‘Green’ hydrogen debate heats up ahead of tax-credit decision

The Biden administration plans to set strict requirements on the sources of carbon-free electricity used by hydrogen producers seeking lucrative federal incentives, according to news reports citing leaked information regarding long-awaited rules for the Inflation Reduction Act’s clean hydrogen tax-credit program.

Politico and Bloomberg this week reported on leaked details of draft guidance from the U.S. Treasury Department. Anonymous sources indicated that Treasury will adopt tax-credit requirements that climate advocates have pushed for rather than the approach backed by fossil fuel and utility companies.

Siding with the climate advocates are energy analysts, corporate clean-hydrogen buyers coalitions, state legislators and many companies competing in the nascent clean hydrogen field who say strict rules are vital to avoid directing taxpayer dollars toward hydrogen production that would increase carbon emissions rather than reduce them.

On the other side are companies building hydrogen production facilities, as well as industry groups with members including fossil fuel companies and utilities. They have been arguing for the past year that such strict rules could strangle early investment in green hydrogen, but a number of independent studies have cast doubt on these claims.

The draft guidance in question will not be final, and the Treasury Department has declined to comment on it. But as described in news reports, it would propose restrictions that would meet or even exceed those set by the European Union last year to require that the power used to make green hydrogen must be tracked on an hour-to-hour basis to the zero-carbon resources that generated it. What’s more, it would require that those zero-carbon resources must be newly built specifically to serve hydrogen production facilities, rather than being drawn from existing generation whose power is diverted from other uses.

If these provisions make it into the final version, ​“We would consider that to be a monumental win for climate, for consumers and for the hydrogen industry itself,” said Dan Esposito, senior policy analyst with decarbonization think tank Energy Innovation.

Bloomberg cited unnamed people with knowledge of Treasury’s plans who said that the draft guidance would require hydrogen projects to be supplied with new clean-power sources operating on the same grid, as measured on an annual basis through 2027, then switching to being measured on an hourly basis starting in 2028, with no allowance for projects operational before then to continue to use annual accounting after that time.

And Politico reported that the draft guidance would require electrolyzers to use carbon-free electricity from resources built no earlier than three years prior, to ensure that the gigawatt-scale demands of hydrogen production are supplied by new carbon-free resources rather than using clean power already available on the grid.

If these leaked requirements do end up in Treasury’s draft guidance, which is expected to be formally released as early as next week, it would represent a victory for proponents of the so-called ​“three pillars” framework for maximizing the decarbonization potential of green hydrogen production, which is predicated on hourly matching, deliverability, and additionality of clean electricity supplies.

Without those three requirements in place, companies could earn federal tax credits for hydrogen production that could actually increase overall carbon emissions compared to doing nothing at all, or could even create double the emissions of producing hydrogen with fossil fuels, according to some studies.

“The evidence here was far too loud for the administration to ignore,” said Rachel Fakhry, who leads the hydrogen and energy innovation portfolio at the Natural Resources Defense Council. ​“We’re really hoping the administration will hold the line on this.”

The logic behind the ​“three pillars”

The Inflation Reduction Act’s 45V tax credit offers tiers of incentives for hydrogen produced with low carbon emissions, including methods that use electricity to convert water into hydrogen via electrolyzers — so-called ​“green” hydrogen. The tiers are based on carbon-emission levels; producers seeking the most lucrative $3-per-kilogram tax credit must emit no more than 0.45 kilograms of carbon dioxide per kilogram of hydrogen produced.

That’s far less than the roughly 10 kilograms of carbon dioxide that’s emitted per kilogram of ​“gray hydrogen” produced from fossil gas, which is how the vast majority of the world’s hydrogen is made today.

In fact, to hit the 0.45-kilogram target, electrolyzers have to use almost entirely carbon-free power for every hour they operate, said Jesse Jenkins, head of Princeton’s Zero Lab and co-author of a 2022 study that provided one of the earliest warnings of the potential emissions-increasing impact of lax rules for the 45V tax credit.

“If just 2 percent of your energy comes from gas plants, or 1 percent from coal plants, you’ve busted that 0.45-kilogram” limit, he said.

While lower tax credits are available for hydrogen produced with higher carbon emissions, the $3-per-kilogram top-tier credit is seen as vital to making green hydrogen cost-competitive with fossil-gas hydrogen. According to industry estimates, green hydrogen currently costs $5–$6 per kilogram, compared to $1–$1.50 for hydrogen produced via gas.

The big unknown is how the Treasury Department will set the guidelines for determining how much CO₂ is emitted during hydrogen production. That’s why the department’s guidance, which has been repeatedly postponed from an initially expected release date of early this year, has prompted high-profile lobbying campaigns from industry groups that could stand to reap tens of billions of dollars of taxpayer largesse depending on how the tax credit is structured.

Some of these groups have argued that imposing strict rules for clean-energy accounting will stifle the early investment needed for clean hydrogen to scale up to meet the demands of a zero-carbon future. Green hydrogen is considered vital to decarbonizing sectors such as steelmaking, chemicals manufacturing and heavy transportation. The Biden administration has set a goal of producing 10 million metric tons per year of low- and zero-carbon hydrogen by 2030, up from almost nothing today.

