Renewable trade group pitches US government on hydrogen tax credit rules

The American Clean Power Association, one of the largest renewable energy trade groups in the US, is urging the federal government to embrace rigorous constraints for clean hydrogen tax credits to ensure the credits' climate integrity, according to its newly released framework proposal.

On June 16, the ACP released its Green Hydrogen Framework, which proposes a set of "guardrails to ensure that [the new green hydrogen industry] is both clean and green," the industry group said.

The framework proposal comes as the US Treasury Department and the Internal Revenue Service develop guidance for how the government will implement rules behind the tax credits, which will ultimately determine the amount of subsidies hydrogen producers can receive.

Per the Inflation Reduction Act, hydrogen producers will eventually be able to obtain tax credits worth up to $3/kg depending on the hydrogen's lifecycle emissions levels. But before the tax credit scheme is in place, the government needs to craft requirements that strike a balance between emissions stringency and growth-oriented flexibility.

"There has been intense debate within ACP, as well as other stakeholders, on how to best encourage first movers in commercializing this new technology – while also ensuring emissions reductions," the ACP said. While some stakeholders want to see the government adopt strict rules that would disincentivize hydrogen producers from pulling existing clean power from the grid, others would prefer the government avoid adopting overly restrictive requirements that could hamper the nascent industry's near-term growth.

The debate over tax credit guidance has been centered around what has become known as the "three pillars" of tax credit calculations: additionality, time-matching and deliverability (also referred to as regionality).

Additionality would determine how producers would be able to obtain tax credits when using grid energy to power electrolyzers versus drawing power from dedicated renewable sources; Time-matching requirements would encourage producers to run electrolyzers when intermittent renewable resources are most abundantly available; And deliverability standards aim to avoid congestion in transmission lines by requiring producers to draw power from local sources.

"Over the past several months, ACP has been working diligently to find consensus among the diverse range of views among our members and forge a collective position to help provide a constructive path forward on these issues," the group said.

ACP positions

With regards to time-matching, ACP takes the position that the government's guidance should be more lax than other stakeholders have argued. The group says that the guidance should adopt annual time-matching requirements, where renewables are built according to the annual demand of a producer's electrolyzers, rather than hourly requirements, where hydrogen production is limited to the hourly quantity of renewable energy generated.

"While moving to hourly time-matching at the outset would ensure a high degree of confidence that green hydrogen production will not result in an increase in near-term grid carbon emissions, the majority of studies conclude that green hydrogen projects cannot be competitive on a wide scale basis under an hourly matching regime at the outset," it said.

With regards to additionality requirements, ACP takes a more stringent position. It argues that hydrogen producers should be required to procure an amount of new clean power generation that matches electrolyzer demand.

"While a strict additionality requirement could diminish early green hydrogen production, it also serves as an opportunity to drive new clean energy deployment, utilize existing renewables that would otherwise have been curtailed, and reward the repowering of old facilities," the group said.

Finally, ACP's proposed deliverability or regionality framework would limit where hydrogen projects could be located relative to the clean power generation. Specifically, the proposal argues that electrolyzers should be located within the same jurisdiction of a balancing authority. According to the Energy Information Administration, the US grid is divided into around 70 balancing authorities, and each is responsible for balancing electricity supply and demand for a certain subdivision of the grid.

"Because transmission constraints can prevent procured renewable projects from physical delivery of electricity into the region/grid where the electrolyzer is located, our proposed geographic boundaries are drawn tight enough to decrease the risks of increased emissions due to transmission constraints, while also being large enough to provide access to areas with the best clean energy potential," ACP said.

Treasury rules highly anticipated

It's not clear when the government will release the guidance. The Treasury Department recently told S&P Global the release "is still months away."

In December 2022, the agency received thousands of public comments from stakeholders across the hydrogen economy, demonstrating a broad range of viewpoints on carbon measurement intricacies.

"Whether the tax credits will be a climate hit or miss almost entirely hinges on the guidelines that the IRS and Department of Energy will enforce on hydrogen producers to account for their emissions," Rachel Fakhry, a senior advocate at the Natural Resources Defense Council, wrote last year in a letter to the Treasury Department. A bad accounting system "would dole out large subsidies to dirty hydrogen sources."