Biden admin’s long-awaited hydrogen rules are here — and on the right track

This guest essay was updated on Dec. 22, 2023.

It’s not often you get to write the rules to govern an entirely new industry. But that’s exactly what the Biden administration is doing now with new proposed rules that define what kinds of hydrogen production methods count as clean.

This morning, the Treasury Department proposed a framework that aligns with the best available evidence, protects consumers and the climate, and sets the right foundation for robust and durable growth of the U.S. clean hydrogen sector.

At stake is who gets to claim the most generous subsidy for clean hydrogen production in the world — and whether that ​“clean” hydrogen is truly clean, or an exercise in greenwashing that could cost the American taxpayer hundreds of billions of dollars while increasing CO₂ emissions by hundreds of millions of tons. 

Clean hydrogen: The basics

Hydrogen is a carbon-free fuel. Burning it or using it in an industrial process releases mostly water with no direct emissions of greenhouse gases. But how you produce it matters.

Making hydrogen is energy-intensive, and virtually all hydrogen produced in the U.S. today comes from using steam to separate hydrogen from fossil gas while venting the resulting CO₂ into the atmosphere. This fossil-fueled process produces about 10–15 kilograms of CO₂-equivalent greenhouse gas emissions for each kilogram of hydrogen. Since the U.S. makes about 10 million metric tons of hydrogen annually, that causes about 100–150 million metric tons of CO₂-equivalent emissions — equal to 2–3 percent of total U.S. emissions or the annual carbon footprint of roughly 4.5 million U.S. households.

A new tax credit in the Inflation Reduction Act, known as ​“45V” for its section in the tax code, is meant to clean up hydrogen’s act. A generous subsidy — worth up to $3 per kilogram of hydrogen produced with near-zero emissions — is designed to rapidly scale up production of this clean fuel and help decarbonize challenging sectors like steelmaking, fertilizer and long-distance freight — plus displace the 10 million tons of dirty hydrogen consumed today (primarily for petroleum refining and ammonia production).

Most of the focus is on electrolysis, which uses electricity to split water into hydrogen and oxygen. But here is where the new rules really matter. Electrolysis consumes vast amounts of electricity. A large-scale hydrogen production facility might consume as much electricity as a medium-sized city. If it’s not supplied almost exclusively with clean power, emissions from electrolysis are huge. If you plugged an electrolyzer into the average U.S. grid to make hydrogen, it would generate roughly twice as much CO₂ per unit produced as the conventional fossil-fueled method.

In fact, an electrolyzer getting just 2 percent of its electricity from gas-fired power plants or less than 1 percent from coal would violate the strict statutory emissions requirements to claim the $3-per-kilogram subsidy.

“Three pillars” to build the clean hydrogen industry on

An overwhelming consensus has emerged in the research community that three key requirements must be met in order to ensure clean hydrogen is truly clean: Electrolysis must be powered by clean electricity that is 1) drawn from newly built carbon-free sources, 2) physically deliverable to the electrolysis facility, and 3) matched hourly with the electrolyzer’s power consumption (as opposed to a producer simply buying renewable energy certificates, stapling them on to their grid power, and calling it clean, as is the current default).

Together, these ​“three pillars” — new supply, deliverability and hourly matching — can help ensure that fossil fuels do not provide the additional electricity used to power electrolyzers subsidized by 45V tax credits. 

This may sound arcane, but it’s really quite simple: If hydrogen producers bring new clean energy sources online and consume electricity only when these resources are actually producing electricity that could be delivered to the electrolyzer, then they are as clean as if the hydrogen electrolyzers were plugged directly into a wind or solar farm. If they don’t, then major problems can arise.

Fortunately, the Treasury Department’s proposed 45V guidance is based on this ​“three-pillars” framework. The proposed rules require hydrogen producers to secure clean electricity from new energy sources from day one and phase in hourly matching rules in 2028, without exempting preexisting projects. They also include a geographic-deliverability requirement based on a triennial Department of Energy study of major transmission constraints.

In proposing this strong framework for electrolysis, the Biden administration successfully resisted a torrent of intense lobbying from big industrial players like the utilities NextEra and Constellation, oil majors like BP and Exxon, fuel-cell maker Plug Power, and their trade-group proxies, which collectively spent millions on ads and lobbying over the past year to weaken the hydrogen rules.

But this is no ​“greens vs. industry” fight. In fact, a broad range of industry voices have consistently championed a three-pillars-based set of hydrogen rules. 

