Hydrogen production tax credit guidance hews to stringent clean energy pillars

The US Treasury Department issued long-awaited guidance for a hotly anticipated hydrogen production tax credit. In doing so, it incorporated stringent conditions that advocacy groups said were necessary to provide environmental guardrails despite industry group concerns that the provisions could stifle the emerging clean hydrogen ecosystem.

Treasury outlined its framework for the 45V hydrogen production tax credit (PTC) in a Dec. 22 notice of proposed rulemaking (NPRM), ending months of speculation about the overdue guidance and teeing up a period of public comments and hearings that will shape the final PTC.

The stakes are high for the Biden administration, which aims to drive down the cost of hydrogen production and boost US production from less than 1 million metric tons of clean hydrogen today to 10 MMt by 2030 and 50 MMt by 2050.

The US established the tax credits through the Inflation Reduction Act of 2022, offering hydrogen plants up to $3 per kilogram produced, depending on the carbon footprint of the production process. To qualify as "clean," hydrogen projects must limit their emissions to about 5% of that produced by conventional hydrogen production from fossil fuels.

The act allows hydrogen producers to reduce or avoid greenhouse gas emissions in several ways, such as by swapping natural gas for carbon-free electricity as an energy source or installing carbon capture technology. But the act was ambiguous as to what qualifies as carbon-free electricity.

Some called for a requirement that hydrogen producers must procure new wind, solar or nuclear power as opposed to relying on existing clean electricity resources on the grid. Others proposed safeguards, including requirements that tax credit claimants run their electrolyzers only when clean electricity is being generated and that the electricity that they procure be in proximity to the plant.

Those ideas, known as the three pillars, have generated fierce debate for months. But senior administration members said the guardrails provided the best regulatory structure to address legitimate environmental concerns and meet the requirements of the statute, which requires Treasury to use the Clean Air Act's definition of lifecycle greenhouse gas emissions.

"Treasury's proposal will help build the clean hydrogen industry, while including important environmental safeguards that implement the law's references to the Clean Air Act," John Podesta, President Joe Biden's senior adviser for clean energy innovation and implementation, told reporters.

Solving the grid challenge

Under the proposal, hydrogen facilities would submit information about their production process to the US Department of Energy, which would assess the process's lifecycle GHG emissions. The producers would then use a DOE-furnished emissions value to claim the credit as part of their tax filings.

The DOE on Dec. 22 released a new version of its Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) tool, tailored to assess the emissions value of hydrogen production facilities applying for the 45V credit.

The new GREET model accommodates eight hydrogen production pathways, including electrolysis and steam methane reforming paired with carbon capture and storage. The NPRM outlines a process for taxpayers seeking the credit for other forms of hydrogen production to apply for a provisional emissions rate.

Hydrogen producers drawing electricity from the grid to power their facilities would have to buy and retire energy attribute certificates (EAC), which represent the attributes of a unit of produced electricity. EACs are fuel-neutral, a high-level category that includes fuel-specific certificates like renewable energy credits linked to renewable power projects.

Those contractual mechanisms, tracked by regional grid operators and other qualified registries, create a way for hydrogen producers to demonstrate that electricity drawn from the grid came from a clean source.

However, the NPRM adopted the three pillars as conditions for EACs to be used in the GREET system.

Additionality

Under the proposed rule, electricity that powers hydrogen production must come from new clean sources, a tenet known as additionality or incrementality.

The NPRM considers generation assets that started operation or have undergone an increase in capacity, known as uprating, within three years of the hydrogen facility's in-service date to fulfill the condition.

The proposal seeks comment on three other potential ways to satisfy the additionality requirement.

The first is avoiding generation asset retirements as a result of providing electricity to hydrogen production facilities. The second is demonstrating that hydrogen production will result in little or no incremental grid emissions, such as when power generation would otherwise be curtailed if not used for hydrogen production.

The third pathway under consideration recognizes the difficulty of determining hydrogen production's role in preventing retirements or curtailment. It would serve as a proxy for retirements and curtailments by allowing power producers to classify 5% of their generation as incremental. The NPRM sought comment on whether 5% is an appropriate level.

The pathways could be beneficial for nuclear generators in light of DOE analysis that suggests 5% of the existing US nuclear fleet is at risk of retirement, a senior administration official told reporters.

Nuclear generators have been among the loudest critics of the additionality clause. Several regions selected to host hydrogen hubs by the DOE plan to generate hydrogen using nuclear power.

Deliverability and time-matching

Hydrogen producers must also demonstrate that they sourced clean electricity from within an established region, a concept known as deliverability.

The NPRM adopted the regions identified in DOE's recent transmission needs study, which found that the US will need to more than double its existing transmission capacity to achieve Biden's goal of 100% clean electricity by 2035. The study included analysis of transmission constraints and congestion.

The NPRM requested feedback on whether electricity delivered from another region for hydrogen production should qualify for EACs.

The third condition is time-matching, also known as temporal matching. The NPRM proposes that, beginning in 2028, EACs must represent power generated in the same hour that a hydrogen production facility uses it. The NPRM adopted a phase-in period because hourly tracking systems are not currently broadly available.

"For project developers that are early movers, five years provides flexibility and time for this industry to take off," Deputy US Treasury Secretary Wally Adeyemo told reporters.

Battle over three pillars

Industry groups lobbying against the three pillars argued that the rules will delay deployment of new hydrogen infrastructure or deter investment in the US altogether.

The three pillars have also split Democrats, with progressives generally supporting them and more moderate caucus members sharing the industry groups' concerns, including Sen. Tom Carper, one of the architects of the hydrogen PTC.

However, after consulting with the DOE and Environmental Protection Agency, Treasury determined that its guidance must take into account and prevent hydrogen production's potential to generate indirect emissions.

Indirect emissions can result when new power demand places strain on the grid, requiring additional generation to backfill supply. Often, fossil fuel generation provides this marginal supply, which results in increased emissions.

"Allies and partners have already put similar structures for hydrogen in place, and having clear rules to ensure that the US develops a clean hydrogen industry will help drive innovation and demand for more advanced American-made electrolyzer technology," Adeyemo said.

In a letter to Treasury released on Dec. 22, the EPA said indirect emissions resulting from an increase in energy production can result in significant indirect emissions, such as when the federal renewable portfolio standard boosted biofuels output.

The EPA additionally determined that it is reasonable for Treasury to conclude that increased hydrogen production will increase electricity demand and spur fossil fuel generation. Lastly, the EPA determined that EACs were an appropriate tool to verify that hydrogen producers are using clean electricity and avoiding indirect emissions.

Treasury to regulate RNG use

Treasury intends to propose rules similar to the three pillars to provide guardrails for the use of renewable natural gas (RNG) in hydrogen production.

RNG is produced by capturing methane and processing it into pipeline-quality gas, preventing emissions from organic waste sources such as landfills, farms and water treatment plants. Hydrogen producers can use RNG in several ways, including as a feedstock for blue hydrogen and a source of power generation for electrolyzers.

Treasury anticipated disqualifying hydrogen production that uses RNG in a way that diverts the fuel from an existing use, which would require backfilling and generate indirect emissions.

The NPRM also requested comment on the use of RNG certificates, noting that existing systems are limited in their capacity to track and verify RNG pathways, particularly around indirect emissions accounting.

Comments on the NPRM will be due 60 days after it is published in the Federal Register.

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