Hydrogen should be having its moment. It enjoys bipartisan support as policymakers, businesses and other stakeholders see the potential it holds for industry as a reliable, clean and American source of energy. Unfortunately, the current draft of the guidance for the hydrogen production tax credit makes missteps that could reduce both support for hydrogen and the chance for the industry to reach its potential anytime soon, if at all.
Tax credits provide an opportunity to help scale up clean and economic hydrogen on a path to market acceptance.
Unfortunately, the proposed rule for the 45V hydrogen production tax credit released by Treasury in December of 2023 fell flat. In an attempt to set high standards for clean hydrogen production, the guidance was written in a way that would actually create significant barriers for the development of a robust hydrogen economy.
For a more detailed explanation of the 45V tax credit, see our recent blog on 45V in CRES Forum’s Right on Energy policy blog series.
The comment period for the proposed rule ended on February 26, 2024, with nearly 30,000 comments received, a testimony to the high stakes involved. Many environmentalist groups praised the draft rule, as it focused heavily on ensuring that only new zero-carbon electricity is used to produce hydrogen. This would prevent any existing low- or zero-carbon generation assets from contributing to the growth of the hydrogen industry. On the other hand, the clarion call from the majority of industry stakeholders – who will actually be in the business of producing and utilizing hydrogen – indicates a desperate need for the guidance to be reworked to allow the needed flexibility for the U.S. hydrogen economy to take off.
As written, the guidance requires hydrogen produced via to source its electricity from only new low- or zero-emissions sources. This effectively bars production via zero-carbon assets like nuclear and hydropower from qualifying for the credit, as new reactors and dams can take years, if not decades, to permit. This requirement could also prove challenging for some renewable energy projects, which also often face siting and permitting issues.
Treasury’s goal is to prevent electrolyzers from displacing clean electricity that might otherwise feed the grid, which some fear would necessitate more fossil fuel electricity production (based on the current fuel sources used for grid electricity). Others have argued that this fear is overblown. Our grid is rapidly decarbonizing, and the EIA has projected that over the next two years, most of the new generation added to the grid will come from zero-emissions sources.
The proposed rule also establishes an hourly “time-matching” requirement, with annual matching allowed until January 1, 2028. This requirement seeks to ensure that the amount of eligible renewable power sent to the grid “matches” the amount of power consumed by hydrogen production so that said production does not increase emissions. Many stakeholders doubt that hourly tracking will be feasible in the short term, as developing the infrastructure and tracking systems for hourly matching could be prohibitive for some facilities, and some have argued for time-matching to have longer phase-in period.
CRES Forum expressed these concerns in comments submitted to Treasury in response to the 45V proposed rule. Read the comments here.
In addition to consternation expressed by a wide array of hydrogen industry stakeholders, leaders from all seven hubs selected for the Department of Energy (DOE) wrote a joint letter to Treasury specifying that unless the guidance is “significantly revised,” many of the projects generating investments towards these hubs would “no longer be economically viable.”
The near impossibility of using existing nuclear or hydropower generation to produce hydrogen, given how the guidance is currently drafted, dismayed hub stakeholders that had been planning to use those generation sources. The proposed guidance also makes it difficult for hydrogen produced from American natural gas paired with carbon capture to qualify for the full value of the credit, which alarmed hub participants that had been planning to use that production pathway.
The letter from the Hubs called for the credit to remain flexible and technology neutral, stating that “overly restrictive policies on an industry that is just beginning to emerge will introduce additional risks and costs,” and will be an obstacle towards achieving the administration’s hydrogen production and cost reduction goals. It has been reported that some hydrogen producers are seeking legal advice on potential pathways to challenge the guidance in the courts if the guidance is not drastically altered.
Policymakers in Congress are also speaking out. Sen. Shelley Moore Capito (R-W.V.), the Ranking Member on the Senate Energy and Public Works Committee (EPW), sent a letter to Treasury on February 23, 2024, relaying similar concerns. Sen. Capito outlines serious shortcomings with the draft guidance, pointing out that the requirements as written will “dramatically delay and drive up the costs of hydrogen investments,” making many projects “financially unviable.” And it’s not just Republicans raising red flags: Democratic members of Congress and some labor unions have also expressed frustration with the Administration’s guidance.
Even some energy professionals within the Biden Administration don’t necessarily agree with the guidance as drafted. There are reports that DOE officials are working behind the scenes to push Treasury to adopt a less restrictive approach to the rule, although the Department has been publicly supportive of the current draft. The requirement specifying that only new low- or zero-emissions generation sources can be used to produce hydrogen in particular has raised concerns internally at DOE, as it would “limit the amount of available hydrogen, which in turn reduces the possibility of a hydrogen economy actually starting,” according to a recent E&E News article.
CRES Forum is in strong agreement with Sen. Capito and the joint Hydrogen Hubs on the importance of starting off with a flexible guidance framework for the hydrogen tax credit. As drafted, it would undermine the Regional Hubs program and the development of the hydrogen economy more broadly. CRES Forum calls on Treasury to make the necessary changes to the draft guidance to incentivize investment in all-of-the-above hydrogen development by taking a feedstock and technology-neutral approach. Jeopardizing the viability of hydrogen projects before they even get off the ground is the wrong way to start.