The Biden administration plans to set strict requirements on the sources of carbon-free electricity used by hydrogen producers seeking lucrative federal incentives, according to news reports citing leaked information regarding long-awaited rules for the Inflation Reduction Act’s clean hydrogen tax-credit program.
Politico and Bloomberg this week reported on leaked details of draft guidance from the U.S. Treasury Department. Anonymous sources indicated that Treasury will adopt tax-credit requirements that climate advocates have pushed for rather than the approach backed by fossil fuel and utility companies.
Siding with the climate advocates are energy analysts, corporate clean-hydrogen buyers coalitions, state legislators and many companies competing in the nascent clean hydrogen field who say strict rules are vital to avoid directing taxpayer dollars toward hydrogen production that would increase carbon emissions rather than reduce them.
On the other side are companies building hydrogen production facilities, as well as industry groups with members including fossil fuel companies and utilities. They have been arguing for the past year that such strict rules could strangle early investment in green hydrogen, but a number of independent studies have cast doubt on these claims.
The draft guidance in question will not be final, and the Treasury Department has declined to comment on it. But as described in news reports, it would propose restrictions that would meet or even exceed those set by the European Union last year to require that the power used to make green hydrogen must be tracked on an hour-to-hour basis to the zero-carbon resources that generated it. What’s more, it would require that those zero-carbon resources must be newly built specifically to serve hydrogen production facilities, rather than being drawn from existing generation whose power is diverted from other uses.
If these provisions make it into the final version, “We would consider that to be a monumental win for climate, for consumers and for the hydrogen industry itself,” said Dan Esposito, senior policy analyst with decarbonization think tank Energy Innovation.
Bloomberg cited unnamed people with knowledge of Treasury’s plans who said that the draft guidance would require hydrogen projects to be supplied with new clean-power sources operating on the same grid, as measured on an annual basis through 2027, then switching to being measured on an hourly basis starting in 2028, with no allowance for projects operational before then to continue to use annual accounting after that time.
And Politico reported that the draft guidance would require electrolyzers to use carbon-free electricity from resources built no earlier than three years prior, to ensure that the gigawatt-scale demands of hydrogen production are supplied by new carbon-free resources rather than using clean power already available on the grid.
If these leaked requirements do end up in Treasury’s draft guidance, which is expected to be formally released as early as next week, it would represent a victory for proponents of the so-called “three pillars” framework for maximizing the decarbonization potential of green hydrogen production, which is predicated on hourly matching, deliverability, and additionality of clean electricity supplies.
Without those three requirements in place, companies could earn federal tax credits for hydrogen production that could actually increase overall carbon emissions compared to doing nothing at all, or could even create double the emissions of producing hydrogen with fossil fuels, according to some studies.
“The evidence here was far too loud for the administration to ignore,” said Rachel Fakhry, who leads the hydrogen and energy innovation portfolio at the Natural Resources Defense Council. “We’re really hoping the administration will hold the line on this.”
The logic behind the “three pillars”
The Inflation Reduction Act’s 45V tax credit offers tiers of incentives for hydrogen produced with low carbon emissions, including methods that use electricity to convert water into hydrogen via electrolyzers — so-called “green” hydrogen. The tiers are based on carbon-emission levels; producers seeking the most lucrative $3-per-kilogram tax credit must emit no more than 0.45 kilograms of carbon dioxide per kilogram of hydrogen produced.
That’s far less than the roughly 10 kilograms of carbon dioxide that’s emitted per kilogram of “gray hydrogen” produced from fossil gas, which is how the vast majority of the world’s hydrogen is made today.
In fact, to hit the 0.45-kilogram target, electrolyzers have to use almost entirely carbon-free power for every hour they operate, said Jesse Jenkins, head of Princeton’s Zero Lab and co-author of a 2022 study that provided one of the earliest warnings of the potential emissions-increasing impact of lax rules for the 45V tax credit.
“If just 2 percent of your energy comes from gas plants, or 1 percent from coal plants, you’ve busted that 0.45-kilogram” limit, he said.
