The Treasury Department has released proposed guidance for a tax credit meant to spur investment into hydrogen, an energy source that emits no carbon emissions when burned. But the highly anticipated rules are sparking division within the sector, with many asserting the department’s stringent requirements will hinder the industry from taking off, while others cheered the strict criteria as promoting the “cleanest” form of hydrogen production.
The tax credit, known as “45V” and created by the 2022 Inflation Reduction Act passed by Democrats, adopted several proposed requirements recommended by environmentalists, who had hopes of ensuring the subsidies would spur renewable energy production rather than fossil fuels. The proposed guidance, though, could be changed before finalization.
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“During the policymaking process, we spent countless hours with a wide range of stakeholders throughout the hydrogen industry, clean energy developers and buyers … environmental groups and elected officials,” said John Podesta, senior climate adviser within the Biden administration. The “proposal will kick off the next stage of engagement with a wide range of stakeholders as we seek specific comments and feedback on areas where we hope to provide additional clarity and certainty in the final rules.”
The high-profile guidance has the industry divided on whether or not the guardrails will support the growth of the industry — or hold it back.
“The guidance announced today by the Biden-Harris administration will place unnecessary burdens on the still nascent clean hydrogen industry,” said Frank Wolak, the president and CEO of the Fuel Cell and Hydrogen Energy Association. “The nation needs commonsense solutions for this tax credit that are aligned with the congressional intent to spur robust economic development and create jobs while reducing carbon emissions.”
On the other hand, several green hydrogen companies and renewable energy groups, which are likely to benefit the most from the guidance, cheered the proposed rules.
“By adopting strong standards focusing on emissions intensity, the United States will secure a leadership position in the energy transition and catalyze global investment and demand for clean hydrogen to support long-term, economywide decarbonization,” said Laura Luce, the CEO and founder of the green hydrogen company Hy Stor Energy.
As it stands, the guidance determines the tax credit based on how much carbon emissions are emitted through the hydrogen production process, ranging between 60 cents to $3 per kilogram of hydrogen, with the highest tax credit being limited to wind, solar, and other renewables that were built within the first three years of operation for a hydrogen facility.
The proposed guidelines would also require hydrogen production to be matched with clean power generation annually until 2027. By 2028, the credit criteria will switch to “hourly matching,” a standard that has garnered controversy from the industry, which has argued that it’s unfeasible to implement.
“If you go to a place like Finland, which has almost a 90% renewable grid, you don’t have to worry about time-matching at all,” said Andy Marsh, the CEO of Plug Power, a company specializing in producing hydrogen fuel cells. But for a country like the United States, the strategy wouldn’t be ideal until the next decade, Marsh said.
The guidance would further require that the clean energy powering hydrogen production be sourced from the same region in efforts to limit how much emissions are emitted from electrolyzer.
The tax credit would also be eligible for hydrogen produced from natural gas combined with carbon capture and storage under certain conditions. The Treasury Department is anticipating finalizing rules that would create pathways for producers using fossil fuels to qualify for the tax credit, which will likely garner pushback from environmentalists.
The tax credit is expected to be available for 10 years for hydrogen projects that begin construction before 2033, meaning that it will be available for some facilities well into the 2040s.
The Biden administration has been investing heavily in the nascent hydrogen industry, previously announcing a $7 billion investment in regional hydrogen hubs to accelerate commercial-scale deployment. Currently, the U.S. produces less than 1 million metric tons of clean hydrogen annually, but the Department of Energy aims for 50 times that amount by 2050.
However, production of “green” hydrogen — that is, hydrogen produced via non-carbon-emitting energy sources — will be dependent on the development of renewable energy, which has been hindered as utilities struggle to connect solar and wind sources to the grid and permitting approvals for projects lag.
Furthermore, differing visions for how to implement the tax credit have spurred intraparty conflict among Democrats. In an October letter sent to Treasury Secretary Janet Yellen, Sens. Sheldon Whitehouse (D-RI), Martin Heinrich (D-NM), Jeff Merkley (D-OR), and others urged for the department to keep the guidelines stringent in order to ensure the subsidies will not be used as a lifeline for fossil fuels.
Other Democrats, however, argued for the guidelines to be more flexible in order to spur growth within the industry. Sen. Maria Cantwell (D-WA) led a group of Democrats in a separate letter to the Treasury, arguing against the very principles for which the previous group had advocated.
“Overly prescriptive guidance could prevent the growth and certainty needed for clean hydrogen to provide meaningful alternatives for difficult to decarbonize sectors, reach competitive hydrogen market prices, and realize the more than 100,000 new jobs the Energy Department projects the clean hydrogen industry could create by 2030,” the senators wrote in the letter.
Sen. Tom Carper (D-DE), chairman of the Environment and Public Works Committee and author of the tax credit, had engaged in a colloquy on the Senate floor clarifying the intent of the tax credit, that it was supposed to be technology agnostic and not solely reduced to renewables.
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But the debate on the guidance isn’t over. Following the leak of the tax guidance’s draft, centrist Sen. Joe Manchin (D-WV) had vowed to fight the rules, calling them “horrible” in an interview with Bloomberg.
The proposed rule will be open for public comment for 60 days. It’s unclear when the Treasury and IRS will issue finalized rules.
