The future of the clean hydrogen industry depends on the IRA tax credit

In August, the White House passed a historic $369 billion climate change spending bill. One of the most significant tax breaks in this historic law was a tax credit for the production of climate-friendly hydrogen.

Today, hydrogen is used for many purposes, including the production of ammonia-based fertilizers, which the world depends on to grow crops, and the processing of crude oil into useful petroleum products. But it has also been compared to the “Swiss Army Knife of decarbonisation” because it can be used as an energy source in industries that are particularly hard-pressed to wean off fossil fuels, such as aircraft and freight transport.

The impact of the tax credit on reducing emissions depends on how federal agencies implement it. As with most things in accounting, the devil is in the details.

On one side of the debate, some energy providers say overly strict regulations could kill the clean hydrogen industry before it even gets off the ground.

“In our view, if you put regulations in place that are too strict… the cost of producing green hydrogen will be uneconomic and the industry will not scale, effectively making it dead on arrival,” the spokesperson says NextEra Energywhich produces clean energy from wind, solar and nuclear sources and owns a major utility in Florida.

On the other hand, environmental policy groups argue that the rules could be so lax that the new “clean” hydrogen industry could actually increase rather than reduce carbon emissions.

“Weak guidance could … force the Treasury to spend more than $100 billion on subsidies for hydrogen projects that lead to higher net emissions, defying legislative requirements and tarnishing the nascent ‘clean’ hydrogen industry,” it said. An open letter was sent by 18 organizations to federal agencies.

“With lax regulations and weak analysis of GHG emissions throughout the life cycle of hydrogen production, the hydrogen tax credit may end up going to producers whose hydrogen emissions are actually no less than alternatives, and may even have the indirect effect of increasing emissions from the electric grid ” explained Emily Kent, who works on fuel sources for the Clean Air Task Force, a climate policy shop that signed the letter.

The debate has put Electric Hydrogen CEO Rafi Garabedian in an awkward position.

Garabedian’s startup is working on a type of electrolyzer to split water into hydrogen and oxygen and has received funding from Bill Gates’ climate investment firm Breakthrough Energy Ventures and others. Under a loose interpretation of the tax credit rules, demand for electrolyzers will jump as companies race to capitalize on the new credit.

But in the long run, if the industry actually increases rather than decreases carbon emissions, the public will eventually demand that the subsidies end, potentially tarnishing the whole idea of ​​”clean” hydrogen.

“I would like to sell electrolysers to everyone, but not for the wrong reason. Not if they are installed and operated in a way that is more carbon-intensive than alternative options,” Garabedyan said.

The U.S. Treasury and Internal Revenue Service are deciding how the tax credit will be structured, and their request for public comment received input from energy giants such as BP and A shellindustry associations such as the Renewable Fuels Association and the American Gas Association, and many others.

The amount of the tax credit will depend on how much CO2 is emitted when a particular producer produces hydrogen. The debate is about how to account for this CO2.

In the power grid, electricity generated in different ways – by burning coal or natural gas or by capturing energy from the wind or the sun – is pooled together. A Renewable Energy Certificate, or REC, is a legal certificate that certifies that a specific energy producer has created a certain amount of renewable energy.

However, not all RECs are the same. Some are measured annually, while others are measured in much smaller increments.

The difference in the hydrogen tax credit comes down to what type of REC should be allowed.

BP America, for example, wants annual RECs allowed, according to a public comment to the IRS. Annual RECs are a more flexible way of implementing tax legislation that will help stimulate the investment needed to get the industry off the ground. That’s important for BP, which plans to spend between $27.5 billion and $32.5 billion on a combination of what the energy company sees as growth drivers for the transition, including hydrogen production and renewables, between 2023 and 2030.

“The rule should provide flexibility to help jump-start this nascent industry. The ability to match renewable energy production with annual hydrogen production demand would provide the greatest flexibility,” BP said in a statement to the IRS.

NextEra argues that requiring more detailed metering — such as hourly metering — would make it impossible to economically create green hydrogen, instead favoring so-called “blue” hydrogen that comes from burning natural gas or other fossil fuels.

“Requiring overly detailed timing (such as hourly) would destroy the green hydrogen economy by giving a significant advantage to blue hydrogen and dependence on fossil fuels, and is inconsistent with the legislative intent to accelerate progress toward a clean hydrogen economy,” said David P. Reuter, director of communications for NextEra. told CNBC.