Building a truly clean hydrogen industry from the start

Companies from across the hydrogen supply chain told the Biden administration they want rules based on the three pillars, ranging from electrolyzer manufacturers like Electric Hydrogen and the world’s largest hydrogen producer, Air Products, to clean energy developers like Intersect Power and EDP Renewables, and big future buyers of clean hydrogen like steel producers Nucor and ArcelorMittal and shipping giant Maersk.

These industry players all support sound rules based on the three pillars because without them, no one is going to buy what the hydrogen industry is selling.

Many customers are willing to pay a ​“green premium” for products seen as climate-friendly. Members of the First Movers Coalition have pledged to buy $12 billion worth of decarbonized products, including hydrogen-derived products like steel and aviation fuel. Auto companies burnishing their green credentials want to build electric cars with clean steel. Shipping companies like Maersk have to meet new maritime decarbonization rules. The European Union plans to import 10 million tons of clean hydrogen by 2030 — a potential market worth roughly $50 billion annually — and the U.K., Japan, South Korea and others are setting their sights on clean hydrogen imports as well.

But the EU has already established the three pillars as the guiding principles for its clean hydrogen rules, and they won’t import hydrogen or any products derived from hydrogen like fertilizer, steel and sustainable aviation fuel if they don’t meet those standards.

And why would anyone looking to market their products as ​“clean” — whether steel, cement, fertilizer or fuels — buy hydrogen if the U.S. rules end up subsidizing producers that demonstrably increase greenhouse gas emissions?

The very credibility of the clean hydrogen industry is at stake, and it depends on sound environmental rules so the sector can scale up in a credible way from the start.

Looser rules would mean faux ​“clean” projects would undercut companies trying to build legitimately clean hydrogen projects. Lax rules would also encourage projects to operate 24/7 using low-tech, inflexible electrolyzers primarily produced in China, rather than more high-tech, flexible electrolyzers produced by U.S. manufacturers like Electric Hydrogen, which will start churning out 100-megawatt-scale electrolyzers at a gigafactory in Massachusetts next year. Without the three pillars, 45V will encourage projects that are little more than subsidy farms and will become completely uneconomic once the tax credit ends. That’s not the kind of industry our industrial policy is meant to support.

Some firms complain while others prepare to invest billions

So while a few corporations have taken it upon themselves to speak on behalf of ​“the hydrogen industry” as they attack strong hydrogen rules, they have no such right. The industry is no monolith, and plenty of businesses stand ready to invest to scale up a real clean hydrogen sector.

In fact, some of the loudest industry voices also criticized proposals in Europe to implement the three pillars, pushing ​“sky is falling” narratives and claiming that imposing credible emissions rules would kill the nascent industry before it could get off the ground. In reality, Europe’s pipeline of hydrogen projects has only grown since the EU adopted rules based on the three pillars.

We should thus be very skeptical of the loudest industry complaints in this country too. In fact, we already have billions of dollars of announced investments to build gigawatts of three-pillars-compliant projects in the United States.

AES and Air Products are developing a $4 billion megaproject in Texas that will flexibly operate electrolyzers to match production from dedicated new wind and solar projects. Hy Stor Energy is building a 110,000-ton-per-year hydrogen plant in Mississippi powered by new renewable energy with underground hydrogen storage, and a similar hydrogen storage hub in Utah could also easily meet the three-pillars rules. Apex Clean Energy and TotalEnergies are each building projects pairing large new renewables resources with electrolyzers.

Even NextEra, which tells anyone who will listen that hourly matching is too onerous, is planning a project with CF Industries in Oklahoma that will pair 450 megawatts of new renewable energy supply with a 100-megawatt electrolyzer, a ratio that will make hourly requirements trivial to meet while maintaining a high utilization rate at the electrolysis plant.

I’ve also spoken personally in the past six months with several other project developers planning to build truly clean hydrogen mega-projects; they’re just waiting for final rules before making public announcements.

Time for the Biden administration to stick to its guns

The biggest thing holding the industry back now isn’t the risk of strong rules. It’s the absence of any rules at all. The best thing the Biden administration can do to get investment flowing to clean hydrogen projects is to finalize sound rules ASAP. 

While today’s proposed rules are built on a sound foundation, the devil will be in the details, and the proposal will need to endure through a comment period until it’s finalized next year.

