A lucrative tax credit for making clean fuel won’t be so easy to come by

By | December 23, 2023

WASHINGTON — The Biden administration on Friday released its long-awaited plan to offer lucrative tax breaks to companies that make hydrogen, a clean fuel, and proposed new rules aimed at ensuring the policy does not inadvertently lead to a spike in global energy production. global warming.

Hydrogen is widely seen as a promising tool to tackle climate change, as long as it can be produced without creating greenhouse gases. When burned, hydrogen emits mainly water vapor, and it could be used instead of fossil fuels to make steel or fertilizer, or to power large trucks or ships.

But making hydrogen requires energy, and little so-called clean hydrogen exists today. Currently, most hydrogen is made from natural gas in a process that releases global warming carbon dioxide.

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Congress last year approved a tax credit to encourage companies to make more hydrogen from renewable energy and other carbon-free sources, prompting fierce lobbying from companies focused on who should be able to claim the credit.

Experts have warned that some companies could claim to use wind or solar energy to make hydrogen while indirectly causing emissions to rise, and they urged safeguards to prevent that. Some industry groups wanted more lenient rules around the credit so that a wider range of projects could qualify.

In the guidelines issued Friday, the Treasury Department largely sided with those pushing for stricter restrictions.

To qualify for the full tax credit, companies typically must use clean electricity from newly built sources, such as wind and solar farms, to run electrolysers that split water into oxygen and hydrogen. From 2028, these electrolyzers should run at the same hours as the wind or solar farms were in operation.

Many hydrogen developers and environmental groups praised the proposal. Without these restrictions, hydrogen producers could draw enormous amounts of power from the existing grid and cause a spike in greenhouse gas emissions if coal- or gas-fired power plants were required to run more often.

“The U.S. has the highest hydrogen tax subsidy in the world, so we believe the country should set the highest standards for what counts as clean,” said Eric Guter, vice president of hydrogen at Air Products & Chemicals Inc., the largest producer in the world. of hydrogen. The company is developing a $4 billion project in North Texas with AES that will use wind and solar energy to generate hydrogen.

But other industry groups criticized the rules, saying they could prevent the development of many early hydrogen projects.

The American Clean Power Association, which represents major wind, solar and transmission companies, said the requirement to match hydrogen production with clean electricity on an hourly basis by 2028 was too strict.

This provision “will discourage a significant majority of clean energy companies from investing in green hydrogen production and facilities,” the group’s CEO Jason Grumet said in a statement.

The Treasury Department will accept comments from the public for 60 days and may make changes before finalizing the plan.

For example, some nuclear power producers had asked for tax credits to be made available for hydrogen produced from existing nuclear power plants. But the government postponed a decision on that issue and instead asked the industry for more information. Very few nuclear power plants are expected to be built in the near future.

Cost is currently the biggest hurdle to cleaning up hydrogen. Although some companies around the world have used wind, solar or nuclear power plants to run electrolysers and make hydrogen without any emissions, that process costs about $4 to $6 per kilogram of hydrogen. That is about two to three times as expensive as making natural gas.

The hydrogen tax credit was intended to bridge that gap and boost a new industry, providing up to $3 for every kilogram of “clean” hydrogen companies produce over a decade.

But defining what counts as ‘clean’ has proven controversial.

Most of America’s electricity still comes from coal and natural gas plants, so if a company were to simply plug some electrolyzers into the existing grid to make hydrogen, emissions would most likely increase. Similarly, if a hydrogen company tried to use electricity from an existing wind or solar farm, other coal or gas plants would have to run more often to compensate for the lost energy. Without safeguards, several studies suggested, the tax credits could inadvertently lead to the release of hundreds of millions of tons of additional carbon dioxide.

To avoid that outcome, the Treasury Department has proposed several restrictions. To earn the full tax credit, hydrogen producers would have to draw on new sources of clean electricity built within the last three years. Consider a new wind farm or investments that expand the capacity of an existing nuclear power plant. Those power stations should be in the same grid area as the hydrogen plant. And from 2028, the electrolyzers could only run during the same hours when clean power was available.

Some hydrogen companies said the proposed rules could be difficult to follow. Wind and solar power don’t run all the time, and matching hourly hydrogen production to renewable fluctuations would increase costs, they said.

“These policies will make things harder for everyone,” said Jacob Susman, CEO of Ambient Fuels, a clean hydrogen developer that had planned about $700 million in new projects. Still, he said his company would try to work with the new rules.

Other companies and experts said the new rules around hourly matching could boost innovation. An American startup, Electric Hydrogen, makes an electrolyzer designed to cycle solar and wind energy output up and down. The new rules could give this type of technology an edge over the less flexible electrolyzers made in China, the company said.

“There will be a wave of lobbying around the final rule,” said Rachel Fakhry, policy director for emerging technologies at the Natural Resources Defense Council, an environmental group. “We are monitoring it closely to make sure no new loopholes arise that are harmful to emissions or to consumers.”

It is still unclear how much clean hydrogen the United States will actually produce in the coming years. Although the Biden administration has laid out a strategy to produce 50 million tons of clean hydrogen by 2050, more than 50 times what is produced today, there are steep hurdles, including setting up systems to transport hydrogen and finding buyers for it the fuel.

To that end, the Energy Department is also spending $7 billion to create hydrogen hubs across the country to connect producers and buyers, while establishing programs to boost hydrogen demand and reduce the cost of electrolyzers.

“There are an awful lot of tools in our clean hydrogen tool belt that we didn’t have before,” said David Turk, the deputy energy secretary. “There is a huge opportunity here.”

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