on-site storage of hydrogen provides important power quality and security benefits. * Visibly Link Hydrogen Production and Clean Energy Technologies: Wind, photovoltaics and other projects that include clean energy technologies should be promoted as the preferred source of hydrogen production. Supporting projects that highlight the capability of producing hydrogen on-site from these sources will serve an important "ambassador" role, engendering important local and public support for hydrogen technologies. These projects can also support the acceptance of natural gas as an important transition fuel. Many states that currently support other clean energy technologies can seek opportunities to develop hybrid projects, linking together energy generation with hydrogen production and storage. * Establish Incentives for High-Value, On-Site Applications: Financial incentives that target specific applications of hydrogen technology can encourage both private and public-sector players to deploy hydrogen and fuel cell technologies. High-value and niche applications for production and use of hydrogen from renewable sources (such as backup power and battery replacement) may lead to self-sustaining markets important learning-by-doing benefits and increased public acceptance. * Proactively Address Regulatory Incentives: Advanced energy technologies can best be promoted with forward-thinking regulatory policies. Many states have implemented regulatory preferences and incentives (such as standby charge exemptions and net metering policies) that recognize and accommodate the public preference for and benefits from fuel cell, hydrogen and clean energy technologies. The regulatory strategies used by these early leaders can be replicated in other states. If hydrogen is to fulfill its role in a clean energy future, it will certainly be in conjunction with clean energy technologies that can operate in a distributed energy context. Currently, many regulatory barriers prevent the wide-scale adoption of clean distributed generation and limit the ability to store hydrogen on-site. These can be critical components of distributed generation projects that rely on hydrogen derived from renewable resources. * Accelerate Private Investment: Successfully deploying hydrogen technologies will require significant investment from the private sector. The introduction of new technologies entails crossing what has come to be called "the valley of death"—the need for capital investments to take promising technologies from the invention and technology validation stage to the point of initial demonstration, field testing, and commercialization. These early investments can be accelerated with preferential tax treatment and other incentives to judiciously use public resources to assist and share risks with industry to develop new energy solutions. Florida, for example, has proposed significant tax benefits that could accelerate ongoing investments by Fortune 100 companies such as the recent investments by Sprint in fuel cell systems. States should consider enacting similar favorable tax policies and exemptions for projects developing hydrogen from renewable resources. * Develop Compelling Communications Strategies: The potential use of hydrogen outside of the industrial sector has been hampered by public misperceptions and lack of awareness of its significant benefits. In recent years, many states have conducted sophisticated consumer and stakeholder research that has resulted in new communications campaigns to increase public understanding and support for clean energy technologies. Many states, for example, recently joined together to develop and fund a "Clean Energy: It's Real, It's Here, It's Working. Let's Make More" branding campaign. This kind of proactive communications strategy could yield tremendous results for the hydrogen sector, helping to organize currently disparate enthusiasm for hydrogen with a single, compelling message.