In the evolving landscape of the U.S. energy sector, hydrogen’s role is starting to come more into focus. The pivotal catalyst in this transition is the recently introduced 45V Hydrogen Production Tax Credit under the Inflation Reduction Act (IRA). This credit, offering up to $3 per kilogram of hydrogen produced, represents a seismic shift in the economics of clean hydrogen production. The sliding scale credit is set to be determined by the relative lifecycle carbon intensity per kilogram of hydrogen, with eligible values starting at 4kg CO2/kg H2 and decreasing to zero.
The article was first published November 28, 2023
“Details of the 45V tax credit are critical in whether it will be effective in delivering clean energy,” said Joe Powell, Founding Director of The Energy Transition Institute at the University of Houston.
As we eagerly await the U.S. Treasury Department’s guidance on how the emissions intensity of hydrogen production will be calculated, the implications of these rules are profound. The eligibility criteria and the extent of the credit could make or break the financial viability of projects using different technologies, feedstocks, energy supplies, and emissions accounting methods for hydrogen production. The nuances of this tax credit are not just administrative details; they are the linchpins that could dictate the pace and scale of the U.S. hydrogen economy’s growth.
TLDR Summary:
- IRS and DOE Rulemaking on 45V: The IRS and the Department of Energy are currently formulating rules for the 45V hydrogen production tax credit. Rules were expected to be released by the end of 2023, but that day may have been pushed back to early 2024.
- Lobbying Efforts and Competing Interests: Various large businesses, trade and advocacy groups, and environmental organizations are lobbying heavily to influence these rules, presenting a complex scenario with multiple interests.
- Emissions Boundary and Full Lifecycle Accounting: The current production tax credit measures emissions from well-to-gate. There is an effort to expand this to include full lifecycle emissions, which would capture emissions beyond the point of hydrogen leaving the production facility.
- Emissions Allocation for Pyrolysis Companies: There’s a need to determine how to allocate emissions between the two products (hydrogen and solid carbon) produced by one technology.
- Preference for Mass-Based Allocation: It is argued that mass-based allocation is less prone to manipulation and easier to certify than economic value-based allocation.
- Truck Transportation and Emissions: Concerns are raised about the environmental impact of transporting hydrogen by truck, suggesting that it should be minimized.
The 45V Debate: Striking a Balance
The 45V tax credit has sparked a heated debate among stakeholders, as well as some unlikely alliances. A coalition comprising academics, select energy companies, and environmental organizations advocates for strict implementation. They propose a stringent emissions accounting system based on three pillars: additionality, deliverability, and hourly time-matching. These measures aim to ensure that the clean hydrogen produced truly contributes to carbon reduction goals.
Joe Powell said additionality needs to be examined carefully. “Does the credit result in additional clean energy generation in the system of interest? To do so, one must consider what happens instantaneously or at least on an hourly basis, as there are times during the year when renewable energy goes to near zero (wind and/or solar), and incentivizing generating hydrogen from fossil fuels during these times leads to having to install more fossil capacity as dispatchable power,” said Powell. “All of this can be managed via detailed systems analysis and accounting, but it would require astute knowledge of the interdependent energy systems to construct appropriate policy.”
Opponents argue that stringent additionality requirements could impose unreasonable costs and delays, potentially hampering the scale-up of hydrogen production and disadvantaging renewable-based hydrogen in comparison to fossil fuel-based hydrogen with carbon capture and storage (CCS). They argue that these types of rules were not applied to other emerging clean technologies, and are still not applied to many fossil-based projects or other large electrical loads. Furthermore, the debate extends to the practicality and economics of hourly versus annual energy matching, with some studies suggesting that hourly matching could be significantly more expensive, as many utilities lack the data resolution in their own power production mix today.
The Lifecycle of Hydrogen Emissions: An Onsite Perspective
Mack Hopen, Commercialization Manager at Modern Hydrogen, highlights the importance of understanding the full lifecycle of hydrogen emissions. He emphasizes, “The full lifecycle of emissions is crucial in realizing the environmental impact of hydrogen production.” As Hopen points out, the current production tax credit draws a boundary from well to gate, failing to account for emissions post-production.
Hopen illustrates this with a striking example: “You could make hydrogen in Florida via electrolysis with clean solar electricity, put it on a truck, and send it out into the world. That diesel truck could drive for dozens, if not hundreds of miles to its delivery point, creating an order of magnitude more emissions if you didn’t produce and use that hydrogen at all. In theory, all the while, you can claim the maximum credit available, despite increasing global macro emissions.”
