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Clean energy journalism for a cooler tomorrow

Is cheap, clean hydrogen possible? The green hydrogen’ battle, continued

Big oil and energy companies say strict rules for hydrogen tax credits could kill a nascent industry. Clean-energy advocates say that’s dead wrong.
By Jeff St. John

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A red-tinted photo of a hand in a boxing glove hitting a hand in a punching mitt, surrounded by white hydrogen molecules.
(Binh Nguyen/Canary Media)

Canary Media’s Down to the Wire column tackles the more complicated challenges of decarbonizing our energy systems.

This is part two of a three-part Down to the Wire series on how the federal government should design rules for the hydrogen tax credit under the Inflation Reduction Act. See also part one and part three.

Truly green” hydrogen needs to be made with truly carbon-free power. But will strong hydrogen tax-credit rules that require the use of truly carbon-free power make it harder to create a green hydrogen industry that can compete economically against fossil fuels?

Yesterday we walked through the case for the federal government to set rigorous rules for the 45V hydrogen production tax credits, which will be worth tens of billions of dollars; clean-energy advocates want to require producers to meet a high bar for the clean energy that fuels their process. Today we consider the opposing case, which argues that looser rules are needed to get the clean hydrogen sector off the ground.

Many of the parties calling for strict rules have cited an analysis by Princeton’s Zero Lab that finds that hydrogen made from grid electricity will lead to net increases in carbon emissions unless production is paired with clean energy on an hourly basis. It also indicates that hydrogen production that uses genuinely carbon-free power can be cost-competitive with hydrogen made with fossil gas, thanks to the generous size of the tax credits — even when the clean hydrogen producers are required to follow strict applications of the principles of additionality, deliverability and hourly matching (see part one for definitions of these terms).

But Zero Lab’s analysis is not the only one out there. Many of the companies submitting comments to the IRS say that requiring additional, deliverable and hourly matched clean energy to power electrolysis could push costs above those for hydrogen made with fossil gas, limit production to only those parts of the U.S. with the highest amounts of clean energy, and undermine the country’s push to become a leader in low-cost hydrogen production.

As Jesse Jenkins of Princeton’s Zero Lab told Canary Media, There isn’t really much of a question about the veracity of the emissions analysis we’ve performed. The main response from those seeking to develop electrolyzer projects and make the most money is that this is too onerous and would raise project costs too high to be profitable.”

Even a recent report by energy consultancy Wood Mackenzie that’s being cited by NextEra and other opponents of strict rules finds that green” hydrogen production could lead to increased carbon emissions. WoodMac determined that absolute emissions increase marginally” under the scenario it modeled for low levels of hydrogen production in Arizona and South Texas — even though those two states have relatively high percentages of renewable energy in their grid mixes.

It is expected that the outcomes would vary significantly on a regional basis and may also vary as hydrogen production scales well past the addition of a 250 MW electrolyzer in a region,” the report’s authors write in a March op-ed.

The arguments against strict clean-energy accounting: Cost and competitiveness

WoodMac’s analysis is more clear regarding its findings on the cost of hydrogen made via annual matching versus hourly matching of clean energy. It found that making hydrogen under hourly-matching requirements would be 60 to 175 percent more expensive than making it under annual matching — a cost increase that could result in unfavorable economics for green hydrogen adoption.”

That cost increase is central to arguments made by Plug Power against strict rules for the hydrogen tax credits. The company, a maker of hydrogen fuel cells, is planning to invest more than $1 billion in hydrogen electrolysis facilities in California, Georgia, Texas and its home state of New York.

Until all those renewables are available on the grid, you’re still going to have to [power production with] natural gas and other resources,” said Roberto Friedlander, the company’s director of investor relations. Plug Power plans to buy renewable energy credits for all its sites to meet green” hydrogen production requirements, directly use solar power to make cleaner hydrogen in Texas and hydropower in New York, and eventually build clean power to supply its electrolyzers, he said.

