Hydrogen watchers on all sides of US tax credit debate warn of cost of inaction

US hydrogen industry watchers are warning that policy uncertainty could be costly to the emerging sector as individual stakeholders debate which producers should qualify for clean energy incentives.

The Biden administration has "got to lay something down. There is a cost to inaction," Jason Grumet, CEO of the American Clean Power Association, said at a July 31 panel on federal hydrogen policy. "But they need to lay something down that is confident, that people can rely on. These are 30-year investments in energy infrastructure; we're not just making apps here."

The US Treasury Department is nearing the deadline for draft guidance on the Inflation Reduction Act's 45V tax credit program, which awards up to $3/kilogram of hydrogen depending on the carbon footprint of its production. The IRS decision on how to measure that carbon footprint could determine whether a project can qualify for the federal subsidy, prompting a flurry of lobbying in recent months.

While industry members have argued that strict rules could stifle the nascent industry, environmental groups say a poorly defined policy would defeat the purpose of the tax credit, intended to spur a market for the fossil fuel alternative. A point of contention is how hydrogen producers source their electricity, which could have an outsized effect on a project's lifecycle greenhouse gas emissions.

Congress gave Treasury until Aug. 16 to propose rules, but some industry members have said the guidance may not come until autumn.

The challenge is striking a balance between flexibility and the policy certainty that is necessary to drive investment in clean hydrogen, panelists said at the Washington event.

"If the industry does not believe that what Treasury's saying is something that they can rely on and make these investments, then everyone's going to continue to wait," Grumet said.

Conversely, Nathan Iyer, an associate at the think tank formerly known as the Rocky Mountain Institute, cautioned that overly inclusive guidance could incentivize hydrogen production pathways that end up driving CO2 emissions. "Now is Treasury going to pull that route and potentially topple over all the projects that depended on it? That's not a good outcome," he said during the panel.

One option is a "safe harbor" system with strict eligibility requirements for the tax credit that can be expanded as new hydrogen production pathways develop, Iyer said. An example is running a hydrogen production plant on curtailed renewable electricity, despite RMI's call for a requirement that plants procure new clean power capacity.

"We know that's clean power. It doesn't necessarily come from new clean power or new clean capacity," Iyer said. "But we know there's probably an option to make that work."

Paul Wilkins, a government affairs specialist with Electric Hydrogen Co., agreed that Treasury should err on the side of higher environmental standards. The electrolyzer manufacturer has argued for strict additionality and time-matching rules.

"The reason that we have a level of confidence around the industry's ability to meet those requirements is looking at some of the historical precedents out there," Wilkins said. "The Clean Air Act Amendments of 1990 are the classic example of where a lot of industries said the sky was going to fall and costs were going to be too high. The rules came out and, lo and behold, industry and innovation and competition won the day and it's one of the most successful environmental programs we have."

S&P Global Commodity Insights reporter Siri Hedreen produces content for distribution on Capital IQ Pro .