$100 billion in federal subsidies on the line in the clean hydrogen controversial debate. In August, the White House signed a significant piece of legislation that includes $369 billion in funding for climate change initiatives. In that landmark statute, there was a significant tax credit for ecologically beneficial hydrogen production.
The manufacturing of ammonia-based fertilizer, which is vital for the world’s crop development, and the purification of crude oil into useful petroleum products are two of the various contemporary uses for hydrogen. However because it can be used as a power source in sectors like aviation and heavy shipping, which are notoriously difficult to transition away from fossil fuels, it is also known as a “Swiss Army Knife of decarbonization”.
The tax credit’s effect on emissions reductions will depend on how federal agencies execute it. As is true for the bulk of accounting-related difficulties, the devil is in the details.
On one side of the debate, some energy businesses contend that making the standards unduly strict could doom the clean hydrogen industry before it even gets off the ground.
The cost of manufacturing green hydrogen will be unprofitable and the industry won’t expand, thus killing it on arrival, according to a spokeswoman for NextEra Energy, which produces clean energy from wind, solar, and nuclear sources and operates a big utility in Florida.
On the other side, environmental policy groups fear the standards could wind up being so loose that the emerging “clean” hydrogen economy could actually end up increasing, rather than lowering, carbon emissions.
An open letter sent to federal agencies by 18 organizations states, “Weak direction could… force Treasury to spend more than $100 billion on subsidies for hydrogen projects that increase net emissions, directly violating the law and damaging the reputation of the emerging ‘clean’ hydrogen industry.”
The Clean Air Task Force, a climate policy firm that signed the letter, said that Emily Kent, who covers fuel sources, said that the hydrogen tax credit could go to producers whose hydrogen actually has more emissions than the alternatives and could even have the indirect effect of increasing emissions from the electricity grid.
She also pointed out that the hydrogen tax credit may end up going to businesses whose hydrogen is not actually less emission-intensive than the alternatives because of lax standards and insufficient life-cycle greenhouse gas emissions analyses.
As a result of this conversation, Raffi Garabedian, CEO of Electric Hydrogen, is in a difficult position.
Breakthrough Energy Ventures, Bill Gates’ climate investment firm, has lent money to Garabedian’s business, which is developing an electrolyzer that can split water into hydrogen and oxygen. Companies eager to capitalize on the new benefit would see a surge in demand for electrolyzers under a loose interpretation of the tax credit regulations.
The public would eventually demand an end to the subsidies, putting a negative light on the idea of “clean” hydrogen as a whole if the enterprise really leads to an increase in carbon emissions rather than a decrease.
But not for the wrong motives, I’d love to sell electrolyzers to everyone, according to Garabedian, not if it’s going to be constructed and run in a way that generates more carbon than the alternatives.
Following its appeal for feedback from the general public, how the tax credit will be applied is currently being decided by the IRS and Treasury Department. Trade associations like the American Gas Association and the Renewable Fuels Association, as well as significant energy giants like BP and Shell, contributed their opinions.
The amount of the tax credit will depend on how much CO2 is released when a given company creates hydrogen. Yet, the topic of contention is how to account for that CO2.
On the energy grid, electricity generated using a number of techniques, such the burning of coal or natural gas or the use of wind or solar energy, is integrated. A renewable energy certificate, sometimes known as a REC, is a formal document that verifies a certain energy provider produced a specific amount of renewable energy.
Yet, not every REC is the same. Some are measured every year, while others are measured in much smaller time intervals.
Which type of RECs should be allowed is the key point of contention over the hydrogen tax credit.
In its public response to the IRS, for instance, BP America requests that annual RECs be permitted. The more adaptable way to implement the tax law is through annual RECs, which would encourage the necessary investment to launch the sector.
This is critical for BP, which plans to invest between $27.5 and $32.5 billion in a variety of what the oil company refers to as its transition growth engines, such as hydrogen production and renewable energy, between 2023 and 2030.
In order to help this new business get off to a faster start, the rule should be flexible. According to BP’s letter to the IRS, the greatest flexibility would be provided by matching renewable energy generation with annual demand for hydrogen production.
NextEra claims that requiring hourly accounting would favor “blue” hydrogen, which is produced by burning natural gas or other fossil fuels, and make it more expensive to produce green hydrogen.
According to David P. Reuter, chief communications officer at NextEra, “Requiring time matching that is too granular (such as hourly) would devastate the economics of green hydrogen by providing a significant advantage to blue hydrogen and dependence on fossil fuels, and does not align with legislative intent to accelerate progress towards a clean hydrogen economy.”
Reuter cited research from the international consulting firm Wood Mackenzie that demonstrated how annual credits would permit the electrolyzers that produce hydrogen to operate continuously while hourly matching would drive up the cost of hydrogen production.
On the other hand, organizations that are concerned about climate change, such as Electric Hydrogen and the Clean Air Task Force, argue that enforcing guidelines that are more lax would go against the climate goals of the Inflation Reduction Act.
Environmental groups say that using natural gas in a steam methane reformer process today is actually better for the environment than using fossil fuels to power a hydrogen electrolyzer.
These climate-focused organizations are calling for “additionality and deliverability” and hourly REC criteria to ensure that the clean energy needed to run an electrolyzer to make hydrogen is actually clean energy.
If clean energy is produced at the same hour as hydrogen producers consume it, such as when the wind is blowing, the sun is shining, or a nuclear power plant is generating energy on the relevant transmission system, then hourly accounting would only allow hydrogen producers to claim credits for renewable energy.
The US Department of Energy yesterday (6 June) released a Notice of Intent to fund the USD 8 billion programme to develop regional clean hydrogen hubs (H2Hubs) across the country. (Photo via https://www.offshorewind.biz/)
At this time, very few marketplaces provide hourly RECs. However, Electric Hydrogen’s chief legal officer Beth Deane told CNBC that she anticipates that other registries will provide their own hourly RECs as soon as the need for more stringent accounting criteria arises outside of the hydrogen tax credit debate.
The open letter from the climate groups says that while it takes 12 to 18 months to set up an hourly matching accounting system, large-scale hydrogen production takes at least 24 months.
M-RETS, the largest and most non-profit credit tracking system in North America, may offer hourly REC tracking across North America as a service in the interim.
The inability to count credits for renewable energy that would have been produced regardless is referred to as “additionality.”
“Deliverability” means that credits can only be used for renewable energy that is actually being produced in a location connected to the hydrogen producer’s electrolyzer via a transmission line that isn’t already crowded.
Deane claims that requiring hydrogen producers to match their energy consumption on an hourly and location-specific basis is a closer approximation of reality.