The Treasury Department guidance for hydrogen tax credits is sparking debate about how the federal government will measure industry emissions and the role of nuclear power and carbon capture technology in developing “clean” fuel.
The guidance released in late December outlined how companies can obtain a tax credit for clean hydrogen production established in the Inflation Reduction Act, known as 45V. The credit is worth up to $3 per kilogram of hydrogen produced if emissions are low enough with prevailing wages and apprenticeship requirements. It scales down to as low as 60 cents per kilogram for hydrogen projects with higher emission levels.
Now, new questions are emerging about the plan that will be determined in coming months and could influence whether U.S. hydrogen production helps the environment.
The final rules “may be more beneficial comparatively to hydrogen production,” said Timothy Fox, managing director for ClearView Energy, noting that Treasury has “wiggle room” to make changes.
The guidance regulations are available for public comment until Feb. 26. A public hearing is scheduled for late March.
The Biden administration says it hopes the tax credit will lower the cost of hydrogen produced with renewable energy and fossil fuels tied to carbon capture to $1 per kilogram by 2031.
Under the guidance, companies must immediately use new clean electricity added to the grid and produced in the same region as a hydrogen production facility. By 2028, all companies will have to prove that they are producing hydrogen during the same hour new clean energy sources contribute to the grid — a policy that environmentalists say is key to keeping hydrogen emissions in check.
Upon release, environmentalists and progressive congressional Democrats praised the plan for provisions such as the requirement to use new clean power immediately.
But hydrogen producers and other Democrats slammed the rules, arguing that they would slow the development of hydrogen projects. The Hydrogen Forward coalition, which includes companies such as Bloom Energy and Linde, called the guidance “overly restrictive and unworkable.”
As the administration weighs public comments, here are three issues still to be decided in 2024 that could shape the emerging industry.
How do you define new clean energy?
Under the Treasury guidance, a clean electricity source is considered new if it comes online and starts powering the grid within three years before a hydrogen production facility uses it. For example, if a hydrogen facility comes online in January 2026, it must use clean power added to the grid between January 2023 and 2026.
Hydrogen producers also must get official documentation known as energy attribute certificates to prove that the new clean energy is powering their facilities and comes from the same region.
Additionally, the rules allow hydrogen producers to count existing clean electricity — such as wind, solar, nuclear and hydropower facilities — as a new energy source if those facilities increase their generation.
However, Treasury is seeking comments on multiple proposed exemptions.
One proposal would allow 5 to 10 percent of hourly clean energy generation from an existing facility powering the grid before 2023 to count as a new clean energy source. That means that power from some wind or solar farms or nuclear reactors operating now theoretically could qualify.
“That is a possible provision to look out for,” said Fox.
Fox said the provision could provide enough energy to produce 1.4 to 2.9 million metric tons of hydrogen annually, according to Clearview’s rough estimate. The U.S. makes roughly 10 million metric tons of hydrogen annually today.
But some environmentalists say they are worried the proposal would undermine the push for “additionality,” or the idea that hydrogen should be produced with added clean electricity on the grid.
“There is that potential sledgehammer impact of just allowing it 5 to 10 percent writ large,” said Rachel Fakhry, emerging technologies policy director for the Natural Resources Defense Council. “Theoretically, we’re deeply concerned about that just watering down the whole intent.”
The administration suggests the 5-to-10-percent proposal could be appropriate because existing power plants could increase their output for hydrogen production during periods when those plants typically reduce power now.
For example, there are times when power plants reduce how much energy they produce in an hour, and they typically reduce generation in the fall and spring when electricity demand is lower than average, according to the U.S. Energy Information Administration.
Yet pulling 5 to 10 percent of existing clean power could require tapping grid electricity. A new study from the Rhodium Group says that could lower or increase emissions, depending on what sources are firing the grid in a given region.
Another question is whether an exemption should be granted in areas where the grid is 100 percent clean.
There are few places in the United States where the grid is 100 percent clean, however. Twenty-three states have committed to having a 100 percent clean grid, but those commitments generally kick in after the 45V tax credit expires in 2032, according to the Clean Energy States Alliance.
Will nuclear get a boost?
Treasury’s guidance doesn’t detail how “pink” hydrogen producers using nuclear power can benefit from the credit, but it does offer some indirect olive branches to the nuclear industry. Even so, it is yet to be determined how much the incentives might boost reactors.
“A 5 percent threshold really does almost nothing for [pink hydrogen], it just doesn’t make [hydrogen production] financially feasible,” said Marty Pugh, a corporate tax partner at K&L Gates.