Overly strict tax-credit rules ​“would deal a major setback to the evolution of hydrogen in the United States and a real setback to the goals of decarbonization and the IRA,” said Frank Wolak, president and CEO of the Fuel Cell and Hydrogen Energy Association, a trade group with more than 100 members including utilities, automakers and manufacturers of fuel cells, engines and turbines.

“We want the most flexibility and the interpretation of the intent of the IRA as it has been written — which is no additionality, no geographic deliverability, and annual average” clean power accounting, Wolak said. ​“What we’re advocating for is what is consistent with the practices in the renewable energy industry, which have been consistent for the past 20 years. Don’t create a double standard.”

The problem with that approach, according to proponents of the three-pillars approach, is that the methods now used to measure the carbon-intensity of electricity purchased by companies, as set in international standards such as the Greenhouse Gas Protocol, fail to differentiate between clean energy procured on an average annual basis and the actual electricity being generated and consumed from hour to hour.

Under annual averaging methods now in play, an electricity buyer could purchase an amount of solar power equivalent to its annual electricity usage and claim it is carbon-neutral, even for the share of electricity it consumes overnight when solar is not feeding into the grid.

Nor do today’s structures require buyers to prove that the carbon-free energy they’re sourcing can be physically delivered to where they consume electricity. Examples include companies signing contracts for wind power generated in Texas, which operates a power grid that’s largely disconnected from the rest of the country, to claim carbon-neutrality for electricity consumed at operations outside of the state.

Finally, today’s structures do not take into account whether clean energy being procured is ​“additional” — that is, whether wind and solar farms or hydroelectric, geothermal or nuclear power plants would have been built and kept running even if a company did not commit to buy the power they produce.

Without such additionality requirements, hydrogen producers could purchase clean power already being generated, which would mean that other electricity buyers would be forced to use electricity that comes from other sources — and today, those sources are largely fossil fuels.

The fight over emissions and costs

The disputes over the 45V tax-credit rules have hinged on two questions. The first: Will the rules increase green hydrogen producers’ costs so much that they will never be competitive? The second: Are the rules really necessary to ensure that green hydrogen production won’t lead to the unintended consequence of increasing emissions?

On that front, the Natural Resources Defense Council has cited a number of studies that conclude that the three pillars are not only vital to decarbonization but also would not be nearly as harmful to the industry’s economics as opponents say they would be.

“If you don’t have these three thresholds,” Fakhry said, ​“emissions will increase, consumer prices will increase, and weaker rules will send the wrong signal to industry on what to invest in.”

That perspective is backed up by a June report from analysis firm Evolved Energy Research, which found that ​“the economic signals for development of clean hydrogen production and new markets from IRA are so powerful that the 45V tax credit will drive large-scale development of a hydrogen economy, even if the Treasury Department should implement stricter accounting of lifecycle emissions based on the three pillars.”

Without these rules in place, however, “​the poor efficiency of hydrogen production means the emissions reduction from displacing fossil fuels with hydrogen or hydrogen-derived fuels may not be enough to offset the emissions increase in electricity production,” the report states.

The three-pillars methodology gained further support from an analysis released last month by the Electric Power Research Institute, a nonprofit research organization that receives much of its funding from U.S. utilities. That analysis found that ​“45V credits could lead to significant deployment of electrolytic hydrogen, even with more stringent qualification criteria including hourly matching of zero-carbon electricity generation and electrolysis production” — a finding that contradicts the claims made by some industry groups that strict rules would crimp the industry’s development.

“All three qualification pillars — hourly temporal matching, use of new generation resources, and local deliverability — are required to ensure net economy-wide CO₂ reductions from 45V across all scenarios during the subsidy period,” the EPRI report concludes.

But other studies have reached markedly different conclusions. For example, the American Council on Renewable Energy trade group published a study that found the ​“hourly matching requirement results in much higher costs for hydrogen production than an annual matching requirement, potentially a significant impediment to the development of a nascent industry,” while having little impact on overall carbon emissions.

Groups opposing strict rules have cited these studies to support their contention that imposing them would violate the Inflation Reduction Act’s goal of using the tax credits to grow a healthy and competitive clean hydrogen industry.

But Jenkins highlighted what he described as significant flaws in the ACORE-commissioned study, as well as in another study from energy consultancy Wood Mackenzie released early this year that reached similar conclusions. While the distinctions are complex, to put it in simple terms, those studies failed to model how adding gigawatts’ worth of hydrogen electrolyzers to power grids would affect the electricity system as a whole, he said.

Those effects would include incentivizing investment in new clean generation and the retirement of old, dirty power plants in the markets where hydrogen producers are operating, as well as altering the mix of power that remains available for other uses — including electric vehicles and electric building heating systems.

Princeton’s Zero Lab backed up these assertions in an April meta-analysis of seven different studies, Jenkins said. ​“There’s a strong consensus, using the best appropriate methods, that concludes the three pillars are necessary, and that if we’re going to subsidize clean hydrogen, it needs to be clean.”

