Developers eager to aid the Biden administration in building a clean hydrogen economy are getting antsy as they wait for the US Treasury Department to clarify a small but potentially pivotal piece of tax guidance.

The Inflation Reduction Act (IRA) of 2022 authorized tax credits of up to $3 per kilogram of clean hydrogen produced, depending on the carbon footprint of the production process, which could make the fossil fuel alternative competitive for the first time in the US.

Just how the IRS decides to calculate a hydrogen project's carbon footprint, particularly for "green" hydrogen production, could have a substantial bottom-line impact. Facilities that fail to limit their per-kilogram emissions to 0.45 kilograms of carbon dioxide, or about 5% of the carbon footprint of conventional hydrogen production, would see their eligible tax credit value drop from $3 to $1.

"I know that Treasury is churning out guidance as fast as they can, and this is a priority," US Energy Secretary Jennifer Granholm said during an April 20 Senate Energy and Natural Resources Committee hearing in response to questions from lawmakers.

Stakeholders say the decision-making boils down to a trade-off between the speedy deployment of new hydrogen facilities and minimal CO₂ emissions from the get-go.

Keeping track of time

Hydrogen emits only oxygen and water when combusted and has the potential to replace fossil fuels in various end uses, including manufacturing, the power sector and heavy-duty transportation.

But as with electricity, hydrogen is only as clean as its production method. While "blue" hydrogen — produced from natural gas, using carbon capture technology to mitigate emissions — tends to draw the most ire from environmentalists, green hydrogen can also have a dirty carbon footprint.

Green hydrogen is produced by electrolysis, a process that splits water into hydrogen and oxygen. When produced using behind-the-meter renewable resources, the gas has almost no lifecycle CO₂ emissions. However, many developers plan to use electricity from the grid to produce the gas.

A strict interpretation of the IRA would require a green hydrogen facility to procure enough renewable power to equal the amount of electricity consumed on an hourly basis. Electricity may be procured directly, behind-the-meter, or indirectly by buying renewable energy certificates.

Proponents of hourly matching say it is needed to prevent the nascent clean hydrogen industry from ramping up the use of coal- and gas-fired generation.

"It's all about getting decarbonization right. That's why the IRA was enacted, and that's, frankly, why we exist as a company and should exist as an industry," Raffi Garabedian, CEO and president of Electric Hydrogen Co., said in an interview. The technology provider has raised about $222 million in disclosed funding to bring its polymer electrolyte membrane electrolyzer to market.

On the other hand, lax regulations "could eventually torpedo the industry if our behavior isn't consistent with our stated goals," Garabedian added.

A less strict interpretation of the IRA would require only annual matching of renewable generation and hydrogen production, meaning that annual electricity consumption must match annual zero-carbon electricity procurement, guaranteed by instruments such as renewable energy certificates.

Though the production of hydrogen and renewable electricity generation may not be simultaneous, proponents of annual matching say the more flexible approach is necessary to keep clean hydrogen costs low.

"Beyond any climate- or economic-focused arguments, the simple truth is intermittent hydrogen production does not work for the downstream sectors that will be the early adopters of clean hydrogen," nearly four dozen companies said in an April 12 letter to Granholm, Treasury Secretary Janet Yellen and White House climate adviser John Podesta.

Urging annual matching, the letter noted that industrial processes that operate at high temperatures need a continuous stream of hydrogen and "cannot simply shut down whenever renewables are unavailable."

Signers of the letter included utilities NextEra Energy Inc. and Sempra Energy, electrolyzer manufacturers Mitsubishi Power Americas Inc. and Cummins Inc., and hydrogen producers Air Liquide USA LLC and Plug Power Inc.

Regardless of downstream demand, hydrogen producers also say electrolyzers are most economical when running as close to 24/7 as possible. The business model has high capital expenditures relative to operating costs, and rapid ramping presents technical challenges.

"The higher the capacity factor, the lower the cost of the hydrogen," Tomeka McLeod, a BP PLC vice president who leads the oil company's US hydrogen business, said at an S&P Global Commodity Insights conference in San Diego in April. "The lower the capacity factor, the higher the cost of the hydrogen."

But Garabedian said the capacity factor argument was "disingenuous" and the hydrogen industry instead should be focused on lowering the cost of electrolyzers. This would allow facilities to flexibly time-match hydrogen production with renewable resource availability, without having to worry about recovering the cost of the equipment.

"Our design principle, the reason we invented the thing we're building, it's exactly that," Garabedian said. "It's to drive down the cost of the electrolyzer to the point where low-capacity-factor, flexible operation becomes economically optimal."

Climate implications

Energy analysts are divided on the potential climate impact of the IRA's hydrogen production tax credits.

A January study from Princeton University warned that in some cases, subsidizing hydrogen produced from grid electricity could drive more CO₂ emissions than maintaining the status quo, unless the government requires strict hourly time-matching.

A study commissioned by the American Council on Renewable Energy came to a different conclusion. The authors found that annual matching could have a positive climate impact by incentivizing hydrogen producers to operate when electricity is cheap and deliver renewables when electricity is expensive.

"And it turns out — it's not always true — but it's usually the case that when power is more expensive, it's also more carbon-intensive," co-author Arne Olson, senior partner with the consulting firm Environmental and Energy Economics Inc., said during an April 19 presentation of the study. "When more and more inefficient resources are being called upon to serve the higher load — so you've got a lot of dirty peakers, old steam units during those hours — you really like your hydrogen production to be off, and any renewables that you've contracted with to be delivered to the grid to reduce the utilization of those really dirty resources."

Treasury has a deadline of Aug. 16 to come up with the tax credit rules. Private-sector organizations are not the only stakeholders waiting in anticipation as the DOE figures out how to spend $8 billion in bipartisan infrastructure law funding to develop hydrogen infrastructure.

"We have hydrogen hub selections to be able to make, some of which we'll be determining based upon that guidance, so [Treasury] know[s] that this is a high priority," Granholm said during the April 20 hearing.

US Sen. Maria Cantwell (D-Wash.) said during the hearing that regulatory certainty around green hydrogen is especially critical to hydrogen development in the Pacific Northwest. Developers have focused on green hydrogen over blue in the region, where hydropower is abundant and natural gas is relatively scarce.

Industry watchers say Treasury's decision will not be binary.

Despite his advocacy for hourly matching, "I actually think the optimum answer is somewhere in between," Garabedian said. "But what's critical is that the rules tighten up fairly rapidly over time so that the resulting industry actually achieves the necessary and desired outcome."

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