We have already seen the same industry opponents of the three pillars complain loudly that the proposal is too strict and overly burdensome. They will no doubt keep working during the comment period to push back the timing of key requirements like hourly matching, exempt certain projects, or kill one or more of the pillars entirely.

The administration must continue to stand firm.

We call these requirements ​“pillars” because all three are structurally critical: remove any one and the whole ​“clean” hydrogen house comes tumbling down. 

Some industry players like Constellation are pushing to permit hydrogen producers to claim on paper that they’re using existing clean electricity sources, like decades-old nuclear or hydropower plants. In reality, unless very specific criteria are met, this amounts to a hydrogen producer adding a new, city-sized electricity demand to the grid without adding any new supply of carbon-free energy. That’s functionally the same as just plugging the electrolyzer in with no rules at all.

Electricity supply must equal demand, so if you add a new demand to the grid without ensuring it is met by new clean supply, it will end up supplied by whatever the markets dictate. While that will include some wind and solar, an electrolyzer consuming 24/7 will build up demand at hours when fossil power plants are generating too, prolonging the life (and pollution) from aging coal and gas plants or even inducing new gas plants to be built.

Others, including the trade group the American Clean Power Association, have asked to be allowed to count clean electricity produced at any time, even if it doesn’t match up with when electrolyzers are actually consuming power, so long as everything adds up on an annual basis. Once again, that creates a nice fiction that hydrogen producers are powered by 100% clean electricity. In reality, this would permit electrolyzers to run 24/7, even when the sun isn’t shining and the wind isn’t blowing, meaning their operations are actually being powered by gas or coal plants.

Thanks to expanded tax credits in the IRA for wind and solar power, hydrogen suppliers can easily contract with a new wind and/​or solar farm and lay claim to enough renewable energy certificates to match the annual electricity consumption of the electrolyzer, but those wind or solar projects would have been built anyway and would have just sold their power to someone else. After all, the whole idea behind the IRA is to make clean electricity so economically attractive that investors build tons of it.

Once again, lax rules that waive hourly matching requirements would let hydrogen producers shuffle things around on paper, but the actual emissions impacts would be twice as bad as just using hydrogen made from fossil gas.

Additionally, without a sufficient geographic-deliverability requirement, there could be significant emissions mismatches as well. A hydrogen producer in Louisiana could claim to be powered by cheap wind power from North Dakota, even when it is really using electricity from a gas or coal plant on the Gulf Coast. Treasury’s proposal to use the Energy Department’s current ​“transmission congestion regions” is generous: These regions span pretty large areas and should probably be tightened in the future to better reflect frequent deliverability constraints within the current zones.

A decision with huge stakes

Are the stakes really worth all this debate? Emphatically: yes!

Consider what would happen if the Biden administration caves to pressure from trade groups backed by Constellation, Exxon, Chevron and BP and nixes one of the pillars entirely or exempts projects that commence construction before 2029, as the American Clean Power Association has urged. If we assume electrolysis capacity grows at about the same pace as the solar PV industry from 2010 to 2016 — a reasonable proxy for a nascent hydrogen sector with strong policy support at its back — then we could see over 44 gigawatts of electrolyzers online by 2032 churning out about 7 million tons of hydrogen annually. Without all three pillars, these projects could cause about 700 million tons of additional greenhouse gas emissions while receiving over $200 billion in taxpayer subsidies over the 10 years of eligibility for the 45V tax credit.

Lavishly subsidizing hydrogen production that fails to meet all three pillars thus would not only result in life-cycle emissions that are blatantly unlawful under the Inflation Reduction Act but could also push America’s climate goals out of reach. 

If hydrogen producers aren’t required to bring online new clean supply to meet their demand, they’ll also wind up driving up electricity prices for American consumers, just as cryptocurrency mines have been shown to do. Without the three pillars, the deployment of 5 gigawatts of electrolysis capacity in California would cause local wholesale electricity prices to rise by 8 percent, according to a peer-reviewed study from my research group.

In contrast, implementing the three pillars ensures hydrogen producers pay for their new sources of electricity and avoids increasing consumer electricity prices. No wonder a group of consumer advocates pressed President Biden to implement sound hydrogen rules based on the three pillars.

We need all three pillars to ensure hydrogen production brings new clean electricity onto the grid, avoids using dirty generators, and protects consumers and the climate. The Biden administration is poised to get this right. It’s time to finalize strong rules and unleash investment to build a truly clean hydrogen sector in America.