U.S. Appalachia hydrogen hub facing bleak prospects

Appalachia’s hydrogen hub is floundering as companies pull out of projects due to high costs and a lack of demand. The potential demise of the hydrogen concept would be the latest failure in a series of misplaced bets on gas over the past 15 years to drive economic growth in the struggling region.

The Appalachian Regional Hydrogen Hub (ARCH2) is one of seven high-profile hydrogen hubs selected several years ago by the Biden administration to receive federal funds. The idea was to funnel money into hydrogen production to bring costs down, accelerating its adoption.

Located around the country, the seven hubs were a mix of green (hydrogen derived from renewable energy) and blue (hydrogen made from gas, accompanied with carbon capture) hydrogen.

ARCH2 has been largely based on blue hydrogen. Located at the heart of the prolific Marcellus shale, ARCH2 could capitalise off abundant low-cost shale gas, using that gas to produce hydrogen, which would then be used as fuel for trucking, aviation, home heating, and data centres, among other applications.

But the hub’s fortunes have gone south pretty much since the hub was awarded $925 million in late 2023.

Last year, chemical company Chemours quietly withdrew from a hydrogen production facility with TC Energy in West Virginia. CNX Resources, a Pittsburgh-based gas producer, backed out of an ammonia production site in the same state. Without much fanfare, the key components of the ARCH2 hub are falling apart.

More recently, CNX paused plans to produce sustainable aviation fuel for the Pittsburgh airport. While not officially apart of the ARCH2 hub, the struggles for the CNX project raise red flags for hydrogen production in the entire region.

At least six projects have now been cancelled, from an original total of 15 that would make up the ARCH2 hub. 

“ARCH2 consists of projects that are either economically very doubtful or that are being undertaken by companies that are vastly under-capitalised,” Sean O’Leary, senior researcher at the Ohio River Valley Institute, an Appalachian-focused think tank, told Gas Outlook.

The Trump administration is considering cutting off funding for green hydrogen hubs, mostly located in Democratic-led states, while maintaining funding for blue hydrogen in Republican-controlled states. The political favouritism could keep the ARCH2 hub limping along, but O’Leary says there is still the fundamental problem that there is no demand for hydrogen in the really big sectors that matter, such as in transit, power generation, or heating buildings. Hydrogen is simply too expensive.

Even with subsidies for carbon capture — the so-called 45Q tax credit — hydrogen is not close to the “tipping point where it makes the technology affordable in mass consumption applications.”

O’Leary added that the Biden administration’s mistake was that it focused on promoting supply, but neglected to stimulate demand for clean hydrogen. The Trump administration will have the same problem.

“The fundamental flaw with the vision of the hydrogen hubs was that there was no demand, there was no market for what they were going to produce,” O’Leary said.

The Trump administration could redefine what type of hydrogen qualifies for additional production tax credits, loosening requirements so that dirtier forms of hydrogen could qualify. It’s not clear that it would meaningfully change the poor economics.

“While the credit could survive due to its job-creating benefits in red states, Republicans are eyeing adjustments that might make it unrecognisable to Democrats and environmentalists,” J.P. Morgan analysts wrote in a note to clients in late March. “These changes could increase costs, posing a challenge for a Republican Party focused on budget savings. The 45V credit, which incentivises low-carbon hydrogen production, is seen as crucial for the nascent industry,” the bank added, referring to the specific tax credit for hydrogen production originally passed under the Biden administration.

ARCH2 is not alone. Most hydrogen projects around the country have stalled out.

“Economics generally prevail in the long run, and at 5-8 times the cost of grey H2 production, most big players and project developers found out the incentives did not cover the gap,” Technip Energies’ director Randy Kessler told Argus Media. Technip was hired to conduct feasibility studies and engineering designs for some of the projects and found that both green and blue hydrogen faced nearly insurmountable economic challenges.

“The people who made money were the consultants who told people what it all meant,” Kessler told Argus.

Latest setback for Appalachia

The looming failure of the ARCH2 hydrogen hub is the latest in a series of doomed economic development strategies promoted by the gas industry, backed by the region’s political leaders from both parties.

In the late 2000s and early 2010s, the fracking boom was supposed to bring riches to the region that would lead to broader economic development.

While production did explode, turning the region into a gas-producing giant, it did almost nothing for economic prosperity, according to research from ORVI. GDP increased significantly, but that money never actually benefited the bulk of the population. Oil and gas production is highly capital-intensive, but not labour-intensive. The counties most impacted by fracking lagged behind others in terms of income, population growth, and job creation.

By the mid-2010s, the industry rolled out a new vision. The surplus of gas would help create a petrochemical and plastics hub — a network of ethane crackers and storage facilities that would transform shale gas into the building blocks of plastic. A series of massive ethane crackers were proposed for the Ohio River Valley. Only one ended up getting built, Shell’s cracker plant in western Pennsylvania.

Not only did the petrochemical dream not pan out, but Shell is now considering offloading that petrochemical facility, if it can find a buyer. Shell has paid millions of dollars in fines for excess pollution from the plant.

And the economic promises from Shell’s investment have proven to be illusory. Beaver County, where the Shell cracker facility is located, is performing worse than neighbouring gas-producing counties and much worse than the rest of the country, according to an ORVI analysis. Notably, Beaver County is worse off economically than it was before the petrochemical facility was built.

“What makes it frustrating for me is that most of this was predictable. And, in fact, it was predicted,” O’Leary said.

During the Biden era, the gas industry capitalised off of federal money in the Inflation Reduction Act to roll out another iteration of the hub concept, this time for hydrogen. Now, that too looks to be at risk of failure.

ARCH2 has struggled to such a degree that last fall they put out a call for new proposals, looking for companies to come with new hydrogen projects.

ARCH2 did not respond to questions from Gas Outlook.

Other hydrogen hubs around the country are also struggling to gain momentum. In fact, hydrogen appears to be losing its lustre even from within the oil and gas industry, which is no longer positioning hydrogen as a key pillar of growth in the way it once was.

In its place, is arguably the latest growth story — LNG exports and the data centre boom. There are reasons to believe this trend is also being oversold, but even if successful, it’s not clear how exporting more LNG or feeding gas into data centres would benefit Appalachia. In fact, those trends could drive up the cost of gas, putting a burden on many people in the region.

“These industries really are structurally incapable of inducing economic prosperity,” O’Leary said.

(Writing by Nick Cunningham; editing by Sophie Davies)