How to understand the U.S. battle over hydrogen tax credits

Washington D.C. Correspondent

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<header><h1>How to understand the U.S. battle over hydrogen tax credits</h1><a href="" rel="author"></a><span class="title"></span><time rel="pubdate" datetime="2023-04-26T00:00:00-04:00">Apr 26, 2023</time></header><p>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.</p><p>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 <a href="https://liftoff.energy.gov/clean-hydrogen/" target="_blank" rel="noopener" data-hs-link-id="0">goal</a> of producing 10 million metric tons of the colorless, odorless gas by 2030.</p><p>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.</p><p>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 <a href="https://www.congress.gov/117/plaws/publ169/PLAW-117publ169.pdf?utm_source=hs_email&amp;utm_medium=email&amp;_hsenc=p2ANqtz-8SPVdA6iXdz_o5NGPRsKCtUg6y6cS325iwyymfdzSSbChPZLhtms3K8GrAXhKPZ0G7qaPP" target="_blank" rel="noopener" data-hs-link-id="0">guidance</a> in mid-August, with a draft due out early this summer.</p><div class="callout">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.</div><p>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 <a href="https://ciphernews.com/articles/renewables-boss-says-world-needs-to-prop-up-new-energy-system/" target="_blank" rel="noopener">coming</a> largely from fossil fuel plants and, to an increasing extent, renewables.</p><p>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.</p><p>“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.</p><p>The European Union grappled with this <a href="https://ciphernews.com/articles/fight-brews-in-europe-over-how-to-supply-renewable-hydrogen/" target="_blank" rel="noopener">issue</a> a year ago, reaching a <a href="https://ciphernews.com/articles/fight-brews-in-europe-over-how-to-supply-renewable-hydrogen/" target="_blank" rel="noopener">compromise</a> 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.</p><p>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.</p><p>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.</p><p>Princeton University’s Zero-Carbon Energy Systems Research and Optimization Laboratory favors a strict approach. The group’s recent study <a href="https://acee.princeton.edu/acee-news/without-guidance-ira-tax-credit-may-do-more-harm-than-good/?utm_source=hs_email&amp;utm_medium=email&amp;_hsenc=p2ANqtz-8SPVdA6iXdz_o5NGPRsKCtUg6y6cS325iwyymfdzSSbChPZLhtms3K8GrAXhKPZ0G7qaPP" target="_blank" rel="noopener" data-hs-link-id="0">concluded</a> grid-powered electrolysis would yield a carbon emissions rate nearly double that of producing hydrogen from fossil fuels.</p><p>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 <em>hourly basis</em> with <em>physically deliverable, &#8216;additional&#8217;</em> clean generation,” ensuring effective emissions rates equivalent to electrolysis powered exclusively by renewables.</p><p>The researchers are referring to a concept known as additionality, or ensuring hydrogen will come from clean energy that’s either new or upgraded.</p><p>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.</p><p>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.</p><p>Dan Esposito, senior policy analyst with Energy Innovation who wrote a <a href="https://energyinnovation.org/wp-content/uploads/2023/04/Smart-Design-Of-45V-Hydrogen-Production-Tax-Credit-Will-Reduce-Emissions-And-Grow-The-Industry.pdf?utm_source=hs_email&amp;utm_medium=email&amp;_hsenc=p2ANqtz-8SPVdA6iXdz_o5NGPRsKCtUg6y6cS325iwyymfdzSSbChPZLhtms3K8GrAXhKPZ0G7qaPP" target="_blank" rel="noopener" data-hs-link-id="0">paper</a> independently verifying Princeton’s findings, said the use of existing clean energy resources would “cannibalize” the grid.</p><p>Grid operators, he said, would turn to the next available cheapest power source—fossil fuels—to replace the clean power used up by electrolysis.</p><p>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.</p><p>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.