With the passage of the Inflation Reduction Act last year, a decades-long effort to get a major climate package through Congress is over. But the work of ensuring this unprecedented bundle of funding for clean energy leads to reduced emissions is just beginning.
A decision with profound implications for that goal now lies with the Treasury Department, which must settle a debate over the best way of crafting a tax credit designed to advance the production of clean hydrogen.
Scientists and climate advocates warn that without rigorous guidelines dictating who is eligible for the subsidy, the government could spend billions propping up hydrogen production facilities with enormous carbon footprints, wiping out many of the other climate gains catalyzed by the legislation.
“Absent strong rules, we could increase emissions by half a gigaton over the lifetime of the credit,” Rachel Fakhry, a senior climate and clean energy advocate at the Natural Resources Defense Council, told Grist. “The current emissions of the power sector is 1.5 gigatons. So this is completely contrary to U.S. climate goals. The stakes are extremely high.”Such concerns came up repeatedly during a public comment period that ended in December.
But the hydrogen industry, oil companies like Chevron and BP that are investing in the technology, and even a few renewable energy groups argued otherwise. They flooded the Treasury with comments insisting that arduous rules will undermine U.S. climate goals — by killing this nascent clean technology before it can even get started.
Onerous rules would “devastate the economics” of green hydrogen, David Reuter, chief communications officer for the energy company NextEra, told Grist in an email. They would shut down investment in the industry, “effectively making it dead on arrival.”
Building a domestic clean hydrogen industry is a key part of the Biden administration’s climate strategy. The fuel has the potential to replace oil, gas, and coal in a range of applications, from aviation to industrial processes like steelmaking and chemical manufacturing. Most importantly, it does not emit carbon when it’s used.
The dispute over the tax credit comes down to the unusual business of producing hydrogen. Current supplies are made by reforming natural gas, which releases greenhouse gasses.
The tax credit is designed to reduce the cost of a carbon-free method that requires only electricity, water, and a machine called an electrolyzer. Producers can earn up to $3 per kilogram of hydrogen they produce this way. The tax credit has no cap, and could pay out more than $100 billion over the next decade.
The question for the Treasury is how to measure the emissions from the electricity used. About 60 percent of U.S. electricity still comes from fossil fuels. Plug your hydrogen plant into the grid pretty much anywhere in the country today, and it could result in higher emissions than the conventional production method that uses natural gas.
Three rules for clean hydrogen
Late last year, a prominent energy modeling group at Princeton University circulated new research showing that hydrogen producers could all but eliminate this emissions impact by following three principles. These are the rigorous rules that the Natural Resources Defense Council and other environmental groups want the Treasury to adopt.
First, producers must contract with new renewable energy resources like wind and solar farms or geothermal power plants, ensuring enough new clean electricity comes onto the grid to cover the hydrogen plant’s demand.
Second, these resources must feed into the same regional grid the hydrogen plant uses, with no transmission bottlenecks between them.
And third, hydrogen producers must match their operations with these renewable energy resources on an hourly basis. That means if they buy power from, say, a solar farm, they have to shut down when the sun goes down.
That hourly matching concept is giving hydrogen producers the biggest headache. “Grid-tied electrolyzers are most economic when operating as close to 100 percent as possible,” said Reuter. “A clean hydrogen project may have to curtail its electrolyzer if renewables are not available at these granular time periods. Curtailment leads to long idle times and higher costs.”
Instead, NextEra and others in the industry urge the government to accept a scenario in which they buy enough renewable energy to cover their electricity usage on an annual basis. That means a hydrogen plant could run ’round the clock for a year, total up its energy usage, and buy an equivalent amount of solar or wind power.
Reuter cited an analysis by the consulting firm Wood Mackenzie, which found that such a scheme could bring enough renewable power onto the grid to cancel out the dirty production and result in net zero-emissions hydrogen.
Wilson Ricks, who led the Princeton study, noted that Wood Mackenzie made several different assumptions that led to that conclusion. For one, the authors didn’t include clean electricity subsidies from the Inflation Reduction Act, “which leads to significantly higher total costs for both annual and hourly matching,” he said. It will be up to the Treasury to parse these differences.