“The cleanest hydrogen is the type that you make on site,” Hopen added. “Hydrogen is the hardest molecule in the universe to transport in large amounts, so we should do as little of it as possible. In cases where it’s required, it should be done predominantly by zero-emission vehicles if we are serious about reducing net emissions.”
Joe Powell makes a similar point. “The greenest hydrogen may be wind-powered electrolysis,” said Powell, citing a recent 2023 Argonne National Labs study. “The current carbon footprint of solar panels imported from China and made using coal power is tangible. Ultimately this will be replaced by clean renewable or nuclear energy across the energy system.”
Emissions Allocation in Pyrolysis
As a pyrolysis company, the allocation of emissions between the dual products of the pyrolysis process is a significant consideration. Methane Pyrolysis produces clean hydrogen as well as solid carbon, which is used in products like asphalt. Hopen discusses the challenge, stating, “’How do you share those emissions amongst the two products?’ is a giant open question.” He advocates for a mass-based allocation over an economic value approach, as it is “harder to fake and abuse” and “much easier to certify.”
The Future of Hydrogen Production
Powell also comments on the technological advancements in hydrogen production, noting that post-combustion capture works on existing assets, “but pre-combustion capture can often be more efficient for new assets.” He cites the example of partial oxidation for hydrogen generation from natural gas as a more efficient method compared to older steam methane reforming units.
Modern Hydrogen’s pre-combustion decarbonization of natural gas capture results in a valuable product: pyrolytic carbon.
The 45V Tax Credit VS Hydrogen Hubs: Why Do We Need Both?
In terms of sheer financial possibilities and funding, the 45V tax credit could be considered more impactful due to its broader application and direct financial incentives. However, hydrogen hubs are crucial for creating the necessary infrastructure and local ecosystems for the hydrogen economy.
The success of hydrogen hubs, according to Powell, hinges on public-private partnerships and decarbonization incentives. These partnerships are essential in covering higher costs and ensuring community acceptance and appropriate permitting pathways.
Compare the two:
45V Tax Credit:
- Wide Impact: The 45V tax credit is a policy tool designed to incentivize clean energy across a broad spectrum, no matter the project size or geography.
- Direct Financial Incentive: This tax credit directly reduces the tax liability of eligible entities, making it a powerful financial incentive. It can significantly lower the cost of clean hydrogen production and other clean energy initiatives.
- Market Influence: By making clean energy more financially viable, the 45V tax credit can stimulate market growth, leading to more investments and opportunities in the sector.
Hydrogen Hubs:
- Focused Investment: Hydrogen hubs represent a more concentrated investment in specific areas, companies, or communities. They are designed to create centralized locations for hydrogen production, distribution, and usage.
- Public-Private Partnerships: Hydrogen hubs often rely on a mix of public and private funding. They can benefit from government grants, subsidies, and private investments.
- Local Economic Boost: While their impact is more localized compared to a broad policy like the 45V tax credit, hydrogen hubs will significantly boost local economies by creating jobs, fostering innovation, and attracting related businesses.
So, the 45V tax credit potentially has a broader scale of impact due to its nationwide applicability. It can influence a wide range of clean energy projects including solar and wind development, and even nuclear power in some cases.
The 45V tax credit provides direct financial benefits to eligible entities, whereas the funding for hydrogen hubs might have more indirect benefits, like improving local infrastructure or creating ecosystems conducive to hydrogen economies.
Hydrogen hubs may provide more immediate economic benefits to a region, whereas the benefits of a policy like the 45V tax credit might be more long-term as they gradually shift the market towards clean energy.
Ideally, a synergistic approach that leverages the strengths of both – the wide-reaching policy support from initiatives like the 45V tax credit and the focused, local development from hydrogen hubs – would be the most beneficial for the growth of the hydrogen industry.
A Clear Framework is Needed
This edition of “Hydrogen Horizons” highlights the complexities of hydrogen production and the critical role of policy in ensuring its sustainability. We’ll continue navigating these challenges and opportunities, and the key will be a clear understanding of the hydrogen production credits and a straightforward approach for 45V implementation.
“The US, and much of the world, fears a tax on fossil carbon, and provides incentives for specific solutions like clean hydrogen, instead,” said Joe Powell. “For incentives to work, the details of how the tax credits are implemented must be spelled out to ensure that more clean energy is generated to produce the hydrogen, vs consuming existing clean energy to generate hydrogen with a tax credit, and then bringing online more fossil power generation.”