Amena has an important explainer on the brewing hydrogen tax credit debate and a chart breaking down the costs. Plus: We have a cool photo showing some PV with RVs!
A battle as complex as it is significant is brewing in the global race to secure government subsidies to scale up an American clean hydrogen economy.
The 2022 Inflation Reduction Act included a ten-year production tax credit designed to turbocharge the nascent clean hydrogen industry and help meet the Biden administration’s goal of producing 10 million metric tons of the colorless, odorless gas by 2030.
Clean hydrogen can be produced either from natural gas equipped with carbon capture and storage equipment or with zero-emitting energy used to split water molecules in a process known as electrolysis in a machine aptly called an electrolyzer. Today, 99% of hydrogen made in the U.S. is produced with unabated fossil fuels and less than 1% is made with renewables-powered electrolysis.
The U.S. Internal Revenue Service is deliberating which hydrogen projects will qualify for the tax credit based on how much carbon dioxide they emit during production. It’s expected to release final guidance in mid-August, with a draft due out early this summer.
This debate reflects a turning point. For decades, factions fought over whether or how to pass comprehensive climate policy. IRA and other new U.S. laws are now scrambling usual alliances, requiring deep dives into complex science and technologies. Expect similar fights over other climate tech, like direct air capture and sustainable aviation fuel.
Specifically, the IRS is weighing to what extent hydrogen made with grid-connected electricity should be equally eligible for the tax credit as hydrogen made exclusively from dedicated renewable power. Grid power varies by region, but on aggregate it’s coming largely from fossil fuel plants and, to an increasing extent, renewables.
If the IRS does include hydrogen made from grid electricity, then it must make another contentious determination: whether emissions should be tallied on an hourly, monthly, quarterly or annual basis.
“The challenge for the IRS is to create rules that accurately account for the emissions of producing hydrogen, without constraining the electrolyzer industry, which is clearly in its infancy,” Maria Martinez, Breakthrough Energy’s U.S. policy and advocacy director, told Cipher.
The European Union grappled with this issue a year ago, reaching a compromise in February to phase in standards that would count hydrogen as coming from renewable sources when its production is matched by generation on an hourly basis starting in 2030.
Unlikely alliances have formed along different sides of this issue in the U.S. Some say a relaxed federal tax credit will jumpstart the sector, helping lower renewable hydrogen costs stemming from pricey electrolyzer equipment by using electricity from the grid. Others prefer stricter rules around the credit, arguing grid-powered hydrogen will increase carbon emissions far more than making the gas from unabated fossil fuels.
Others call for a middle ground approach similar to Europe that would phase in stringent rules. Further muddying the waters, some stakeholders agree on some aspects and disagree on others.
Princeton University’s Zero-Carbon Energy Systems Research and Optimization Laboratory favors a strict approach. The group’s recent study concluded grid-powered electrolysis would yield a carbon emissions rate nearly double that of producing hydrogen from fossil fuels.
The Princeton researchers contend in the report the only way hydrogen producers using grid power should qualify for the tax credit is if they “match 100% of their electricity consumption on an hourly basis with physically deliverable, 'additional' clean generation,” ensuring effective emissions rates equivalent to electrolysis powered exclusively by renewables.
The researchers are referring to a concept known as additionality, or ensuring hydrogen will come from clean energy that’s either new or upgraded.
To the Princeton camp, hourly matching and deliverability means producing hydrogen close to where and when renewable power is being generated, preferably during the day when there is abundant wind and sunshine.
Princeton’s findings have found support among environmental groups like the Clean Air Task Force, climate-focused think tanks like Energy Innovation Policy and Technology LLC and among electrolyzer manufacturers like startup Electric Hydrogen.
Dan Esposito, senior policy analyst with Energy Innovation who wrote a paper independently verifying Princeton’s findings, said the use of existing clean energy resources would “cannibalize” the grid.
Grid operators, he said, would turn to the next available cheapest power source—fossil fuels—to replace the clean power used up by electrolysis.
Making hydrogen from grid power means “taking tax dollars in support of supposedly green technology that is actually creating more emissions because it is drawing power off the grid, which is dirty,” said Raffi Garebadian, CEO of Electric Hydrogen, an electrolyzer company.
Experts generally agree energy drawn from the grid can be verified as clean through certificates or power purchase agreements, but disagreements emerge over how frequently and feasibly that power can be measured and verified.
“[N]o harmonized and consistent national accounting standard and tracking system for 24/7 hourly matching exists today” and those that exist are geographically limited, Breakthrough Energy said in public comments filed to the IRS. Breakthrough recommends the IRS include additionality and deliverability in its rules while specifically phasing in mandates on hourly matching to give the market time to adapt.