While lower tax credits are available for hydrogen produced with higher carbon emissions, the $3-per-kilogram top-tier credit is seen as vital to making green hydrogen cost-competitive with fossil-gas hydrogen. According to industry estimates, green hydrogen currently costs $5–$6 per kilogram, compared to $1–$1.50 for hydrogen produced via gas.
The big unknown is how the Treasury Department will set the guidelines for determining how much CO2 is emitted during hydrogen production. That’s why the department’s guidance, which has been repeatedly postponed from an initially expected release date of early this year, has prompted high-profile lobbying campaigns from industry groups that could stand to reap tens of billions of dollars of taxpayer largesse depending on how the tax credit is structured.
Some of these groups have argued that imposing strict rules for clean-energy accounting will stifle the early investment needed for clean hydrogen to scale up to meet the demands of a zero-carbon future. Green hydrogen is considered vital to decarbonizing sectors such as steelmaking, chemicals manufacturing and heavy transportation. The Biden administration has set a goal of producing 10 million metric tons per year of low- and zero-carbon hydrogen by 2030, up from almost nothing today.
Overly strict tax-credit rules “would deal a major setback to the evolution of hydrogen in the United States and a real setback to the goals of decarbonization and the IRA,” said Frank Wolak, president and CEO of the Fuel Cell and Hydrogen Energy Association, a trade group with more than 100 members including utilities, automakers and manufacturers of fuel cells, engines and turbines.
“We want the most flexibility and the interpretation of the intent of the IRA as it has been written — which is no additionality, no geographic deliverability, and annual average” clean power accounting, Wolak said. “What we’re advocating for is what is consistent with the practices in the renewable energy industry, which have been consistent for the past 20 years. Don’t create a double standard.”
The problem with that approach, according to proponents of the three-pillars approach, is that the methods now used to measure the carbon-intensity of electricity purchased by companies, as set in international standards such as the Greenhouse Gas Protocol, fail to differentiate between clean energy procured on an average annual basis and the actual electricity being generated and consumed from hour to hour.
Under annual averaging methods now in play, an electricity buyer could purchase an amount of solar power equivalent to its annual electricity usage and claim it is carbon-neutral, even for the share of electricity it consumes overnight when solar is not feeding into the grid.
Nor do today’s structures require buyers to prove that the carbon-free energy they’re sourcing can be physically delivered to where they consume electricity. Examples include companies signing contracts for wind power generated in Texas, which operates a power grid that’s largely disconnected from the rest of the country, to claim carbon-neutrality for electricity consumed at operations outside of the state.
Finally, today’s structures do not take into account whether clean energy being procured is “additional” — that is, whether wind and solar farms or hydroelectric, geothermal or nuclear power plants would have been built and kept running even if a company did not commit to buy the power they produce.
Without such additionality requirements, hydrogen producers could purchase clean power already being generated, which would mean that other electricity buyers would be forced to use electricity that comes from other sources — and today, those sources are largely fossil fuels.
The fight over emissions and costs
The disputes over the 45V tax-credit rules have hinged on two questions. The first: Will the rules increase green hydrogen producers’ costs so much that they will never be competitive? The second: Are the rules really necessary to ensure that green hydrogen production won’t lead to the unintended consequence of increasing emissions?
On that front, the Natural Resources Defense Council has cited a number of studies that conclude that the three pillars are not only vital to decarbonization but also would not be nearly as harmful to the industry’s economics as opponents say they would be.
“If you don’t have these three thresholds,” Fakhry said, “emissions will increase, consumer prices will increase, and weaker rules will send the wrong signal to industry on what to invest in.”
That perspective is backed up by a June report from analysis firm Evolved Energy Research, which found that “the economic signals for development of clean hydrogen production and new markets from IRA are so powerful that the 45V tax credit will drive large-scale development of a hydrogen economy, even if the Treasury Department should implement stricter accounting of lifecycle emissions based on the three pillars.”
