Treasury Department rules for hydrogen tax credits are exposing deep divisions between industry and environmentalists, highlighting the challenge for the Biden administration as it aims to build hubs of “clean” fuel that do not spike emissions.
The split was on display last week as the department held its first hearings on the draft rules published in December to receive tax credits under the Inflation Reduction Act, known as 45V. Treasury, which is weighing more than 30,000 comments on the proposal, is aiming to ensure that the industry has ample incentives to grow and will rely only on low-carbon sources for production such as renewables, nuclear and carbon capture.
“The results of the final regulations for this tax credit are truly make or break for this industry,” said Frank Wolak, president of the trade group Fuel Cell and Hydrogen Energy Association, at one of the hearings. “At this time, financiers and participants are largely sitting on the sidelines.”
A chief area of dispute at the hearings was how to handle language in the tax guidance requiring hydrogen producers to use new low-carbon energy sources powering the grid, rather than existing generators. The goal is to avoid new fossil-fuel-fired power being brought online to help meet hydrogen’s electricity consumption.
But Dorothy Davidson, CEO of the MachH2 hydrogen hub, which is in negotiations with the Department of Energy for up to $1 billion in federal funding, said the current rules would prevent hydrogen projects tied to nuclear power from being built at all. Critics say that the current tax rules hinder use of nuclear energy because its high capital costs and lengthy construction times for reactors make it more difficult to bring online than other low-carbon electricity sources.
Andy Vesey, CEO of Fortescue Future Industries’ North American operations, said the proposed regulations would sharply increase his company’s hydrogen project costs and push back the schedule for its planned facilities. A requirement to use new clean energy could take five years or more to fulfill and increase the price of hydrogen by 20 percent, Vesey said. The company’s Buckeye project envisions making hydrogen from renewable energy outside of Phoenix, Arizona.
He added that a Treasury proposal requiring hydrogen producers to prove they are making fuel during the same hour as new clean energy is powering the grid would increase hydrogen production costs. Under the draft guidance, companies receiving the credit would need to provide that proof of hourly matching starting in 2028.
“Adding battery storage to comply with [the proposal] could increase the costs at a facility the size of our Buckeye project by over 140 percent,” he said.
But environmentalists pushed back against assertions that Treasury’s plan would kill the nascent clean hydrogen industry, pointing to recent announcements to build projects. Unlike traditional hydrogen made from natural gas, clean hydrogen envisions using emissions-free power like renewables or tying production from fossil fuels with carbon capture.
“Claims that the [draft guidance] will hinder industry growth consistently flout on-the-ground evidence,” said Erik Kamrath, a hydrogen advocate for the Natural Resources Defense Council.
Kamrath said that companies such as Air Products, Hy Stor Energy, Synergetic and EDP Renewables have all planned and expressed interest in 50 gigawatts’ worth of projects in compliance with the proposed tax regulations.
That’s enough to produce 6 million metric tons of clean hydrogen, according to the White House. The Biden administration has set a goal of producing 10 million metric tons of clean hydrogen fuel annually by 2030.
The four companies cited by Kamrath largely supported Treasury’s draft rules at the hearings.
“You’re hearing a lot this week from the subset of companies that … now may need to abandon dirty project designs in favor of clean ones” under proposed tax credits rules, said Dan Esposito, manager of the electricity program at Energy Innovation: Policy and Technology, an energy and climate think tank. “Fortunately, many companies say they can rise to the occasion, and we should believe them.”
Davidson of the MachH2 hydrogen hub called for Treasury to allow 10 percent of existing clean energy to count as “new” clean energy in final regulations. That exemption would allow nuclear projects being eyed by the hub to advance, Davidson said. The hub is one of seven chosen by DOE in October to demonstrate hydrogen production with funding from the bipartisan infrastructure law.
NRDC’s Kamrath said the 10 percent exemption would cause a spike in emissions, citing studies from the Rhodium Group, Energy Innovation and Princeton University researchers. According to those studies, the exemption could open the door for fossil fuel power from the grid to produce hydrogen.
Another dispute last week centered on how to count methane emissions that might leak from natural gas infrastructure used to make hydrogen.
The Appalachian Regional Clean Hydrogen Hub and Air Liquide, a French company making hydrogen in the U.S., for example, called for Treasury to allow companies to provide their own upstream methane leak data. They said that would be more accurate.
Treasury’s initial guidance says the department will assume that an average of 0.9 percent of the methane used to make hydrogen has leaked when calculating hydrogen emissions.
Ilissa Ocko, a senior climate scientist for the Environmental Defense Fund, said allowing companies to submit their own methane leakage data would lead to “greater inaccuracies” in counting methane emissions, however. She added that the 0.9 percent methane leakage rate assumption is too low, arguing that many projects emit more of the greenhouse gas than that.
She called for Treasury to work with other agencies to update the number and provide methane leakage rates for different regions of the country.
Without the change, “we are incentivizing hydrogen systems that threaten U.S. climate goals,” Ocko said.