The stakes of eschewing any one of the three principles are not just about emissions or project costs. Fakhry said that if hydrogen producers increase demand for electricity when renewable resources are unavailable, they will undoubtedly cause natural gas and coal-fired power plants to ramp up. That could worsen air pollution and drive up the cost of electricity. It also creates a reputational risk for the budding industry — it will be much harder to make the case for using green hydrogen if there’s uncertainty about how clean it actually is.
Right now, some self-described green hydrogen producers are flocking to areas like upstate New York, where existing hydropower is cheap, and Florida, where solar energy is abundant. But if the Treasury agrees that hydrogen production must be powered by new, clean resources at all times to earn the tax credit, those projects wouldn’t just lose the ability to claim the credit — they would lose credibility.
Companies push back on regulations
Criticisms of the approach NextEra and others propose are not new, nor are they unique to hydrogen. Many companies that claim they are “powered by 100 percent renewable energy,” are likely doing some form of annual matching.
But there’s a growing consensus that this claim is misleading. In 2020, technology giant Google came to the conclusion that it needed to match its energy usage with clean sources on a 24/7 basis to fully eliminate its carbon footprint. At the time, there weren’t really any products or systems set up to facilitate this.
But the landscape has changed dramatically since then, said Maud Texier, director of clean energy and carbon development at Google. Businesses have sprung up to help companies track their consumption on a granular basis, and renewable energy markets have created hourly products.
“We see a whole value chain and ecosystem developing around this 24/7 solution,” she said. “Today for new entrants, there’s many more tools for them to get started.”
Google still has a ways to go to achieve its goal. But many other companies, nonprofits, and even governments have signed on to the concept. A United Nations-sponsored initiative includes more than 100 signatories. In 2021, the Biden administration set a goal for at least 50 percent of the power consumed by government buildings to be emissions-free on a 24/7 basis by 2030.
“The market is heading in this direction,” said Fakhry. “The tools are here and can scale really fast where they’re not. And the Treasury imposing anything short of that is contrary to momentum in the market.”
The argument that hourly matching would destroy the economics for green hydrogen also doesn’t entirely stand up to scrutiny. Seven hydrogen and renewable energy companies filed joint comments to the Treasury arguing that the approach is technologically and economically feasible.
One of them, Electric Hydrogen, is developing electrolyzers designed to shut on and off to match renewable energy availability. Raffi Garabedian, the company’s CEO, acknowledged that today’s electrolyzers are so expensive that it does make it harder to square a project’s finances if they operate intermittently. But he said some hydrogen developers are combining wind and solar contracts, allowing them to operate a lot closer to 24/7.
“You’re still shutting off every day, but that helps the economics,” he said. “But it’s not possible, nor is it the right thing to do to run hydrogen production at all hours of the day. I’ll just say that really bluntly.”
Garabedian and others pointed to a hydrogen plant under development in Texas, a joint project by the energy corporation AES and the chemical company Air Products. Rather than plugging into the grid, the companies plan to build wind and solar farms to supply the plant directly. A representative for AES confirmed that the plant “will ramp up and down with the availability of renewable energy generation.”
Another project under development in Mississippi by the company Hy Stor is taking a similar approach, combining wind and solar to power its plant. It will use underground caverns to store hydrogen so that it can provide a steady supply to customers when the plant’s operations slow or halt.
It’s true that rigorous rules would significantly skew the geography of clean hydrogen. Daniel Esposito, a senior policy analyst at the think tank Energy Innovation, said he expects to see more developers head to wind belt states like Texas and New Mexico. To him, this would be a positive outcome, because industries in those areas, like ammonia production and major trucking routes, are great candidates to become clean hydrogen customers. “There’s a lot of great uses there that don’t have a lot of great alternative solutions,” he said.
Whatever Treasury Secretary Janet Yellen and her department decide will shape the future of the nation’s clean hydrogen industry for years to come — and by extension, the impact of the Inflation Reduction Act. For Esposito, the decision turns on a single question.
“Are we aiming for building up the industry, emissions be damned? Or building up the industry at a slower pace, with the emissions in check from the start? We just want to make sure that everybody writing the rules knows the implications.”
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