US hydrogen projects still on ice as developers seek answers on tax credit rules

A key regulatory milestone that US energy developers had cited as a deciding factor for investing in green hydrogen has come and gone, but industry watchers say they have yet to see an opening of the floodgates.

For months, the sector had been looking to the US Treasury Department for guidance on the type of projects eligible for the federal government's 45V hydrogen production tax credits, an incentive program expected to make electrolytic hydrogen economic for the first time. In December 2023, the Biden administration released that guidance, which proposed high standards for hydrogen producers seeking to claim the "clean" subsidy.

"Certainty is critical for supporting investment and scale-up of projects and equipment manufacturing," Rhodium Group, a research provider, wrote in its Jan. 4 analysis of the guidance. "While there are still some wrinkles to iron out, the IRS has laid out the rules of the road for clean hydrogen for years to come."

The rules were long-awaited. US lawmakers passed the 45V tax credit program in August 2022, setting a deadline for the IRS to draft guidance by August 2023.

But the proposal, which came four months overdue, still leaves questions unanswered on whether certain hydrogen projects will be able to survive on the subsidy, according to developers. The IRS has scheduled a public hearing on March 25 for stakeholders to comment on the proposal before the administration finalizes the rules.

In the meantime, "the 45V rules are still in draft and proposed relatively tight restrictions on using grid electricity, and therefore we do not expect a significant near-term increase in hydrogen project capital flows," said Brian Murphy, hydrogen and low carbon fuels analyst at S&P Global Commodity Insights.

Treasury proposal

The 45V tax credit program offers producers up to $3/kg of hydrogen, depending on the lifecycle greenhouse gas emissions of the production process. To qualify for the full credit, claimants must limit their emissions to about 5% that of conventional hydrogen plants, which use fossil fuels as a feedstock.

Hydrogen producers have several options under the program for limiting their emissions, such as running carbon-free power through an electrolyzer —producing what is known as green hydrogen — or installing carbon capture technology to abate the emissions of natural gas-derived hydrogen.

But the US Inflation Reduction Act of 2022 was ambiguous as to whether green hydrogen producers must procure new clean electricity resources, a provision known as "additionality" or "incrementality," as opposed to using existing renewable and nuclear generation.

Treasury has proposed making incrementality a requirement, which some environmental researchers say is necessary to prevent subsidized hydrogen plants from overwhelming the US power grid.

Another proposal would require electricity-powered hydrogen plants to match their operations with clean electricity generation on an hourly basis starting in 2028.

While environmental groups applauded the proposals for setting a high standard for clean hydrogen, industry groups have largely criticized the rules for not allowing enough time to build out the clean electricity resources that would be required.

Jury is still out

One early indicator of whether hydrogen developers are responding to incentives is the sale of electrolyzers, which produce hydrogen by separating it from the oxygen in a water molecule. In October, Siemens Energy AG North America President Rich Voorberg said the 18-MW electrolyzer manufacturer was bracing itself for a surge in orders following the release of the 45V guidance.

Now that the draft is out, "the company has been assessing the proposed guidance with customers, but it is too early to gauge its impact on sales," Siemens Energy spokesperson Jake Rubin said in an email.

Some prospective developers may still be waiting for regulatory certainty. The IRS has requested public comment on several proposed exceptions to the incrementality requirement. For some business models of hydrogen production, the outcome of these proposals will be crucial to making a final investment decision, Murphy said.

One proposal is to grant exceptions for existing electricity generation at risk of retirement, such as nuclear power plants, or to except nuclear and hydroelectric resources that relicense. Another is to allow hydrogen producers to tap into existing grid resources during times of high renewables output when that electricity might otherwise be curtailed.

Alternatively, Treasury has proposed a blanket rule that would allow power producers to classify up to 5% of their existing carbon-free generation as "incremental."

Not all investment decisions may hinge on a project's ability to claim an exemption from the incrementality rule.

Comprehensive projects equipped with a hydrogen offtake agreement and balance sheet financing that involve the construction of dedicated renewables and electrolyzers "may find they have enough certainty" to commit, Murphy said. "But projects at this stage of development are rare in the US."

Other hydrogen projects that use gas, as opposed to electricity, as their primary energy source with carbon capture technology to abate emissions are sidestepping the incrementality debate.

8 Rivers Capital LLC announced plans on Jan. 9 to build an ammonia plant in Port Arthur, Texas, involving the use of a proprietary hydrogen production technique expected to capture more than 99% of its emissions. Jennifer Diggins, the developer's vice president of public affairs, declined to comment on whether the company planned to claim 45V tax credits or another program for carbon capture projects, called 45Q. Companies are not allowed to claim both.

However, 8 Rivers applauded the proposed rules for enshrining an openness to multiple hydrogen production methods, including those that use gas as a feedstock. The Biden administration prioritized the design of clean energy subsidies that are tech-neutral, instead using overall carbon footprint as an eligibility requirement.

"I'll be interested to see ... what industries are coming in with and what the follow-up questions really are" during the open comment period, Diggins said in an interview. "But I think for a technology like ours, this really shows that there's a commitment from the administration, whether it's from the White House or the IRS, to really support this nascent industry, and make sure these projects can ultimately be successful."

S&P Global Commodity Insights reporter Siri Hedreen produces content for distribution on S&P Capital IQ Pro. S&P Global Commodity Insights is a division of S&P Global Inc.