On another side of the debate, odd bedfellows like large multinational chemical companies, some hydrogen producers and renewable energy advocates argue against a too-strict tax credit.
The IRS must straddle “a fine line” between helping scale up production from renewables and making the economics work, said Mona Dajani, partner at the law firm Shearman & Sterling, whose clients include energy companies like Mitsubishi Partners.
Source:BloombergNEF and Business Council for Sustainable Energy• Production costs assume tax credits of $3 per kilogram for hydrogen from electrolysis and from natural gas with carbon capture and storage (CCS). Data reflects inflation-adjusted figures in 2023.
Hydrogen producers Air Liquide and Plug Power question the practicality of producing hydrogen only where clean power is generated.
“An appropriate location for hydrogen production is not always aligned with the availability of low emission energy sources,” said Dave Edwards, Air Liquide USA’s hydrogen energy director, told the IRS.
“Limiting hydrogen production to times of renewable energy generation can significantly hinder the adoption of applications that need an uninterrupted flow of hydrogen and, in turn, impede investment in new green hydrogen infrastructure,” ACP wrote in its December comments.
In an interview more recently, ACP’s CEO Jason Grumet told Cipher the urgency of climate change should mean society builds up a clean hydrogen sector while simultaneously greening the electricity grid itself. “There’s just not time to do this sequentially,” Grumet said.
Cipher Executive Editor Amy Harder contributed to this article.
Editor’s note: Maria Martinez is U.S. policy and advocacy director at Breakthrough Energy and investors at Electric Hydrogen include Breakthrough Energy Ventures (BEV), a program of Breakthrough Energy, which also supports Cipher.
Amy’s take: It’s notable when influential people like environmentalist Bill McKibben step out like this. I wonder if this is the beginning of more, or if this article is an outlier.
European countries aim to turn North Sea into green power engine — Reuters
Anca’s take: The fact that so many heads of state descended on the small Belgian coastal city of Ostend reflects countries’ renewables ambitions in the North Sea. Delivering on that ambition will be the real challenge.
Climate Change Deception Lawsuits Move Closer to State Trials — Bloomberg Law
Amena’s take: The only story I have seen so far explaining that the U.S. Supreme Court’s denial of oil company petitions opens the door for more lawsuits from U.S. municipalities.
Amy’s take: All these dispatches from India are worth a read, but this (last) one captures the narrow road ahead—both literally and when it comes to tackling climate change in India and beyond, as the journalist Bill Spindle writes.
Biden’s newest big climate rule will rest on rarely used technology — E&E News (paywall)
Amena’s take: This story stands out because it highlights the possible use of carbon capture and storage, which hasn’t been economically feasible for power plants (though it has in other industrial facilities).
Chile’s president moves to bring lithium under state control — Financial Times Anca’s take: Expect more of these moves, with countries (especially low- and medium-sized ones) keen not to miss out on economic gains as demand for their resources heats up.
Dr Sultan Al Jaber says China is model for mixing economic growth with energy transition — The National News
Amy’s take: It'd be interesting (if controversial) to do a serious evaluation of what parts of China’s leadership style could be adapted into a democracy to empower it to build things more quickly.
India’s heatwaves putting economy, development goals at risk – study — Reuters
Amena’s take: This figure is frightening: As much as 90% of India's total area now lies in extreme heat danger zones.
A Green Hydrogen Economy Depends on This Little-Known Machine — Bloomberg
Amy’s take: Hydrogen made from electrolyzers was popular many decades ago but lost out to today's dirtier production method. Sound familiar? Electric cars of early automotive days lost out to their gasoline counterparts but are now coming back.
More of what we're reading:
One in five cars sold this year will be electric – IEA — Reuters
Japan receives first low-carbon ammonia cargo from Saudi Arabia — Reuters
Shell pulls out of large carbon capture project in northern England — Reuters
U.N. chief chides Biden, other world leaders — AP News
AND FINALLY...
PV with the RVs
This drone photo was taken by Brian Harder, Cipher reader and older brother to our own Amy Harder. He and his family recently stayed at this RV park in Hermiston in Eastern Oregon that prides itself on its ample supply of solar panels. Aptly named PanelView RV Park, it opened in 2020 and took advantage of government funding, including a grant from the U.S. Agriculture Department, according to this East Oregonian article.
Each week, we feature a photo that is somehow related to energy, the thing we all need but don’t notice until it’s expensive or gone. Email your ideas and photos to news@ciphernews.com.
Editor’s note: In addition to supporting Cipher, Breakthrough Energy also supports and partners with a range of entities working to tackle climate change, including nonprofits, corporations, startups and research firms. For more information on Cipher’s editorial policy, click here.
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