Interagency Collaboration on Hydrogen Tax Matters as Biden Administration Publishes First Strategic Roadmap
Technical experts from the Department of Energy are weighing in on how the Treasury Department should devise a production tax credit for hydrogen. Energy Secretary Jennifer Granholm and her team of senior officials are working with the Treasury and the White House to address the various options. On Monday, June 5, David Turk, Deputy Secretary of Energy noted, “There are different opinions on this, different perspectives on this, and we’re taking all that in, “we certainly appreciate how important this tax credit is, how important it is to work with a sense of urgency here and get that clarification out there so everybody can make business decisions based on that tax credit.”
The 45V hydrogen production tax credit, established by the Inflation Reduction Act of 2022, promises up to $3 per kilogram for hydrogen that meets certain emissions standards. A new debate has cropped up in recent weeks over whether the Treasury Department should require hydrogen producers to source energy from new renewable power plants in order to qualify for the tax credit.
A Breakdown of 45V
The Clean Hydrogen Production Tax Credit is available to people operating qualifying clean hydrogen production facilities in the U.S and applies to hydrogen produced after December 31, 2023, in facilities that begin operating before January 1, 2023, for their first decade of service.
The credit’s base rate is 60 cents per kilogram, adjusted for inflation. It’s then multiplied by an applicable percentage based on the plant’s life cycle greenhouse gas emissions. The percentage ranges from 20%-100%.
There is also a bonus tax credit available for qualifying facilities.
The bonus is five times the base credit and is contingent on facilities meeting wage-related and registered apprenticeship requirements.
The Clean Hydrogen Tax Credit should give a major boost to renewable energy. Facilities will only qualify to receive it if they get power from new clean energy sources.
Many have argued for strict implementation of the tax credit, saying that weak guidelines would lead to an increase in net emissions and result in the subsidization of hydrogen with higher emissions intensity than current natural gas production methods.
Matching Renewables
Environmental groups are urging the Treasury Department strictly require additionality, or use of new renewable energy to produce hydrogen, to avoid an increase in greenhouse gas emissions from using energy already on the power grid and diverting it from other uses. They are also pushing for hydrogen producers to match their production, on an hourly basis, to renewable generation to ensure hydrogen is being cleanly produced all hours of the day instead of averaging out power sources over the course of a year. There are some concerns with the feasibility of implementing hourly versus annual matching. Although multiple initiatives offering hourly energy attribute certificates (EACs) have emerged in recent years, these resources are not uniformly available across the nation, so challenges to equitable implementation and data procurement from utilities and power companies remain. From the Treasury side, they have not said when their guidance will be released since comments were due December 2022.
Roadmap Weighs Emissions
The Energy Department, also on Monday, finalized its first-ever hydrogen roadmap, which describes how the US could scale-up use of the clean-burning fuel. The U.S. National Clean Hydrogen Strategy and Roadmap estimates hydrogen has the potential to add 100,000 net new direct and indirect jobs by 2030. US demand for hydrogen could reach 50 million metric tons by 2050, it estimates, spurred in part by the $7 billion regional hydrogen hub program it launched last year. It examines future demand scenarios—with strategic opportunities for the domestic production of 10 million metric tons (MMT) of clean hydrogen annually by 2030, 20 MMT annually by 2040, and 50 MMT annually by 2050. The report does not directly weigh in on the tax credit debate. But it acknowledges both sides.
While electricity from the grid lowers barriers to electrolyzer production, it will most likely result in higher carbon intensity than the traditional method of producing hydrogen from natural gas, the report says. If electrolyzers are plugging into the grid in the fossil fuel-heavy parts of the country, carbon intensity could reach 40 kilograms of CO2 per kilogram of hydrogen produced—twice the median carbon intensity of the power grid. At the same time, the report notes hydrogen production has a 10-year window to scale up while claiming tax credits, adding, “Electrolysis may not achieve the necessary learning curves to remain competitive in the absence of tax credits.”
The team at Constitution Partners is actively monitoring the ongoing hydrogen debates in government and industry. Please reach out with any questions you may have.