The Internal Revenue Service has proposed strict rules for green hydrogen production tax credits. Environmental and renewable energy interests are applauding. Fossil fuel and legacy electric generators are fuming. A fight over the final rules, including the federal courts, looks likely.
The Biden administration’s Inflation Reduction Act provided for the hydrogen production tax credits, (known as 45V rules for their place in the tax code) to spur development of what might be an important carbon dioxide-free gaseous energy source. Hydrogen could supplant fossil fuels such as natural gas and petroleum in a wide variety of uses including ground transportation, electric generation, aviation, cement, and steel making.
How hydrogen, found only tightly bound up with other elements, can be produced cleanly is controversial. In a news release, the Treasury Department said, “While clean hydrogen holds considerable potential to reduce emissions across a range of sectors and applications, conventional hydrogen production typically results in significant climate pollution.”
Hydrogen can be burned as a substitute for natural gas or oil-based fuels or used in fuel cells – an electro-chemical technology that looks a lot like batteries. In both cases, it produces no CO2, only water vapor. When burned, hydrogen can produce copious amounts of oxides of nitrogen, conventional and regulated air pollutants. Because it is so light, storing H₂ in sufficient amounts to use as a fuel is also difficult and expensive.
Most hydrogen used today results from steam reforming of the methane in natural gas, producing CO2 along with elemental hydrogen. The only way to produce pure hydrogen without CO2 emissions uses electricity to split the hydrogen from the oxygen in water (H2O). If the electricity comes from fossil-fueled generating plants, environmental benefits vanish.
Electrolysis is much more expensive than steam reforming, which is why the 2022 law offers generous tax credit. According to the IRS, the proposed subsidy could amount to as much as $3 per kilogram of hydrogen produced, depending on how it is made.
“Electrolysis,” observes Princeton University’s Jesse Jenkins, “consumes vast amounts of electricity. A large-scale hydrogen production facility might consume as much electricity as a medium-sized city. If it’s not supplied almost exclusively with clean power, emissions from electrolysis are huge. If you plugged an electrolyzer into the average U.S. grid to make hydrogen, it would generate roughly twice as much CO2 per unit produced” from steam reforming with natural gas.
Climate activists have pushed for tight rules that lead to almost exclusive use of wind and solar electricity for the tax benefits. Oil and gas interests, and some electric utilities, have argued for policies that would allow existing plants, including gas-fired and nuclear units, to qualify for tax credits.
The proposals are technology neutral, although their application will clearly benefit renewable such as wind and solar, and disadvantage current fossil fuel and nuclear generation, including the vast majority of current H₂ producers. Jenkins, who runs Princeton’s Zero-carbon Energy Systems Research and Optimization Laboratory, or ZERO Lab, outlines “three pillars” as the foundation of the proposed IRS rules: new supply, deliverability, and hourly matching.
- New supply. To qualify for the subsidies, the source of the electricity to run the electrolyzer must have been built for the purpose of making hydrogen. The Treasury news release explains, “Clean power generators that began commercial operations within three years of a hydrogen facility being placed into service are considered new sources of clean power. Generation resulting from a generator’s newly added capacity (“uprates”) are also considered new sources of clean power.” That essentially rules out existing nuclear plants unless they are able to uprate their capacity and dedicate it to H₂
- Treasury says, “Clean power must be sourced from the same region as the hydrogen producer, as derived from DOE’s 2023 National Transmission Needs Study. The proposed rules also request comment on how to consider transmission of clean power between regions.”
- Hourly matching. The proposed rules require that “the claimed generation must occur within the same hour that the electrolyzer claiming the credit is operating. The proposed rules include a transition to allow annual matching until 2028 when hourly tracking systems are expected to be more widely available and seeks comment on this transition timeline.”
The proposed regs closely match provisions advanced for months by environmental and clean energy groups, including the Natural Resources Defense Council and the Clean Air Task Force. Jenkins observed that “the Biden administration successfully resisted a torrent of intense lobbying from big industrial players like the utilities NextEra and Constellation, oil majors like BP and Exxon, fuel-cell maker Plug Power, and their trade-group proxies, which collectively spent millions on ads and lobbying over the past year to weaken the hydrogen rules.”
The comment period closes Feb. 26 and a public hearing is scheduled for March 25 at 10 a.m. Utility Dive reported, “Some leading hydrogen producers are already talking about suing to stop the implementation of the Treasury Department’s proposal, according to Mona Dajani, a partner at Baker Botts.” Dajani chairs the law firm’s energy infrastructure and hydrogen practice.
Sen. Joe Manchin (D-W.Va.), outgoing chairman of the Senate Energy and Natural Resources Committee, who is not running for reelection this year and is pondering a run for president as an independent, panned the Treasure proposal. “Today’s proposed rules on the IRA’s hydrogen production tax credit will only make it more difficult to jumpstart the hydrogen market, which will be a critical part of our secure energy future. Make no mistake, obstructing hydrogen development in our country is the short-sighted goal of the far-left advocacy groups who lobbied the Administration for these restrictions because they oppose all energy sources other than solar and wind….”
–Kennedy Maize