An aerial shot of a construction site of cleared land in the midst of a heavily forested area
Construction is underway at the Georgia site where Plug Power is building its first large-scale electrolysis facility in the U.S. (Plug Power)

But if eligibility for those tax credits is restricted to hydrogen produced with newly built clean energy delivered from where it’s produced to where it’s consumed on an hourly basis, Plug Power’s electrolyzers won’t be eligible for the credits and thus won’t be able to compete on cost with hydrogen made from fossil fuels, he said. That’s particularly true if today’s gray hydrogen” producers are allowed to qualify by adding carbon-capture-and-storage systems to their steam-methane-reforming sites to produce so-called blue hydrogen” — something that’s not cost-effective today, but would be eligible for tax credits if the Treasury Department’s final eligibility rules deem it sufficiently low-carbon to earn the incentive.

You have to have government intervention to help these nascent clean-energy industries,” Friedlander said. How else can you inspire people to take on the risk of these investments?” 

These cost concerns are echoed broadly in comments to the IRS and Treasury Department from a range of companies and trade groups arguing against hourly matching. 

BP America, a division of U.K.-based oil giant BP, stated in comments to the IRS, Stringent requirements such as hourly zero-emission matching have the potential to devastate the economics of clean hydrogen production. Moreover, such restrictive requirements are likely not practical or feasible in these early stages. If a green hydrogen production facility can only produce during hours when wind and solar are available, the low utilization rate will dramatically increase the price of the hydrogen produced.”

NextEra’s comments to the IRS use the same phrasing as BP America’s in claiming that hourly time-matching would devastate the economics of clean hydrogen production,” adding that it would not align with legislative intent to accelerate progress towards a clean hydrogen economy.”

NextEra — the parent company of utility Florida Power & Light and clean-energy developer NextEra Energy Resources — has made hydrogen central to reaching its goal of zero carbon emissions by 2045. The company’s large-scale hydrogen electrolysis plans include a project in Florida at its Gulf Clean Energy Center fossil-gas power plant that would be powered by Florida Power & Light solar projects and a project in Arizona in partnership with industrial-gas producer Linde, NextEra Chief Communications Officer David Reuter said in an email.

An hourly match requirement would drive up the price of clean hydrogen and reduce investment by equipment manufacturers,” he wrote. 

NextEra also stated in its IRS comments that an internal analysis it conducted indicated that hourly clean-energy matching would increase the cost of green hydrogen production by around 70%–170% versus annual matching, eliminating the ability of the [production tax credit] to make green hydrogen cost competitive with other forms of hydrogen.”

That cost estimate was echoed in comments from the Edison Electric Institute, a U.S. utility trade group, which used language nearly identical to NextEra’s. Like the cost estimate from Wood Mackenzie, it is significantly higher than the estimates from Zero Lab, which found cost premiums for hydrogen produced via hourly matched clean energy on the Western U.S. electricity grid would be only 20 to 50 cents higher than a base price of $2.50 to $3.50 per kilogram.

Location matters: Deliverability and geography

NextEra and Edison Electric Institute lay out some key reasons why they say hourly matching will drive up costs. One has to do with location, or more precisely, the fact that some parts of the country have less clean energy than others.

Edison Electric Institute noted that requiring hourly matching would disadvantage producers in some geographical areas. Although hourly matching may be achievable more quickly in certain regions of the United States with the appropriate renewable generation mix, it will take longer in many other parts of the United States,” it wrote.

And NextEra wrote that hourly clean-energy matching would require green hydrogen projects to buy time-correlated renewables during periods of under-generation, which corresponds to higher market price periods.”

But proponents of strict hourly matching rules point out that the availability of clean energy ought to be a primary factor in deciding where to produce green hydrogen. That’s not just because clean energy is a vital input to producing carbon-free hydrogen, they say. It’s also because electricity prices — a major factor in hydrogen costs — are usually lower at times when clean energy is plentiful and higher at times when electricity demand spikes and a higher proportion of fossil fuels are used to make up the balance.

