Industrial-gas producer Air Liquide is no stranger to the hydrogen industry. But participation in utility ratemaking cases — that's a new experience.

Utility interest in hydrogen presents a significant opportunity for the resource and has filled the inbox of Dave Edwards, director and advocate for hydrogen energy at Air Liquide, in recent years. But for hydrogen to reach its full potential, Edwards said, multiple barriers must still be overcome, including the need for a regulatory framework that is as adaptable as the commodity itself.

"One of the things that gets lost when we have a conversation about the grid is, once the hydrogen is available, it has all this utility outside the power grid," Edwards said. "A grid operator managing a hydrogen storage facility doesn't have to sell it as electricity to go back into the grid. ... That is one of the places hydrogen has this strength of flexibility, but it means the regulatory framework needs to be flexible in that same sense."

While industry interests look to hydrogen for everything from energy storage to decarbonizing natural gas service, regulations remain siloed, geared toward overseeing one type of utility or another. Innovative incentives and policy are needed to advance the adoption of hydrogen, but prospective suppliers of the commodity say it's not even clear which regulatory body they should approach with their requests.

"A regulatory framework that values this interconnectivity is really going to be critical," Edwards said, "and how you do that is a real challenge, because there isn't a structure we can build off."

Fundamental framework

For many utilities, including NW Natural, integrating hydrogen into their operations begins, by necessity, with regulatory approval — they simply aren't permitted to purchase the commodity without it.

Fortunately for NW Natural, Oregon's Senate Bill 98 granted that permission in 2019 alongside a series of provisions the utility said could serve as a model for other utilities and regions pursuing the use of hydrogen.

SB 98 created voluntary carbon reduction targets for Oregon gas utilities, similar to targets already adopted in prior years for electric utilities. It asks that gas providers reduce the volume of carbon-based fuels used a total of 5% by 2024, with an additional reduction of 5 percentage points every five years through 2050. It also created the framework needed to make those reductions possible, according to Anna Chittum, director of renewable resources for NW Natural.

The bill then authorized utilities to procure renewable natural gas for their customers, defining renewable natural gas broadly so as to include hydrogen and other renewable, low-carbon gas alternatives. It also established a hypothetical cost of carbon to be applied in resource-planning processes, enabling the lower-emitting resources to potentially qualify as least-cost resources for the purposes of ratemaking.

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"There is a broader issue with hydrogen that isn't addressed. For me and our company, the critical thing for hydrogen is it's this incredible way to marry the gas and power system."

Anna Chittum

Director of Renewable Resources at NW Natural.

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"That was a fundamental change," Chittum said. "We used to be restricted to essentially the least-cost gas."

After the company's first year of working with the new framework, Chittum said the SB 98 approach appears to work as intended. With the cost of carbon taken into account, NW Natural is set to procure an amount of renewable natural gas that will not only meet but likely exceed the targets set by the legislature.

But while SB 98 is helpful, it won't get Portland to the carbon-free future NW Natural envisions, Chittum said. "There is a broader issue with hydrogen that isn't addressed. For me and our company, the critical thing for hydrogen is it's this incredible way to marry the gas and power system."

Oregon's law creates a supportive environment for a variety of renewable natural gas options, but Chittum said she doesn't believe it will be enough for hydrogen. For hydrogen to thrive, she said, it will require policy that captures its potential benefits to several systems — electricity, gas and transportation.

Making hydrogen cost competitive, Chittum continued, requires sharing costs across multiple uses. For example, electrolysis allows utilities to derive hydrogen from water, using surplus renewable energy to split water molecules into oxygen and hydrogen. If electric utilities paid to use the electrolyzer for its demand-management benefits, and gas utilities paid for the resulting hydrogen, the cost of the overall process would decrease.

"With hydrogen production that is utilizing electricity as an input, you have a resource that can modulate the electricity system, and dump the hydrogen into the gas system," Chittum said.

There's just no regulatory framework to enable this integration, she added.

"What we're still missing is regulation and policy that looks holistically at a region's energy system and says, 'What is the least-cost way to decarbonize the entire system,'" Chittum said. "There's resource planning on the gas side, and resource planning that happens on the power side, but there's no comprehensive look, and that's really what is missing. That would be my dream."

Chittum, however, is stumped as to who might be the correct body with which to discuss her dream: The Federal Energy Regulatory Commission? State utility commissions?

