The Biden administration on Friday released it long awaited plan to give lucrative tax breaks to companies that produce hydrogen, a clean-burning fuel, proposing new rules meant to ensure that the policy doesn’t inadvertently lead to an increase in warming emissions planet.
Hydrogen is widely seen as a promising tool to tackle climate change, as long as it can be produced without creating any greenhouse gases. When burned, hydrogen releases mainly water vapor, and it can be used instead of fossil fuels to make steel or fertilizer, or to power large trucks or ships.
But making hydrogen requires energy, and very little so-called clean hydrogen exists today. Currently, most hydrogen is produced from natural gas in a process that releases carbon dioxide that warms the planet.
Congress approved a tax credit last year to encourage companies to produce more hydrogen from renewable energy and other carbon-free sources, setting off intense lobbying by businesses focused on who should get it. of credit.
Experts warn that some companies may claim to use wind or solar power to produce hydrogen while indirectly causing an increase in emissions, and they urged safeguards to prevent that. Some industry groups want more relaxed rules around the credit, so that a wider range of projects can qualify.
In guidance released Friday, the Treasury Department largely sided with those urging tighter restrictions.
To qualify for the full tax credit, companies typically need to use clean electricity from renewable sources, such as wind and solar farms, to run electrolyzers that split water into oxygen and hydrogen. Starting in 2028, those electrolyzers will have to run at the same time as wind or solar farms.
Many hydrogen developers and environmental groups praised the proposal. Without those restrictions, they said, hydrogen producers could take large amounts of power from the existing grid and trigger a spike in greenhouse gas emissions if coal-fired power plants or gas has to run more often.
“The US has the highest tax subsidy for hydrogen in the world, so we think it should have the highest stringency for what’s considered clean,” said Eric Guter, vice president of hydrogen for Air Products & Chemicals Inc., the world’s largest producer of hydrogen. The company is growing a $4 billion project with AES in North Texas which will use wind and solar energy to produce hydrogen.
But other industry groups have criticized the rules, saying they could prevent many early hydrogen projects from being built.
The American Clean Power Association, which represents major wind, solar and transmission companies, said the requirement to match hydrogen production with clean electricity every hour before 2028 is too stringent.
That provision would “discourage a large majority of clean power companies from investing in green manufacturing and hydrogen facilities,” Jason Grumet, the group’s chief executive, said in a statement.
The Treasury Department will receive comments from the public for 60 days and may make changes before finalizing the plan.
Some nuclear power producers, for example, have requested that tax credits be available for hydrogen produced from existing nuclear plants. But the administration delayed a decision on that question, instead seeking more information from the industry. Very few nuclear plants are expected to be built in the near future.
Cost is currently the biggest barrier to producing hydrogen cleanly. While some companies around the world use wind, solar or nuclear power plants to run electrolyzers and produce hydrogen without any emissions, that process costing about $4 to $6 per kilogram of hydrogen. That’s about two to three times more expensive than doing it with natural gas.
The hydrogen tax credit is meant to bridge that gap and start a new industry, by providing up to $3 for every kilogram of “clean” hydrogen that companies produce over a decade.
But defining what is considered “clean” has been controversial.
Most of America’s electricity still comes from coal and natural gas plants, so if a company just plugged a bunch of electrolyzers into the existing grid to produce hydrogen, emissions would likely increase. Similarly, if a hydrogen company tried to use electricity from an existing wind or solar farm, other coal or gas plants might have to run more often to compensate for the lost electricity. Without safeguards, some study suggestedtax credits may inadvertently lead to hundreds of millions of tons of extra carbon dioxide being emitted.
To avoid that result, the Treasury Department proposed several restrictions. To get the full tax credit, hydrogen producers must acquire new sources of clean electricity developed within the previous three years. That could include a new wind farm or investments that expand the capacity of an existing nuclear plant. Those plants need to be found in the same grid region as a hydrogen factory. And, starting in 2028, electrolyzers can only run at times when clean power is available.
Some hydrogen companies say the proposed rules could be difficult to follow. Wind and solar power don’t run all the time, and trying to match hydrogen output with renewable fluctuations on an hourly basis will drive up costs, they say.
“This policy is going to make it harder for everybody,” said Jacob Susman, chief executive of Ambient Fuels, a clean hydrogen developer that plans about $700 million in new projects. However, he said that his company will try to work with the new rules.
Other companies and experts say the new rules around hourly matching could prompt change. A US startup, Electric Hydrogen, is developing an electrolyzer designed to scale up and down using solar and wind output. The new rules could give that type of technology a step up over less flexible electrolyzers made in China, the company said.
“There will be a lobbying blitz around the final rule,” said Rachel Fakhry, policy director for emerging technologies at the Natural Resources Defense Council, an environmental group. “We’re watching closely to make sure there aren’t any new holes that will be bad for emissions or consumers.”
It’s still unclear how much clean hydrogen the United States will actually produce in the coming years. Although the Biden administration has laid out a strategy to produce 50 million tons of clean hydrogen by 2050, more than 50 times what is produced today, there are formidable obstacles, including setting up systems to deliver hydrogen and finding buyers for the fuel.
To that end, the Department of Energy is also spending $7 billion to create hydrogen hubs across the country to connect producers and consumers, while setting up programs to stimulate the demand for hydrogen and reduce the cost of electrolyzers.
“There are so many tools in our clean hydrogen tool belt that we didn’t have before,” said David Turk, the deputy energy secretary. “There is a great opportunity here.”