</p><p>“[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 <a href="https://www.documentcloud.org/documents/23784274-irscomments_breakthroughenergy?utm_source=hs_email&amp;utm_medium=email&amp;_hsenc=p2ANqtz-8SPVdA6iXdz_o5NGPRsKCtUg6y6cS325iwyymfdzSSbChPZLhtms3K8GrAXhKPZ0G7qaPP" target="_blank" rel="noopener" data-hs-link-id="0">public comments</a> 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.</p><p>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.</p><p>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 &amp; Sterling, whose clients include energy companies like Mitsubishi Partners.</p><div id="attachment_825" style="width: 1310px" class="wp-caption alignnone"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-825" class="wp-image-825 size-full" src="https://ciphernews.com/wp-content/uploads/2023/04/042403_HYDROGENTAX_newsletter.jpg" alt="" width="1300" height="849" srcset="https://www.ciphernews.com/wp-content/uploads/2023/04/042403_HYDROGENTAX_newsletter.jpg 1300w, https://www.ciphernews.com/wp-content/uploads/2023/04/042403_HYDROGENTAX_newsletter-300x196.jpg 300w, https://www.ciphernews.com/wp-content/uploads/2023/04/042403_HYDROGENTAX_newsletter-1024x669.jpg 1024w, https://www.ciphernews.com/wp-content/uploads/2023/04/042403_HYDROGENTAX_newsletter-768x502.jpg 768w, https://www.ciphernews.com/wp-content/uploads/2023/04/042403_HYDROGENTAX_newsletter-1120x731.jpg 1120w, https://www.ciphernews.com/wp-content/uploads/2023/04/042403_HYDROGENTAX_newsletter-775x506.jpg 775w, https://www.ciphernews.com/wp-content/uploads/2023/04/042403_HYDROGENTAX_newsletter-545x356.jpg 545w" sizes="(max-width: 1300px) 100vw, 1300px" /><p id="caption-attachment-825" class="wp-caption-text">Source: <a href="https://bcse.org/market-trends/?utm_source=hs_email&amp;utm_medium=email&amp;_hsenc=p2ANqtz-9oPlajxULRV4KQ2RGnlFbQChqId2O91GQzjiVqehDCFM_d6YMiuyKrE0L7kbpKhYVJn0qy" target="_blank" rel="no noopener opener">BloombergNEF and Business Council for Sustainable Energy</a> • 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.</p></div><p>Hydrogen producers Air Liquide and Plug Power question the practicality of producing hydrogen only where clean power is generated.</p><p>“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, <a href="https://www.documentcloud.org/documents/23784635-irs-2022-0029-0054_airliquide?responsive=1&amp;title=1&amp;utm_source=hs_email&amp;utm_medium=email&amp;_hsenc=p2ANqtz-8SPVdA6iXdz_o5NGPRsKCtUg6y6cS325iwyymfdzSSbChPZLhtms3K8GrAXhKPZ0G7qaPP" target="_blank" rel="noopener" data-hs-link-id="0">told</a> the IRS.</p><p>In their IRS comments, two groups representing renewable energy developers, <a href="https://www.documentcloud.org/documents/23784627-irs-2022-0029-0070_attachment_1?responsive=1&amp;title=1&amp;utm_source=hs_email&amp;utm_medium=email&amp;_hsenc=p2ANqtz-8SPVdA6iXdz_o5NGPRsKCtUg6y6cS325iwyymfdzSSbChPZLhtms3K8GrAXhKPZ0G7qaPP" target="_blank" rel="noopener" data-hs-link-id="0">the American Council on Renewable Energy</a> and the <a href="https://www.documentcloud.org/documents/23784634-irs-2022-0029-0175_american-clean-power-association?responsive=1&amp;title=1%22%20%5Ch%20HYPERLINK%20%22https%3A%2F%2Fwww.documentcloud.org%2Fdocuments%2F23784634-irs-2022-0029-0175_american-clean-power-association&amp;utm_source=hs_email&amp;utm_medium=email&amp;_hsenc=p2ANqtz-8SPVdA6iXdz_o5NGPRsKCtUg6y6cS325iwyymfdzSSbChPZLhtms3K8GrAXhKPZ0G7qaPP" target="_blank" rel="noopener" data-hs-link-id="0">American Clean Power Association</a>, also expressed support for looser rules and took particular issue with the concept of hourly matching.</p><p>“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.</p><p>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.</p><p><em>Cipher Executive Editor Amy Harder contributed to this article.<br /></em><br /><em>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.</em></p>
How to understand the U.S. battle over hydrogen tax credits

by -
April 26, 2023
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. In their IRS comments, two groups representing renewable energy developers, the American Council on Renewable Energy and the American Clean Power Association, also expressed support for looser rules and took particular issue with the concept of hourly matching. “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.