The levelized cost of hydrogen is very much driven by the cost of energy,” said Beth Deane, chief legal officer at Electric Hydrogen, which is advocating for stringent tax-credit rules. And the fortunate thing is that the cost of energy is also lowest when the carbon[-intensity of grid electricity] is lowest — when you have a grid that’s pouring off energy because it’s not needed.” Those price differentials are likely to become more pronounced as the country adds increasingly more low-cost solar and wind power to meet its climate goals.

In its comments to the IRS, Electric Hydrogen cited data from the California grid, which is awash in low-cost solar power at midday but sees energy prices spike when gas generators are cranked up to serve peak demand on hot summer evenings. This graphic from Electric Hydrogen cites data from CAISO, California’s grid operator, showing that the cost and carbon-intensity of electricity are generally correlated in that state. But this dynamic is not currently replicated across all parts of the country.

2 graphs showing that in California, times when electricity is cheap often coincide with it having low carbon-intensity
(Electric Hydrogen)

Deane pointed out that some of the arguments against strict hourly matching are being put forward by companies that have already made plans to invest in hydrogen production in areas that lack ample renewable resources today. Plug Power’s first hydrogen facility is being built in Georgia, a state with a current power mix of 47 percent natural gas, 16 percent coal, 24 percent nuclear and 8 percent renewables. Florida, the home of NextEra-owned utility Florida Power & Light, gets 75 percent of its power from natural gas, 5 percent from coal, 13 percent from nuclear power and less than 1 percent from renewable energy.

Under current accounting methodologies based on annual renewable energy credits, those plants would be able to claim to be powered by clean energy produced anywhere in the country — including clean energy that has no connection to the grid that actually powers them.

That’s why calls for hourly matching of renewables are being married with calls for deliverability, or requiring that the clean energy being claimed is physically capable of reaching the electrolyzers using it.

Such deliverability rules would, by their nature, privilege hydrogen being produced in more renewable-rich regions. The American Clean Power Association, an industry trade group that counts NextEra Energy Resources as one of its members, said in its comments to the IRS that if electrolyzers can only produce during hours when clean energy resources are available, the low utilization rate can dramatically increase the price of the hydrogen produced.”

This is especially true in certain regions with lower renewable and storage liquidity,” it added, describing areas with less clean-energy capacity and without natural underground caverns where hydrogen produced in excess of immediate demand can be stored.

The Edison Electric Institute highlighted these region-by-region differences in its comments calling for an annual clean-energy accounting standard, not hourly. Guidance should not favor certain regions over others simply as a result of current renewable resource availability,” it stated.

Deane of Electric Hydrogen acknowledged that strict rules would make green hydrogen production less viable in certain regions in the next few years, but argued that ensuring hydrogen production doesn’t boost overall carbon emissions is the most important goal. Folks that want lax standards have their business reasons for them, and they’re entitled to their points of view,” she said. But we want to make sure people are thinking long-term rather than short-term.”

The pros and cons of keeping electrolyzers running 24/7

Another key argument for why hourly matching will drive up hydrogen costs is that it would require electrolyzers to curtail production when renewables aren’t available. That’s a problem, NextEra wrote, because “[h]ydrogen production equipment remains expensive and requires high utilization to improve the overall facility economics.”

Edison Electric Institute agreed that “[i]f time-correlated renewables are not available, the green hydrogen project may curtail its electrolyzer, leading to long idle times. Hydrogen production equipment remains expensive and requires high utilization to make hydrogen production facilities economic.”

Plug Power made similar arguments in its IRS comments. Electrolytic hydrogen facilities must maintain high capacity and utilization factors, and as a result, will need to operate at times of the day/​night that would preclude the availability of [renewable energy credits] under any hourly-based time matching work,” it wrote.