There’s also the risk that adding gigawatts’ worth of electrolyzers to the grid without requiring that they get their clean energy from newly added sources could drive up electricity costs for consumers. In an October letter to the Biden administration, a group of state and national consumer-advocacy organizations argued that it would be ​“fundamentally unfair to shift the costs of subsidized hydrogen production onto ratepayers, especially when hydrogen producers are receiving an extremely lucrative tax credit that can handily cover any premium associated with complying with the three pillars.”

What’s more, Jenkins argued, any analysis of competing costs that ignores the underlying emissions impact of more lax accounting structures misses the point.

“It is true that if you’re going to meet the three pillars, it is a more stringent standard — it requires you to do something different, not just move things around on paper,” he said. ​“That’s the cost of clean hydrogen — what it actually costs.”

Who’s fighting the three pillars — and who isn’t

Pushback against the three-pillars approach has come primarily from companies planning to invest in hydrogen production sites that are unlikely to be able to earn the full tax credit if strict rules are put into effect.

Those include Plug Power, a maker of fuel cells and electrolyzers that plans to invest more than $1 billion in hydrogen electrolysis facilities. Those sites are in California and Texas, where solar and wind power are growing quickly — but they’re also located in Georgia, which produces most of its electricity from fossil fuels, and the company’s home state of New York, where its facility would rely on existing hydropower.

The Clean Hydrogen Future Coalition — a group that includes BP, Chevron, ExxonMobil and Shell as well as trade associations for U.S. fossil-gas producers and the nuclear energy industry — has been lobbying heavily against stricter rules for 45V, which could negatively impact the profitability of projects that rely on fossil fuels for hydrogen production.

Florida-based utility holding company and clean-energy developer NextEra Energy has argued that applying the three pillars to the 45V tax-credit program would drive up costs and limit production to a handful of locations. NextEra plans for hydrogen to play a major role in the decarbonization goals of its subsidiary utility Florida Power & Light, which will use it to replace fossil gas in power plants — an application of hydrogen that energy analysts say runs a high risk of resulting in increased carbon emissions.

NextEra Energy is a member of the American Clean Power Association trade group, which has also come out against stricter rules for the 45V program. In a Monday statement, ACP CEO Jason Grumet said, ​“It is surprising and disappointing that the administration would propose such a rigid approach that is at odds with decades of learning about new technology deployment.”

“The administration’s failure to provide an economically viable phase-in for the transition from annual to hourly matching will make initial green H₂ production significantly more costly than higher polluting options,” Grumet said. ​“Companies and investors will not risk the tens of billions of dollars required to deploy a first wave of commercial facilities.”

“Absent a meaningful number of first movers, a new industry will not develop,” Grumet continued. A survey of ACP members considering green hydrogen investments found that a majority would not move projects forward under an hourly matching regime, which would increase the cost of hydrogen production by 20 to 150 percent depending on the region.

But many other companies investing in green hydrogen production have come out in support of stricter rules. Hy Stor Energy plans to build a hydrogen production and storage complex in Mississippi powered by solar and wind farms. Energy company AES and industrial-gas producer Air Products plan a hydrogen production facility in Texas to be powered by about 1.4 gigawatts of new renewable energy. And renewable energy developer Intersect Power has lined up more than $6 billion in project finance to build renewables to supply gigawatts’ worth of clean hydrogen production.

“We hear from some particularly loud industry voices that it will not be possible to develop projects under those rules,” Jenkins said. ​“But we have a whole host of industry players who are developing projects under those rules and are moving billion-dollar projects forward,” who ​“see these rules as absolutely vital to get this industry off the ground in a sustainable way.”

Mike Sloan, CEO of Synergetic, a green hydrogen developer that resigned its membership in ACP last week in protest of the trade group’s stance on the 45V tax credit, agreed with this assessment.

“The reality is, the incentives are quite high, and you can get a lot done with the incentives on the table right now,” he said. But ​“you can’t build projects everywhere.”

In particular, it doesn’t make sense to build green hydrogen production in parts of the country that aren’t primed for development of ample and low-cost renewable energy, he said. ​“We’re developing sites primarily in high-production areas that have good wind and solar.”

Setting up rules that allow hydrogen producers to earn the full tax credit in areas where they can’t actually get clean electricity not only runs the risk of increasing overall carbon emissions, he said. It also runs the risk of leaving the industry ill prepared to survive once the 45V tax credits expire, which is slated to happen 10 years after a project begins production under current rules.

That’s because the cost of electricity is the key variable that determines the cost of green hydrogen, Sloan said — and the lowest-cost power in the future will come from increasingly low-cost wind and solar power. Green hydrogen production projects that are designed to use that power when it’s available — by using electrolyzer technologies that can ramp up and down to meet surges and sags in supply, for example — will be far better prepared to thrive in that future than those that are cost-effective only when they can run around the clock on whatever power is available from the grid.

“Quite a lot of the projects that will get built will not be viable in a post-credit environment,” he said. ​“Is that where we want the tax credits to go? To projects that only exist because of the tax credits?”

* * *

For more, read our three-part series: The great ​“green hydrogen” battle.