Similarly, Barbara de Marigny and Thomas Holmberg, partners at the law firm Baker Botts, said on a joint call that some hydrogen developers, including ones using nuclear power, are “extremely unhappy” with the idea of allowing 5 to 10 percent of hourly clean energy from existing reactors to count as new generation. The incentive is not enough to support the costs of nuclear-powered hydrogen projects, they say.
Another Treasury proposal that potentially could boost nuclear would allow clean energy facilities slated for retirement to count as new energy if they stay online because of added revenue from hydrogen production.
Treasury cited EIA data in the tax rules showing that an estimated five percent of current nuclear power plants may retire by 2032.
However, Fox of ClearView Energy said it “may be harder” for nuclear power plants to argue they will retire because of a different tax credit for zero-emission nuclear production called 45U that could help keep plants online longer, with or without hydrogen. Nuclear power plants can qualify for both 45U and 45V.
Nathan Howe, an associate at K&L Gates, made a similar point, saying it is “an incredibly burdensome task” to prove a power plant would have shut down unless it partnered with a hydrogen producer. Pugh said plans to shut down nuclear power plants are weighed over many years and change as market conditions evolve.
For some environmentalists, the ability to count power plants that avoid shutting down as new clean energy is reasonable but needs safeguards to avoid abuse.
“Everyone’s gonna want to claim, ‘Oh, woe is me, I’m on the verge of retirement, you need to give me this massive new revenue stream,’” said Wilson Ricks, a mechanical and aerospace engineering doctoral candidate at Princeton University. “Determining which of those claims are legitimate is the really hard part.”
NRDC’s Fakhry said that whether a power plant that stays online because of hydrogen production should count as new clean energy for 45V should be determined on a “case-by-case” basis.
The Nuclear Energy Institute, a trade group, has long opposed the requirement that hydrogen must be produced with new clean energy sources. The group has argued the requirement disqualifies existing nuclear power, which they say goes against Congress’s original intent of producing hydrogen with low emissions.
Treasury’s guidance also did not clarify whether a nuclear power plant directly powering a hydrogen production facility could count as new clean energy, a policy sought by the nuclear trade group.
When contacted for comment, NEI pointed to a statement from President Maria Korsnick when Treasury released its 45V rules late last year. At the time, Korsnick said the provision that hydrogen producers must use new clean energy will make “many clean hydrogen projects uneconomic and will create years of delay for the few projects that can move forward.”
How many fossil fuel projects will qualify?
For “blue” hydrogen producers aiming to use fossil fuels and carbon capture, a key question is whether they should apply for 45V or a different tax credit for carbon capture technology, known as 45Q.
The answer could ultimately impact which projects get supported and the level of industry emissions.
Hydrogen producers cannot use both tax credits for the same facility under the Inflation Reduction Act.
Treasury’s hydrogen guidance adopted the 45VH2-GREET model, which outlines how federal officials will count the emissions for eight types of production, including five methods using fossil fuels with carbon capture. Currently, Treasury is seeking comments on how blue hydrogen producers can verify their rate of carbon capture.
The GREET model requires companies to consider upstream emissions, such as the processing and delivery of fuel, as well as direct emissions from hydrogen production facilities. Analysts say until more specifics on projects are released, it’s uncertain how much blue hydrogen might qualify.
Extensive questions for blue hydrogen producers “demonstrate the proposed regulations’ general aversion to fossil-fuel powered electrolytic hydrogen, and likely will further delay the deployment of a robust hydrogen economy in the United States,” wrote partners at K&L Gates in a blog post.
DOE did not include five types of hydrogen production, including using renewable natural gas from animal lagoons and fossil-fuel-based methane pyrolysis, in the GREET model. Methane pyrolysis is an emerging technology that splits natural gas into hydrogen gas and solid carbon.
The department is seeking comment on other forms of renewable natural gas, aiming for clarity on issues such as the availability of certificates detailing emissions associated with the transportation of the fuel.
For fossil-fuel-based types of hydrogen production not included in the model, companies will have to petition DOE for a provisional emissions rate to determine if their projects can meet the bar for 45V.
As for 45Q, the carbon capture industry is awaiting updated guidance on how to receive that credit, which provides a monetary value for carbon dioxide that’s permanently stored through geologic storage, enhanced oil recovery or use in products.
Finalizing 45Q guidance will be essential to provide the certainty necessary for “carbon management projects to move forward in securing project financing and breaking ground on construction, “ said the Carbon Capture Coalition — a group of companies and organizations supporting the technology — after the release of the hydrogen plan.
Reporter Christa Marshall contributed.