In a March report, research firm Rhodium Group highlighted another reason why a hydrogen producer may be economically compelled to run as close to around the clock as possible. Many end uses of hydrogen, such as chemicals manufacturing and fertilizer production, need a relatively constant supply of hydrogen,” its report states.

Providing that constant supply under strict hourly matching rules would be more expensive. Today, firmed clean electricity contracts come at a cost premium,” according to Rhodium. Pairing solar power with batteries capable of storing and shifting that power — the most common way that clean power can be firmed” today — could increase the total subsidized cost of hydrogen production from a range of $0.93 to $2.98 per kilogram to a range of $1.49 to $3.65 per kilogram, its analysis found, potentially pushing higher-end prices beyond the level of the $3-per-kilogram tax credit.

Proponents of stricter hourly matching rules point out that hydrogen producers would not be prohibited from running their electrolyzers at times when the electricity powering them isn’t clean. But, they argue, the hydrogen produced at those times simply shouldn’t be eligible for the most lucrative tax credits.

The thorny questions of additionality and round-the-clock production

Some of the companies pushing for more lenient tax-credit rules have plans to produce hydrogen using specific sources of carbon-free electricity — just not new sources. They argue that the use of this carbon-free power should be enough to qualify as clean under tax rules.

Plug Power, for example, has contracted with the New York Power Authority to supply its planned electrolysis facility in New York state with electricity generated by existing hydropower resources. And four utilities that own nuclear power plants — Arizona Public Service, Constellation Energy, Energy Harbor and Xcel Energy — are partnering with the U.S. Department of Energy on pilot projects to use their nuclear plants to produce hydrogen.

Constellation Energy, which owns 19,000 megawatts of nuclear power plants across the country, is lobbying the federal government to allow hydrogen produced using that power to earn the maximum production tax credit.

But advocates of strict tax-credit rules argue that these kinds of projects would divert carbon-free electricity from the grid over the next few years even as clean power will be needed to run electrified homes and electric vehicles. As hydrogen production ramps up to meet huge anticipated demand, this threat is all the more concerning, they say.

That’s why these advocates are pushing the IRS to insist on additionality — requiring hydrogen projects to add new clean electricity sources to power their operations. Without such a requirement, using existing clean resources completely eliminates any emissions benefits of an hourly matching requirement,” according to Zero Lab’s modeling.

Jenkins of Zero Lab argued in a Twitter thread that using existing carbon-free energy to power hydrogen production leads to EXACTLY the same bad outcome as just plugging into the grid and doing nothing.” That’s because the clean power going to those new electrolyzers is being taken away from the grid at large, leaving gaps to be filled by whatever generation is left.

Some of that electricity will come from wind and solar power, but the rest will come from fossil fuels, leading to this hydrogen production pushing up carbon emissions, Jenkins contended.

Electric Hydrogen CEO Raffi Garabedian also argues that running hydrogen operations on round-the-clock baseload” carbon-free electricity sources such as nuclear and hydropower is a particularly bad idea. His company is designing electrolyzers intended to run on solar and wind power that can ramp up and down to match surges and sags in generation.

The last thing you want to do is add more baseload demand,” he said. We’re deploying more and more variable renewables that are stressing ramp rates and transmission capacity. That’s why we’re building so much battery storage. And now we’re going to take all that expensive battery-stored energy and move it into electrolyzers? That doesn’t make any sense.”

Garabedian pointed out that hydrogen facilities that run on variable renewables actually help the grid because they can soak up excess clean power produced during certain hours and seasons. That excess clean power will be an inevitable result of building the gigantic amounts of wind and solar the country will need to fully decarbonize its grid.

That is exactly why we have been working so hard toward this singular goal of making an electrolyzer plant that’s really cheap,” Garabedian told Canary Media Editor-at-Large David Roberts on his Volts podcast in February. If it’s cheap enough, you can afford to use really cheap energy and run your electrolyzer intermittently…and that’s completely green hydrogen.”

