Proposed federal hydrogen tax credit rules could be worth billions for projects, including those in Pa.

• Reid Frazier
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  Reid R. Frazier is an energy reporter for The Allegheny Front, a Pittsburgh-based public media outlet covering the environment in Pennsylvania. His work has aired on NPR and Marketplace.

U.S. lays out Hydrogen tax credit rules that could be worth billions for projects, including those in PA

The Department of Treasury’s new proposed rules for tax credits for “clean hydrogen” could be a boon for boosting the nascent clean energy field, advocates say. But some companies, including oil and gas producers, and politicians say they are too strict to accelerate the industry quickly enough.

The rules will establish how clean the plants need to be to qualify for potentially generous subsidies created by the Inflation Reduction Act.

Part of the hydrogen rollout

The rules are part of the Biden administration’s rollout of clean hydrogen programs.

The first phase was the creation of “hydrogen hubs” around the country, funded with $7 billion from the Bipartisan Infrastructure Law. In September, seven hubs were announced around the country, including two with operations in Pennsylvania: the ARCH2 based in West Virginia and the MACH2 in Philadelphia.

Part Two is the so-called “45V” clean hydrogen tax credits, funded by the 2022 Inflation Reduction Act, Biden’s signature climate legislation.

The credits will give subsidies to facilities that create clean hydrogen with minimal carbon emissions. The IRA designated the largest subsidies – $3 per kilogram of hydrogen produced – for those facilities and companies that create the fewest emissions. Smaller credits, down to $.60 per kilogram, go to those that generate more emissions.

The facilities that can meet the highest requirements, and thus the biggest payments, are plants that make “green hydrogen” by splitting water atoms using wind and solar power. But the law left the Department of Treasury to determine just how clean these plants would have to be to qualify for the $3 subsidy.

In late December, the Treasury released proposed rules that push hydrogen projects to use new sources of zero-carbon electricity, like wind and solar, instead of drawing their power from existing sources.

The rules are important because the U.S. and other countries are trying to kickstart a clean hydrogen economy.

A potential zero-carbon energy source

Hydrogen is a potential zero-carbon energy source, particularly for sectors that are hard to electrify, like steel, fertilizer and long-haul shipping. These sectors account for about 25 percent of global CO2 emissions, according to the Department of Energy.

To get the highest level of tax credit, which would subsidize roughly 60 percent of the cost of green hydrogen, companies have to show that the electricity they use is tied to a new solar, wind or other zero-carbon installation; that these facilities are relatively close to the energy produced; and that they’re drawing power when those facilities are producing energy.

The Treasury also clarified how projects using natural gas as a basis for clean hydrogen production will have to count emissions from gas leaks in fracking, and other “upstream” processes. These so-called “blue hydrogen” projects will use an EPA model to determine how much climate-warming methane is released in providing natural gas for their projects.

These blue hydrogen projects, including those in the West Virginia-based ARCH2 project, will be required to capture and bury a large amount of the carbon dioxide created during the hydrogen-making process to qualify for their credits, which are expected to be lower than those for green hydrogen.

Any facility that qualifies for a credit will be able to claim it for 10 years if construction starts by 2033. That means the subsidy could last well into the 2040s.

Industry response is mixed

The American Petroleum Institute, an oil and gas lobbying group, said the administration should offer more flexibility in the rules.

“As the administration moves forward in this process, we urge them to finalize a policy that fosters more development and flexibility for hydrogen expansion, not less,” the group said in a statement.

Another trade group of companies interested in using the hydrogen subsidy wants the administration to phase in the clean energy requirements to allow companies time to build more renewables.

“The environmental risk that green hydrogen, a critical decarbonization solution, will remain on the sidelines for the next 30 years is vastly greater than the perceived risk associated with providing additional flexibility in the transition timeline,” said Jason Grumet, CEO of American Clean Power Association in a statement.

But other companies say they are ready to roll with projects that can comply. And some companies are lining up to buy products made with green hydrogen.

The chemical manufacturer Air Products, the largest hydrogen supplier in the world, said the rules would “support for the development of truly clean hydrogen projects” and accelerate the growth of the clean hydrogen industry. It is part of a group of companies that supported the rules.

“Weak guidance would result in hydrogen projects increasing greenhouse gas emissions by hundreds of millions of tons and driving electricity price spikes, while receiving billions of dollars of taxpayer-funded subsidies. This would irreparably compromise the credibility and longevity of our industry,” they wrote.

Environmental groups applaud the rules

Julie McNamara, senior energy analyst and deputy policy director of the Climate and Energy Program at the Union of Concerned Scientists, said that without the strict guardrails in place in the proposed rules, “the tax credit could miss the full pollution impact of fossil fuel-based hydrogen projects. The administration must stay the course and ensure heavily polluting projects cannot suddenly qualify as ‘clean’ simply by outright greenwashing.”

Pete Budden of the Natural Resources Defence Council said the rules were “strong and pragmatic” for a subsidy that could exceed $100 billion over the next few decades.

“They adhere to the huge amount of evidence that has accumulated over the past year that showed that really clear guidelines are needed to prevent huge emissions increases from this tax credit, from mislabeling dirty hydrogen as clean hydrogen,“ he said.

Scientists have found that allowing companies to use grid-based electricity to create hydrogen would actually increase carbon emissions, because the electric grid is still powered largely by fossil fuels. One analysis by Bloomberg BNEF found that using grid-connected electricity to make hydrogen would be dirtier than using coal to create hydrogen.

Politicians in Pa. want more natural gas use for hydrogen 

Politicians from Pennsylvania signaled they wanted more flexible rules for natural gas and other power sources. Democratic Sen. Bob Casey said in a statement he had “serious questions” about whether the rules would stymy the industry. “It appears that this rule may cut out of the equation Pennsylvania workers and businesses that are ready and willing to lead the way on hydrogen power,” Casey said.

In a December letter to President Biden, Democratic Rep. Chris Deluzio of Beaver County said he was “concerned with the rigid restrictions that may be placed” on blue hydrogen projects.

The Treasury is seeking comment on giving subsidies to hydrogen producers who harness electricity from natural gas and coal-fired power plants that use carbon capture and sequestration to store their climate pollution.

Deluzio said if the rules are too strict, they could “unfairly restrict” these types of hydrogen projects.

He also wants the rules to allow a phased-in approach to mandating green hydrogen facilities use new renewable electricity, and instead allow them to use more grid energy in their first years of service. “We need to allow this budding industry to breathe without choking it out with unnecessarily strict regulations.”

His office said the rule mandating clean electricity sources be from strictly new facilities would make it impossible to use nuclear energy to power hydrogen production.

“The requirement that clean-energy generators must have begun commercial operations within three years of a hydrogen facility being placed in service eliminates almost all current domestic nuclear facilities (like the Beaver Valley Power Station),” Deluzio’s office said, in a statement. “Congressman Deluzio supports nuclear energy and believes we should use every tool in our toolbox to support an energy transition that both cuts emissions and creates and supports good, union jobs.”

The rules do anticipate this conundrum. The Treasury is seeking comment on a provision to provide the credit to a zero-carbon facility, like a nuclear plant, “if the facility is likely to avoid retirement because of its relationship with a hydrogen production facility.” The Energy Information Administration predicts about 4,600 megawatts of nuclear power, or about 5 percent of the country’s nuclear fleet, could retire in the next 10 years.

“Some clean power plants, primarily nuclear plants, have retired in recent years,” the rules state. “Studies have shown that there is risk of continued retirement in the years ahead.”

The 60-day comment period ends on February 26.

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