Hydrogen producers mull renewables sourcing for electrolysis projects amid new US regulations

US-based hydrogen sector developers are considering which renewable procurement strategies will align with both domestic and international standards for electricity sourcing amid proposed Inflation Reduction Act rules by the US government.

Producers in the hydrogen sector have highlighted the increasing popularity of integrated projects to facilitate adherence to a stronger global regulatory environment.

The drafted guidelines for the IRA 45V Production Tax Credits regulation for hydrogen announced Dec. 22, 2023, by the US Treasury and Internal Revenue Service may add barriers to adopting low-carbon hydrogen, slowing investments in hydrogen production, reducing affordability and stifling market growth, according to an S&P Global Commodity Insights analysis.

Developers of electrolysis-based "green" hydrogen and its derivatives are exploring provisional options to secure renewable energy and comply with additionality criteria, despite generous subsidies for low-carbon hydrogen production.

Before the introduction of the draft IRA rules, many electrolysis-based projects planned to connect to the grid and meet electricity demand. However, with the current rules designed to ensure that subsidized hydrogen production avoids increasing emissions -- especially from the electric grid -- dedicated renewables are becoming a more common approach. Developers view integrated projects as an option that effectively meets the three pillars approach while reducing the challenges that come with the presence of transmission bottlenecks and grid connections.

Large-scale US projects exporting hydrogen to Europe have clarity on the EU delegated Act and additional criteria for renewable hydrogen generation. However, a lack of clarity on production in the US may cause delays in financing and final investment decision for hydrogen developers.

Electrolysis projects that plan to use grid power are currently not viable for investment without the final rules, resulting in significant delays in project development. However, integrated projects that utilize dedicated or "islanded" renewable-powered electrolysis can potentially proceed, although they still encounter technical and contractual challenges without subsidies for grid-powered electrolysis, according to Commodity Insight analysts.

Producers mull grid-connected option for tax credits

A leading electrolysis-based hydrogen developer in the US told Commodity Insights May 30 they would continue forth with their plan of using a blend of electricity from the grid and from a power purchase agreement that sources renewable energy with the environmental attribute attached until directed otherwise by the final IRA rules.

The developer intends to achieve a lower carbon intensity score by matching their energy consumptions on a one-on-one basis with renewable energy credits. The developer and other sources are considering an alternative approach by oversizing their wind/solar PPAs and optimizing operations based on grid prices -- per the draft rules, this strategy would only be viable if it were to meet the three pillars.

As current policies stipulate additional renewable procurement for green hydrogen production, behind-the-meter projects will be a more established approach for sourcing electricity, a renewables developer told Commodity Insights at the World Hydrogen North America Conference, adding that integrated renewable energy development that are co-located with hydrogen projects is the most common practice he sees in the market.

The colocation of renewables and the absence from the grid is intended to avoid basis risk in deliverability of energy in times of low grid capacity, grid connection queues and associated costs, the renewables developer added.

Developers are facing the challenge of proceeding with their initial energy sourcing strategy and hoping it aligns with policy when finalized. However, some projects are evaluating the economic viability of constructing dedicated renewable assets on site to meet the additionality criteria.

Regulation effects on hydrogen, derivatives

The draft rules of the IRA received substantial feedback of approximately 30,000 comments from market participants, and some comments argued that facilitating grid connections and grid-based electricity consumption would expedite hydrogen production in the initial years, resulting in cost reductions.

Michael Wheeler, Vice President of Government Affairs at Intersect Power, said in the company's comment on the Treasuries Draft rules that "regulations should promote development of hydrogen facilities that will be able to continue to operate in the long-term after any tax incentives are phased out."

Wheeler said after the incentives, hydrogen projects would retire, as they would be too financially dependent on government support for offsetting costs that result from the hourly matching requirement.

New Fortress Energy said the 45V draft rules "will significantly limit clean hydrogen adoption in the US, delay the Biden Administration's decarbonization efforts, and eliminate the potential for millions of jobs that the clean hydrogen market could generate."

The company currently has a project to produce electrolysis-based hydrogen, which it will supply to OCI's green ammonia plant in Beaumont, Texas.

OCI said it plans to take advantage of the program in the US, along with EU production guidelines, which both have CO2 costs built into dashboards, allowing for more international standardization for hydrogen projects, Vice President of Global Sustainability at OCI, Hanh Nguyen, said at the World Hydrogen North America conference.