Reuter pointed to an analysis by global consultancy Wood Mackenzie showing that annual credits would allow electrolyzers that produce hydrogen to run around the clock, and that hourly agreements would make the cost of producing hydrogen more expensive.

“An hourly approach would be restrictive and ensure that a nascent industry is stifled before it gets going,” Reuter said.

On the other side of the debate, climate-focused organizations including Electric Hydrogen and the Clean Air Task Force argue that adopting more flexible guidelines would undermine the climate goals of the Inflation Reduction Act.

Environmental groups argue that using fossil fuels to power an electrolyser to produce hydrogen is actually far worse for the climate than the current method of using natural gas in the steam methane reforming process.

These climate-focused groups favor hourly REC standards and what they call “additionality and deliverability,” which will serve as a guarantee that the energy used to power the electrolyser to produce hydrogen is actually clean energy.

First of all, hourly metering would allow hydrogen producers to claim renewable energy credits only if the clean energy is produced at the same time they consume it—when the wind blows, the sun shines, or a nuclear power plant generates power through the appropriate transmission system.

This hourly approach to energy accounting has been adopted by Google, for example, which has been a pioneer in the use of clean energy.

Today, hourly RECs are only available in select markets. But Beth Dean, Electric Hydrogen’s chief legal officer, told CNBC that she expects other registries to provide their own hourly RECs once there are demands for stricter accounting standards outside of the hydrogen tax credit debate. According to an open letter from climate groups, it takes 12 to 18 months to install an hourly metering system, but at least 24 months to start large-scale hydrogen production. Meanwhile, M-RETS, a non-profit and North America’s largest credit tracking system, can provide hourly REC tracking across North America as a service.

“Additionality” means that credits cannot be credited for net energy that would have been produced anyway.

“Deliverability” means that credits can only be credited for clean energy that is actually generated at a location that is connected via a transmission line that is not already overloaded to the location where the hydrogen producer uses an electrolyzer to produce hydrogen.

Forcing hydrogen producers to match energy use on an hourly and location-specific basis would be “the best approximation of reality,” Dean said.

“When it’s on the grid, an electron is an electron, it doesn’t have a color, but it has a history, and you try to make the history match up so that there’s some validity to your claim that it’s clean and therefore should be eligible for tax credits “.

Jesse Jenkins, a professor at Princeton who studies macro-energy grids, agrees that more rigorous accounting is needed.

“Our peer-reviewed studies are fairly conclusive on this front: hourly matching, additionality and physical delivery are all necessary for grid-connected electrolysis to meet the strict requirements set out in the IRA statute. Our research shows that removing any of these criteria results in significant outliers.”

Without this trifecta of accounting standards, hydrogen producers could run electrolyzers around the clock, drawing from fossil fuel sources at night or when there is no wind power, and then claim to make up for it by getting credits from the wind and solar farms that would have produced that energy anyway. energy, explains Wilson Ricks, who works in the Jenkins Research Laboratory.

The imbalance between demand and supply of RECs is also a factor. More RECs are now being produced than the market wants, which means hydrogen producers can simply grab existing RECs without stimulating the creation of new clean energy.

“There is a huge national gap between the total number of clean certificates created and the total demand for those certificates,” Ricks said. “I’m even surprised at how big it is. If this is any indication, hydrogen producers will have enough capacity to buy annual RECs without having to bring new zero-carbon generation into the grid.”

So far, federal agencies are not taking an unequivocal side. Treasury and the IRS will implement the tax breaks in a way that they “advance the goals of improving energy security and combating climate change,” a Treasury Department spokesman told CNBC.

In the long term, Garabedian says, his position is aimed at protecting his company, the industry’s reputation and the tax credit.

“We have to do it right. Otherwise, this whole green hydrogen proposal will get a scam. We have to do the right thing in the long term if we’re going to be true to our intent here, which is decarbonization,” Garabedian told CNBC. “If we end up emitting more carbon than before, that’s a travesty. And the result of this travesty: people realize it, NGOs realize it, environmentalists realize it, and the subsidies will be stopped. So there’s a practical reason to hold high. There’s also an ethical reason.”