The debate over a phased-in approach 

Proponents of stricter tax-credit rules want to ensure that a clean hydrogen industry aligns with long-term decarbonization goals. The companies pushing for more lax rules are primarily focused on creating an economic framework that will help the clean hydrogen industry grow to commercial scale in the next few years.

Given the uncertainties involved in the early stages of clean hydrogen growth, some groups in the latter camp are calling for the federal government to start with looser rules and phase in stricter clean-energy requirements over time. (Part three explains how the European Union has done just this.)

The Energy Futures Initiative, a research group led by former Energy Secretary Ernest Moniz and advised by companies including Duke Energy, ExxonMobil, National Grid and Toyota, make that argument in a February report highlighting the uncertain path for growing clean hydrogen supply and demand in the United States. One major problem is on the demand side, the report states — today, relatively few buyers of clean hydrogen exist, so it’s unclear just how much money producers can expect to make to earn back their initial investments.

Given that demand uncertainty, The IRS should consider a phased approach…that enables investors to start the project development process in the near term, but that also maintains flexibility to adjust requirements over time,” the report argues. For example, the IRS could initially require annual estimates of life cycle emissions — allowing producers to combine multiple energy input types — and phase to daily or hourly data over time.”

Plug Power has also called for starting with broader annual clean-energy matching and moving toward stricter hourly accounting over time. When we fast-forward five to seven years, our plants will largely run behind the meter with a mix of wind and solar,” Plug Power’s Friedlander said.

In its March report, Rhodium Group highlights another reason for allowing a phase-in for stricter hourly matching rules. If making green hydrogen” is too difficult in the next few years, there’s a risk of lock-in of blue hydrogen,” or hydrogen made from fossil fuels with carbon capture, as the leading technology producing clean hydrogen.”

The Rhodium Group report notes that existing blue-hydrogen producers might be able to earn tax credits in a relatively straightforward manner even as hydrogen electrolysis projects face more complex tax-credit rules that stifle investment. That could lead to a competitive advantage for a fossil-fuel-based hydrogen industry, it warns.

But not all analysts see this threat materializing, however. Blue hydrogen deals with its own challenges,” said Rachel Fakhry, who leads the hydrogen and energy innovation portfolio at the Natural Resources Defense Council. The technology to effectively capture the carbon emissions from steam methane reforming and to transport and store the carbon in a way that prevents it from escaping into the atmosphere has not been proven to be effective at commercial scale. And public opposition to projects for capturing, transporting and storing carbon underground is a significant barrier for blue hydrogen, she added. (Listen to Fakhry discuss hydrogen tax credits with Roberts on another episode of the Volts podcast.)

If a phased-in approach is taken, clean-energy groups want to make sure that projects that start collecting tax credits under looser rules are ultimately required to follow stricter rules when they come into force.

But in its comments to the IRS, the utility-funded trade group Edison Electric Institute proposes a lock-in for looser rules. “[T]he provisional emission rate should be guaranteed so the project can proceed to development,” the group stated. Early certainty of emissions rates will be essential for timely clean hydrogen project development.”

But Fakhry contends that allowing projects to keep operating under looser rules won’t just risk using taxpayer money to support hydrogen production that increases carbon emissions. It also risks undermining the competitive economics of projects that are designed to only produce hydrogen when clean power is actually available to them.

That could leave the country with a hydrogen-producing industrial capacity that’s optimized to run around the clock, not one that’s designed to ramp up and down to absorb the growing amounts of solar and wind power the country will need to build to decarbonize.

The size of the subsidy is so large that any phase-in has to be very carefully designed,” she said. If a phase-in allows really bad projects that will never be consistent with emissions thresholds, or what we need from assets on the grid, then we have a big problem.”


Part three digs into hourly clean-energy accounting and how it’s becoming increasingly viable and widespread.

Jeff St. John is director of news and special projects at Canary Media. He covers innovative grid technologies, rooftop solar and batteries, clean hydrogen, EV charging and more.