US hydrogen leaders find room to budge in debate over tax credit rules

Prospective hydrogen developers who had warned that a tough emissions policy could stifle the nascent industry are shifting tactics in their push for tax credit eligibility, calling on the Biden administration for more wiggle room in its proposed rules.

After months of lobbying against strict emissions standards, some industry stakeholders are now looking for a middle ground with the US Treasury Department, requesting exemptions and deferrals.

"We haven't settled on a place among all our members," Frank Wolak, president and CEO of the Fuel Cell and Hydrogen Energy Association, said in an interview. "But deferring those starting points, rather than outright trying to defy them or contest them, is where we're seeing our position is."

Supporters of Treasury's proposal said they would also entertain exceptions to a rule that would require green hydrogen projects to procure new clean power, as long as they are applied surgically.

"We're currently working through how to create more targeted solutions," said Rachel Fakhry, policy director with the Natural Resources Defense Council.

The flurry of advocacy comes as the department seeks input on a proposed framework for measuring hydrogen's carbon emissions, determining eligibility for tax credits worth up to $3 per kilogram of hydrogen produced.

While environmental groups cheered Treasury's framework, industry groups panned the long-awaited guidance, particularly for its inclusion of the so-called additionality rule that would preclude green hydrogen plants from relying on existing grid power.

The rule reflects recommendations from multiple studies in 2023, which called for measures -- dubbed the three pillars -- to prevent the nascent hydrogen industry from drawing on existing renewables resources, shunting the rest of the grid's load toward fossil fuel generation.

Without the three pillars, the 45V hydrogen production tax credit could result in greater greenhouse gas emissions than a business-as-usual scenario, according to Wilson Ricks, who led the Princeton University ZERO Lab's analysis of the subsidy.

But the IRS also indicated it was willing to loosen its rule on additionality, brainstorming circumstances where the use of existing clean resources might avoid such pitfalls.

Curtailed renewables, clean power mandates

One exceptional circumstance listed by the IRS is the production of hydrogen in regions with 100% clean electricity or where state emissions caps prevent an increase in load from leading to an increase in grid emissions. Another involves running hydrogen electrolyzers only during times of high renewable output, using grid electricity that would otherwise be curtailed.

For such circumstances, the IRS said it would consider giving hydrogen producers an opportunity to demonstrate that they would have a minimal impact on emissions, through modeling or other evidence.

"Clean hydrogen producers should have the ability to offer modeling to prove their case and not simply be precluded because the rules don't allow them to offer evidence that they've complied," Wolak said.

One region that could stand to benefit is the Pacific Northwest, where most electricity comes from hydropower.

While "disappointed" by tax guidance, Malcolm Woolf, president and CEO of the National Hydropower Association, said that at minimum, the IRS should exempt hydrogen projects in states with clean energy mandates.

"You're not going to build a new natural gas plant in any of those states that have 100% clean energy standards," Woolf said in an interview.

The difficulty with the IRS' proposed solution lies in the design of such a model, according to Ricks.

In the case of excess renewables, low power prices could be used to demonstrate that hydrogen producers are using clean electricity that would otherwise be curtailed, Ricks said. However, the approach would only be workable within electricity markets with transparent pricing, "so Treasury may be reluctant to privilege certain regions by implementing it."

Ricks also doubted that a regional exemption would limit overall grid emissions, given that a state may resort to purchasing renewable energy credits from neighboring states to meet its clean electricity targets.

Imperiled nuclear plants

Another proposed exemption would apply to power plants — most likely nuclear or hydropower — able to prove that without selling their electricity to hydrogen producers, they would be forced to retire.

"This is potentially one of the more legitimate frameworks, because there are precedents for it," Ricks said.

Rather than inventing a financial test from scratch, Ricks said the IRS could borrow from an existing framework, such as the DOE's civil nuclear credit program. Fakhry said the Natural Resources Defense Council agrees with the proposed additionality exemption, as long as the financial test is stringent.

The nuclear power industry itself has condemned the additionality rule as a de facto exclusion of nuclear, given the unlikeliness of building a new plant within the lifetime of the subsidy.

"Without changes to Treasury's guidance, the US will be the only nation in the world to intentionally sideline its commercial nuclear power plants in the fight against climate change," Constellation Energy Corp. spokesperson Paul Adams said in an email.

In 2023, Constellation planned to co-locate a $900 million hydrogen production facility with its LaSalle County Generating Station in Illinois.

Adams did not comment on the IRS' proposed exemption for economically struggling nuclear plants. However, the Nuclear Energy Institute indicated it would not settle for the compromise.

"We will continue to advocate for a more inclusive application of the credit that encompasses the full potential of our existing and next-generation nuclear reactors, without any caveats," Benton Arnett, the Nuclear Energy Institute's senior director of markets and policy, said in an email.

Wolak, representing members including industrial gas companies and electric utilities, said the FCHEA is advocating for a broader exemption extended to all nuclear and hydropower plants that are relicensing.

Blanket provision

The IRS said it would also consider a proxy allowance in place of a more complex waiver system, proposing to exempt a percentage of hourly generation from existing clean power sources from the additionality rule.

The approach would allow hydrogen producers to source a proposed 5%-10% of their electricity from existing clean power resources, backed by energy attribute certificates.

If the IRS were to implement only one exemption, the 10% rule would be the FCHEA's first pick, Wolak said.

"We think an allowance of 10% at a fleet level would give a lot of flexibility for people to see how they procure the EACs and also recognize that we are transitioning to a place where at some point in time, all resources are going to have to be additional," Wolak added.

But advocates of the three pillars argued that even a 5% allowance could have a domino effect on grid emissions, canceling out the benefits of swapping fossil fuels with hydrogen. A preliminary study by the Rhodium Group estimated that the net systemwide impact could be 1.5 billion metric tons in increased greenhouse gas emissions through 2035 if the EACs are purchased during the grid's "dirtiest" hours.

Even the economic upside of the allowance is in doubt for some industry groups.

"I could see why that might be useful for nuclear plants with their big, central locations," Woolf said. "If you're a 30-megawatt hydropower facility, 5% is way too small to be useful for an electrolyzer."

For other clean power producers, the additionality rule is not the "pillar" at issue.

"We think that if the time-matching requirement is phased in, in a rational way, we can achieve the additionality goals and maintain the economics," Jason Grumet, CEO of American Clean Power Association, said in an interview. "For the renewable sector, it's really the rigidity of the time-matching that we think is untenable."

Under Treasury's proposal, starting in 2028 subsidized hydrogen producers must match EAC purchases and electricity consumption on an hourly basis.

Proponents said the rule is designed to prevent companies from running their electrolyzers during peak hours, ramping up fossil generation, while purchasing EACs during nonpeak hours. But industry groups said that four years is not enough time to implement the rule. According to Grumet, "it's the stringency and rigidity of the time-matching requirement that takes economic facilities and makes them uneconomic."