Hydrogen tax rules draw fire from industry

NC NEWLINE - The October announcement that the U.S. Department of Energy had selected seven regional hub projects for billions in federal money to spur the production of clean hydrogen was met with considerable fanfare from the fledgling industry, seen as crucial to helping decarbonize the American economy.

 WESSELING, GERMANY - JULY 02: A general view during the inauguration of a green-tech "REFHYNE" hydrogen production plant at the Shell Energy and Chemicals Park Rheinland on July 02, 2021 in Wesseling, Germany. The REFHYNE plant is to produce sustainable fuel for aircraft. (Photo by Andreas Rentz/Getty Images)

But when the Biden administration’s Treasury Department released proposed regulations last month for how a key hydrogen production tax credit will be implemented, the reception from some corners of the industry was a lot less warm.

Frank Wolak, president of the Fuel Cell and Hydrogen Energy Association trade group, said the regulations would place “unnecessary burdens on the still nascent clean hydrogen industry,” adding that they fly in face of Congress’ intent in the Inflation Reduction Act, the landmark 2022 climate law.

“Congress intended the tax credit to spur domestic clean hydrogen production and allow the United States to maintain an international competitive advantage, not to be an inadvertent backdoor to regulate use of the electric utility grid,” Wolak said, adding that the regulations “will unnecessarily hold back our domestic industry, driving investment, manufacturing and technology leadership overseas.”

The Edison Electric Institute, which represents investor-owned electric utilities, also criticized the rules, saying they don’t “offer sufficient flexibility to allow the scale up that will be necessary to support a U.S. hydrogen economy.”

Some Democratic senators have also pushed for looser regulations, including Sherrod Brown of Ohio and Pennsylvania’s John Fetterman and Bob Casey. “For an administration that wants to reduce emissions and fight climate change, it makes no sense to kneecap the hydrogen market before it can even begin,” U.S. Sen. Joe Manchin, a West Virginia Democrat, said in a statement.

Environmental groups, other lawmakers and the administration, however, say the restrictions are necessary to ensure hydrogen subsidized by the credits doesn’t actually increase greenhouse gas emissions.

“I’m grateful to see the Biden administration listening to experts to ensure that hydrogen production is adding new clean energy to the grid, protecting consumers and the environment, and expanding clean-energy jobs,” said Pennsylvania State Rep. Danielle Friel Otten, a Democrat and a member of the National Caucus of Environmental Legislators.

What the credit does

The hydrogen production tax credit ranges from 60 cents per kilogram of hydrogen produced to $3 per kilogram, depending on the lifecycle emissions from the facility. Those emissions are determined using a federal model called GREET (Greenhouse Gases, Regulated Emissions and Energy Use in Transportation) and the credit is available for 10 years for projects that begin construction before 2033. The credit starts on the date a hydrogen production facility goes into service, meaning some facilities will be eligible for the credit into the 2040s, the Treasury Department says. That’s a lot of potential money at stake.

“It’s very lucrative,” said Julie McNamara, deputy policy director with the Climate and Energy Program at the nonprofit Union of Concerned Scientists. “Because there’s so much money on the line, this tax credit will shape the hydrogen that ends up getting produced.”

For proponents, clean hydrogen has applications in hard-to-decarbonize industrial sectors like steel, cement, long haul transportation and potential natural gas blending in power production. But most hydrogen right now is produced using a process called steam-methane reforming that also releases carbon emissions and other air pollutants.

To qualify as “clean” for the tax credit, facilities using natural gas to produce hydrogen must capture and store most of the carbon produced. However, most of the wrangling and lobbying has been over what proponents call the “three pillars approach” that the Treasury Department included in the draft rule and would affect hydrogen manufactured by electrolysis, which uses electricity to produce hydrogen from water.

The provisions — called additionality (or incrementality), time-matching and deliverability — are intended to ensure that new hydrogen electrolyzers don’t create more greenhouse gas emissions by siphoning clean electricity from the grid that must be replaced by ramping up coal and gas power plants.

“It’s clean at the point of production,” McNamara said. “But it’s extremely energy intensive. … It takes a lot of electricity to produce that hydrogen.”

So the proposed tax rules say electrolyzers connected to the grid that are seeking the clean hydrogen production credit must use “energy attribute certificates” to demonstrate their purchase of new clean power, either from a new power facility or from added capacity at an existing plant, provided they are built within 36 months of the electrolyzer coming online. Electric power that is currently being curtailed, meaning it’s available but not being used by the grid because of transmission constraints or other reasons, can also count, McNamara said.

The time-matching provision is intended to ensure the use of electricity by the electrolyzer matches when the power it claims to be using is produced. Until 2028, electrolyzers will only have to match those figures annually. But after that, they’ll have to perform hourly matching to qualify for the credit.

McNamara cited the example of Florida, which has abundant solar resources. But an electrolyzer running at night clearly wouldn’t be using solar power.

“If you look on an annual basis, there could be a mismatch,” she said.

The “deliverability” rules require the power a hydrogen facility claims to be using to be in the same grid region as the electrolyzer.

“Without each of these three requirements, there is a strong likelihood that hydrogen production would result in increased grid emissions and would exceed the maximum emissions intensity permitted to qualify for the credit,” the White House said in a statement.

‘Not a free buffet’

The rules, which are out for public comment now, do leave some questions open, McNamara said, including a push by the nuclear power industry to have all nuclear power, not just curtailed electricity, count for clean tax credit purposes. Since nuclear plants produce about 20% of U.S. electricity, that could mean more coal and gas plant electricity needed to backfill the power diverted to hydrogen, she said.

“This is an industry play for profit,” she said.

Three of the hubs that got initial funding approval from the Department of Energy plan to use nuclear energy, including the Midwest Alliance for Clean Hydrogen (MachH2) hub.

“Today’s award is proof positive that DOE and the administration want existing nuclear energy to play a vital role in jumpstarting domestic hydrogen production and we look forward to final Treasury Department guidance,” said Joe Dominguez, president and CEO of Constellation Energy, in October. Constellation plans to build a hydrogen facility at its LaSalle County Nuclear Generating Station in Illinois as part of the Midwest hub. There are also questions around plant retirements and relicensing, and how biomethane (for example gas produced from landfills, sewage treatment plants and manure lagoons) should be valued, among other facets of the rule.

“This is not a free buffet for public funds,” McNamara said. “It’s an intended tax credit to build out the industry we need for the future.”

Attempts to reach representatives of the Pacific Northwest, Heartland, Gulf Coast, Mid-Atlantic and Appalachian hubs for comment were unsuccessful.

Jeff Phillips, a spokesman for the Midwest Alliance for Clean Hydrogen, which includes Illinois, Indiana and Michigan, said the hub’s leadership and sponsors “are actively reviewing” the Treasury tax guidance.

“We will provide further updates as we are able to,” he said.


How to comment

Written or electronic comments must be received by Feb. 26, 2024. The public hearing on the proposed regulations is scheduled for March 25, 2024, at 10 a.m. (ET). Requests to speak and outlines of topics to be discussed at the public hearing must be received by March 4. If no outlines are received by March 4, 2024, the public hearing will be canceled.

Comments may be filed online or mailed to CC:PA:LPD:PR (REG–117631–23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

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