Blue hydrogen: The future of certified gas?

With new funding in play for clean hydrogen production in the US after the passage of the Inflation Reduction Act in August 2022, blue hydrogen producers are eying third-party certified natural gas as a possible pathway to proving lifecycle emissions low enough to qualify for certain tax credits.

Hydrogen has long been touted as a potential game changer for decarbonizing heavy transport and industrial processes, with proponents lauding the absence of greenhouse gas emissions at the point of combustion. However, different methods of hydrogen production result in a wide range of GHG emissions profiles, especially when considering the full lifecycle of inputs.

Blue hydrogen is produced from natural gas most commonly through steam methane reforming, similar to conventional "grey" hydrogen production, but it is also paired with carbon capture, utilization, and storage, or CCUS, technology. Other production pathways for blue hydrogen include auto-thermal reforming and methane pyrolysis.

While CCUS can reduce emissions at the hydrogen production stage, the upstream emissions associated with natural gas feedstock could factor heavily in the overall lifecycle emissions profile. With these upstream emissions in mind, some potential blue hydrogen producers have started exploring certified gas as a solution.

Certified gas, also known as responsibly sourced gas, or RSG, is natural gas that was produced in a facility certified by an independent third-party for having met certain environmental, social or governance requirements, such as low methane emissions.

As of November 2022, at least 26 Bcf/d of US gas production had undergone certification from either Project Canary or MiQ, according to estimates from the two major standard-setters, representing a 20% increase in certified volumes since August.

End-user demand for certified gas has historically lagged US gas producers' enthusiasm for certifying their natural gas production. However, recent months have shown a surge of supply deals for certified gas as end-users test out the viability of the new product to meet decarbonization goals.

Early adopters of certified gas include LNG exporters, utilities, local distribution companies, or LDCs, industrial customers and now, potentially, blue hydrogen producers.

Inflation Reduction Act of 2022

The Inflation Reduction Act of 2022, which was passed and signed into law by President Joe Biden on Aug. 16, contains several important provisions for CCUS and hydrogen, including the 45V clean hydrogen tax credit and the 45Q updated tax credit for CCUS.

The 45V tax credit provision of the IRA provides between $0.60/kg and $3/kg of clean hydrogen produced, based on lifecycle emissions of the production and certain wage and apprenticeship requirements. The credit can be taken for 10 years once production begins, with projects that begin construction by 2032 eligible to receive the credit. To qualify for a percentage of the 45V tax credit, hydrogen producers must demonstrate that they have a lifecycle GHG emissions rate of less than 4 kg CO2e/kg of hydrogen produced. Hydrogen producers that follow certain wage and apprenticeship requirements as mandated under 45V will receive up to five times the amount of the credit.

To receive the highest credit amount of $3/kg hydrogen, producers must demonstrate a lifecycle GHG emissions of less than 0.45 kg CO2/kg of hydrogen, as well as meet the wage and apprenticeship requirements of the 45V tax credit.

Meanwhile, the 45Q provision of the IRA updates the existing CCUS tax credit by increasing its value to $85/mt CO2 for point source capture and $180/mt CO2 for direct air capture.

Blue hydrogen producers can receive either the 45V clean hydrogen tax credit or the 45Q CCUS tax credits, but they cannot be stacked.

Regulations up in the air

While certified gas holds potential as a low-emissions feedstock for blue hydrogen, a key uncertainty is how the US federal government will set guidelines on reporting and verifying lifecycle emissions.

According to the text of the IRA legislation, the Secretary of the Treasury will issue guidance within one year of the enactment of the tax code section. The Internal Revenue Service, or IRS, published a request for comments on the clean hydrogen provisions of the IRA in November that closed in December. It is reviewing almost 200 comments but has not set a date for the publication of guidance, the IRS told S&P Global Commodity Insights via email Dec. 22.

"The IRS is not in the business of looking at methane leakage so setting up a structure will be a challenge," Aaron Bergman, a fellow at Washington-based research center Resources for the Future, told S&P Global Dec. 6.

"I think we are all waiting to see how companies can verify they are using responsibly sourced gas with a low leakage rate," Bergman added.

The environment of regulatory uncertainty has not stopped some market participants from testing out new proposals to provide a lower-emissions natural gas product that might meet blue hydrogen producers' needs. Certified gas standard-setter Project Canary, gas producer BKV, and the marketing arm of multinational energy company Engie have come together to propose what Project Canary CEO Chris Romer has termed "truly measured net-zero gas." Project Canary has certified BKV gas wells, with BKV planning to capture and sequester emissions at the processing stage for the certified gas production. BKV plans to mint removal credits for the captured carbon through an established carbon registry, which will then be transferred to Engie for marketing.

Blue hydrogen production could be a potential use case for this type of bundled product, Romer said in a Nov. 16 interview with S&P Global.

"Who are the biggest buyers of this gas going to be – all of those blue hydrogen companies," Romer said. "We already have more buyers than we have gas." The Project Canary-BKV-Engie framework also brings up another as-yet unsettled component of whether certified gas can be used to meet clean hydrogen production requirements: the role of credits and certificates. If certified gas is accepted as proof of upstream lifecycle emissions for gas inputs, the question remains on whether the physical gas used must be bundled with its original certificates, or if certificates can be purchased and then bundled with gas used.

As the debate around calculating emissions unfolds, parallel efforts are being undertaken to provide lifecycle emissions for hydrogen production. On Dec. 13, S&P Global announced a partnership with GTI Energy and the National Energy Technology Laboratory to launch the Open Hydrogen Initiative, or OHI. With industry input, the OHI will provide a tool that will provide facility-level emissions information for hydrogen producers.

Still, "certified gas could be another tool to help companies navigate the nascent clean hydrogen market," Brian Murphy, senior hydrogen analyst at S&P Global, said Jan. 4.