The U.S. clean hydrogen industry may be vanishingly small, but thanks to new proposed rules from the Biden administration, the geography of the emerging sector is coming into focus — and not everyone is pleased with it.
Late last month, the Biden administration laid out its rules for the 45V hydrogen production tax credit. It’s the world’s most lucrative incentive for using water and carbon-free electricity to produce “green” hydrogen, a fuel that could help decarbonize essential industries like steelmaking and shipping.
But to get the subsidy, hydrogen producers must follow the world’s strictest rules for when, where and how the clean power they use is generated and consumed, to ensure that clean hydrogen doesn’t end up causing more climate harm than it solves.
Those newly proposed rules are known as the “three pillars.” Canary Media has covered the ins and outs of the three pillars — why they’re needed, how they could work and who’s been for and against them — over the past year as environmental groups and some industry players lobbied the government to adopt the approach.
The pillars boil down to three key requirements hydrogen producers must comply with to receive the most lucrative tax credits: use zero-carbon power delivered from where it’s generated to where it’s consumed and tracked on an hour-by-hour basis, which comes from newly built resources rather than existing ones, to ensure that existing zero-carbon power isn’t diverted from the grid to be used for hydrogen production.
Energy experts have demonstrated in multiple studies and models that these stipulations are necessary to ensure clean hydrogen production actually helps to decarbonize the economy. Without such strict rules, they warned, hydrogen producers would receive billions in federal subsidies for a “clean” fuel that actually makes emissions worse.
Now, as the U.S. Treasury Department prepares to defend its proposed rules against challenges from fossil fuel companies, utilities and others that oppose them, the entire industry is trying to understand just how this approach will work in practice.
One clear and early implication is that, under the three-pillars structure, certain regions of the country will win, and others will lose. That’s because cost-effective green hydrogen production will be driven to the places where new renewable power can be built at the lowest cost and produce as much power as possible — and most likely barred from regions that lack those characteristics.
This logic can be frustrating on both a conceptual and political basis, however, particularly for states with large existing nuclear and hydropower resources that won’t pass the rule requiring that hydrogen use carbon-free electricity from resources built no earlier than three years before hydrogen production begins.
Meanwhile, the Midwest and the Southwest U.S. — and in particular states like Texas, which combine rich and fast-growing renewables potential with much of the country’s preexisting hydrogen infrastructure — are likely to benefit the most from the coming wave of clean hydrogen production.
But regardless of state-level economic development goals, the weight of expert analysis indicates that this outcome — in which production coalesces in the states with strong renewable resources — is the only one aligned with the goal of establishing a cost-competitive and truly clean hydrogen industry over the long haul.
Still, these political considerations will likely play a role in how the proposed rules are finalized.
“I think that the guidance coming out is not the end of the discussion — it’s really the start,” said Kyle Hayes, a partner with law firm Foley & Lardner. “We’re probably in for a very heavy comment period” over the next 60 days, as the Treasury Department fields challenges and collects support from various energy analysts and industry players with a stake in the outcome.
Why the Biden administration’s proposed rules will favor some regions over others
The regional impacts of the three-pillars guidance bring the likelihood of creating “tensions between environmental concerns and economic outcomes” among different regions seeking a piece of the emerging hydrogen industry, said John Bistline, a program manager in the Energy Systems and Climate Analysis Group at the Electric Power Research Institute, a nonprofit organization largely funded by U.S. electric utilities. (Bistline spoke to Canary Media prior to Treasury’s release of its guidance.)
That tension is made clear in EPRI’s work modeling the impacts of the 45V tax credit under a variety of scenarios. That research found that only a structure that incorporated all of the “three pillars” would yield an industry that won’t actually increase overall grid carbon emissions — a finding in line with more than a half-dozen studies from academic and nonprofit institutions.
But EPRI’s research made clear that such rules would also determine which parts of the country could produce green hydrogen that can compete with the fossil-gas-derived “gray” hydrogen that currently accounts for almost all of the country’s roughly 10 million metric tons of annual hydrogen production.
Simply put, regions that can rapidly build new wind and solar power will fare much better than regions that can’t. In places with the highest-quality wind and solar resources, tax credits could cover about 90 percent of the production costs of green hydrogen, according to EPRI’s analysis; in the regions with the least favorable clean-energy resources, tax credits could cover less than half of those costs.
The following chart indicates how important high-quality wind and solar power is to making green hydrogen cost-competitive with fossil-fuel-derived hydrogen. This chart depicts a “dedicated generation scenario” under which hydrogen is produced only by clean energy that’s directly serving the electrolyzer, not connected to the grid at large, which is a much more restrictive way to source clean energy than obtaining it from the grid.
Even without being able to tap clean energy that is generated elsewhere on the grid, hydrogen producers building their own wind farms in the Midwest could expect to match the average gray hydrogen cost of $1 to $1.50 per kilogram, the analysis found. Those building their own solar power in the Southwest would be within striking distance of that cost.
In these cases, the Inflation Reduction Act’s tax credits for new wind and solar development, designated as “IRA” on the chart above, combine with the most lucrative 45V tax credits to deliver a double incentive punch.
The simple lesson is that green hydrogen production in parts of the country with high wind and solar power potential will cost less and create lower emissions than hydrogen produced elsewhere. And the corollary to that lesson is that hydrogen producers will flock to those areas as a result.
Why clean power is so vital to a healthy hydrogen industry
Proponents of the three-pillars structure don’t see this as a flaw. Rather, they call it a reflection of the underlying economic and environmental factors that will support a healthy clean hydrogen industry.
Many of the companies that have thrown their support behind the three-pillars rules already have plans to build out the renewable energy resources needed to power their planned electrolyzers. Energy company AES and industrial-gas producer Air Products aim to invest about $4 billion in a Texas hydrogen production facility matched with about 1.4 gigawatts of new renewable energy. Intersect Power, a renewable energy developer with more than $6 billion in project finance lined up for solar and battery projects, plans to build renewables to supply the clean hydrogen facilities it has under development, which will have a combined 3 gigawatts of production capacity.
“Developers will locate their projects where they can find renewable energy to make their hydrogen green,” said Beth Deane, chief legal officer at Electric Hydrogen, a startup developing electrolyzer technology that’s expected to be used by green hydrogen developers including Intersect Power and New Fortress Energy. “They will operate those projects to follow the variable resource so they can optimize their capital investment. This will lead to a lower cost of hydrogen over time.”