Philippe Gerretsen, a senior manager of energy project development at Nikola, has an idea: independent system operators.

Wholesale advantage

Gerretsen's foray into utility regulation began when he was tasked with securing a low-cost electrical rate for hydrogen production to support heavy-duty, hydrogen-powered trucks operating in the southwestern U.S. The endeavor ended in the creation of a specialty hydrogen production tariff in Arizona with fluctuating rates that allow Nikola's electrolyzers to function as a demand management resource, facilitating the production of cost-competitive green hydrogen.

"This Arizona rate case was really advantageous in that it allowed us to produce hydrogen with a high capacity factor," Gerretsen said, "meaning we can amortize our capital costs over more hours, and that helps us to reduce the cost of capital."

Tacoma Power in Washington state has followed a similar approach. Last year, it started offering a special tariff for customers who want to use electrolysis to produce hydrogen. However, instead of a variable rate structure, Tacoma Power offers a low fixed rate to help keep customers' expenses predictable, according to Clay Norris, the utility's power manager. In exchange for the lower rate, the customer must agree to curtail their electrolysis use during times of high demand from other customers.

So far, Tacoma Power has no takers on the new rate structure, though discussions are in the works, Norris said, including with customers who asked about raising the 65-megawatt cap placed on the rate currently.

"We would consider it, but the larger the load, the more it makes sense that they're just a wholesale customer instead of a retail customer," Norris said.

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"I think it's too early to have a comprehensive conversation, and I don't know that it would be that productive to put resources into figuring it out for all applications. I think the market is going to figure a little bit of this out."

Christine Wyman

Senior Principal at Bracewell

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But wholesale tariffs, Gerretsen said, are really a stepping stone toward Nikola's final goal. Long-term, he said he believes the ultimate regulatory solution for hydrogen is to allow electrolytic hydrogen producers to participate directly within wholesale independent system operators markets.

There the company could not only buy electricity at wholesale rates — potentially taking advantage of the lowest prices when energy is in excess — but might also be able to market ancillary services to further offset costs and produce affordable hydrogen for transportation and gas companies.

"What this does is ... allow us to use hydrogen as a grid-balancing resource," Gerretsen said. "Regardless of whether hydrogen is used to generate electricity, in transportation or in industry, we're still serving to mitigate the variability of renewable resources. From our standpoint, this is the direction everything should be going."

Nikola, Gerretsen said, is currently in talks with the California Independent System Operator and intends to approach the state legislature with a proposal in the next session.

"If California wants any hydrogen production to take place in the state that is competitive against diesel and other existing fuel sources," he said, "this is a requirement in order to get the cost low enough."

Incentive for change

At Air Liquide, Edwards said, discussions about immediate policy priorities are currently focused on transportation and potential incentives that could drive greater deployment of hydrogen in that sector — zero-emission-vehicle mandates, manufacturing incentives, tax credits for low carbon fuels. But energy production, Edwards said, is an enormous opportunity for the future.

A fundamental question utilities and regulators must ask, Edwards said, is what hydrogen has to offer to the electric grid. And an obvious answer, he said, is energy storage — suggesting this might be the place for hydrogen-oriented regulation to begin.

"You can take that hydrogen, and put it back onto the grid, either by putting it through a natural gas turbine, or do things like put it into fuel cell systems which are very effective for things like backup power and distributed power," he said. "There needs to be a mechanism for that storage."

Christine Wyman, a senior principal with Bracewell specializing in developing and implementing policy strategies for clients, believes that the market will ultimately determine where and how hydrogen should be regulated.

"I think it's too early to have a comprehensive conversation, and I don't know that it would be that productive to put resources into figuring it out for all applications," Wyman said. "I think the market is going to figure a little bit of this out."

But Edwards said he believes this approach could also present some of the same challenges hydrogen already faces in the regulatory landscape.

Whenever a new technology enters the market, he said, existing regulations tend to restrict the adoption of that technology for a time because the rules in play cater to the solutions available at the time they were written. Basing rules around the storage solutions available on today's market could create a barrier to the adoption of hydrogen in the future.

The key moving forward, he said, might be championing policy that is tech-neutral and avoids prescriptive solutions as much as possible. If regulators can arrive at a framework for energy storage that is as flexible as hydrogen is versatile, Edwards said, hydrogen could represent a "huge opportunity for our energy system to become more flexible and more robust."