The brewing rift within the Biden admin’s clean hydrogen strategy

The Biden administration’s proposed rules for clean hydrogen tax credits are taking heat from the seven regional hubs the administration hand-picked to jump-start the clean hydrogen industry.

The Internal Revenue Service is finalizing the potentially transformational 45V tax credit for clean hydrogen production, which could inject hundreds of billions of dollars into an infant industry that many consider crucial to decarbonizing broad swaths of the economy. Monday was the deadline to submit comments, prompting nearly 30,000 submissions in clean energy’s wonkiest war of words.

The IRS proposal, released on a Friday in late December, hewed to science-based principles to ensure that hydrogen production does in fact avoid carbon emissions, as required in the Inflation Reduction Act. Plenty of hydrogen companies have embraced these strict rules. But some industry groups, fossil fuel companies and prominent lawmakers have opposed them, arguing instead for laxer rules that would allow companies to claim the full 45V tax credit of $3 per kilogram even if their hydrogen production creates substantial carbon emissions.

This was all fairly typical jockeying for the most lucrative version of a new tax policy. But Monday’s joint filing from the seven regional hydrogen hubs exposes a more complicated rift within the Biden administration’s climate strategy.

The Department of Energy’s Office of Clean Energy Demonstrations selected the seven hubs last fall to receive a combined $7 billion to fund clusters of hydrogen production, distribution and consumption across the U.S. They are meant to spearhead the laborious mission of spinning up a nonexistent clean hydrogen industry to supply mostly nonexistent end uses that, if executed properly, could decarbonize such things as steel production, heavy industry, aviation, shipping and more. The hubs carry political and economic weight too, as they could generate $40 billion in private investment across the U.S. and create more than 300,000 direct jobs.

Now those hubs have banded together to share their worries that the tax credits, as defined by the IRS, ​“may have far-reaching negative consequences for the entire domestic clean hydrogen industry.” E&E News reported Thursday, citing anonymous sources, that DOE officials are also pushing the IRS to loosen the requirements, in order to support the hubs while they’re getting off the ground.

Specifically, the hubs argue that many of their planned hydrogen projects ​“will no longer be economically viable.” Losing those projects would diminish the hubs’ theoretical carbon-reduction potential, reduce the economic benefits and ​“negatively impact disadvantaged communities,” according to the letter.

The letter stands out from the other tens of thousands of comments the Treasury Department received because the hubs are a pillar of the Biden administration’s clean hydrogen — and decarbonization — strategy. The tax credits, created by the 2022 Inflation Reduction Act, support the supply buildout for clean hydrogen. But the hubs, which were created by the 2021 Bipartisan Infrastructure Law, are the main U.S. policy to spur demand for clean hydrogen.

Hubs seek 45V tax credit flexibility to emit carbon

It may very well be the case that some hydrogen hub projects would become less profitable under the proposed rules. But those projects would only be less profitable if they emit a significant amount of carbon dioxide — an outcome at odds with the very purpose of the clean hydrogen decarbonization push.

The production of ​“green” hydrogen uses clean energy to run electricity through water, splitting off hydrogen gas. But numerous studies have shown that the details of how this electricity is generated and sourced have huge impacts on the real carbon-intensity of the product. If a producer uses grid electricity and buys renewable credits to offset their annual power consumption, they end up producing more carbon emissions than conventional hydrogen-production facilities, which split hydrogen from fossil gas and send planet-warming carbon dioxide straight into the atmosphere.

The other major pathway for making low-carbon hydrogen is using the conventional fossil-fueled process but capturing and storing the resulting carbon dioxide emissions. This ​“blue-hydrogen” approach raises a thicket of technical questions around life-cycle emissions accounting that the IRS is also hammering out.

As the IRS worked on its proposed hydrogen subsidy rules, climate analysts homed in on ​“three pillars” needed to ensure truly clean green hydrogen, and the agency ultimately adopted them. Power sources must be: newly added to the grid (instead of diverting electricity from existing clean power plants); producing energy at the same time the hydrogen is being synthesized; and delivered to the same regional grid as the user. These rules logically produce the most benefit for the places that are best suited to building new, low-cost renewable power plants, as Canary Media previously reported.

The political problem is that the process of selecting the sites for many of the DOE’s hydrogen hubs did not prioritize their ability to source new clean power. The hubs, after all, were created based on criteria in the earlier bipartisan legislation and chosen by DOE before the Inflation Reduction Act tax-credit guidance was released. The Pacific Northwest hub wants to use its existing hydropower resources to make hydrogen. The Midwest and mid-Atlantic hubs hope to use existing nuclear power. Both resources fit nicely for hydrogen production since they’re round-the-clock, carbon-free generators. But redirecting that zero-emissions electricity away from the grid creates a hole that other power plants — likely burning fossil gas — need to fill.

The hubs are also asking Treasury to either waive or delay the requirement for them to buy clean electricity that actually corresponds to the hours when they consume power.

With this request, they’re essentially suggesting that the government subsidize carbon-emitting hydrogen in the hopes that it eventually gets cleaner as renewable energy production soars and grid emissions fall. The hubs say this ​“flexibility” is necessary to encourage high volumes of (eventually) clean hydrogen. Climate groups counter that the interim emissions are too high a price to pay.

Several firms are ready to play by the three-pillars guidelines and make money right now. Companies like AES, Apex Clean Energy and Intersect Power have merged clean hydrogen development with renewables development. The cleanest projects pair electrolyzers with off-grid renewable construction; this ensures only clean power goes into electrolysis and dodges the very real costs and delays associated with interconnecting to the electric grid. Texas is awash in such proposals, many of them operating without the benefit of DOE hub funding, but they’re also cropping up in places that don’t have strong renewables markets, like Hy Stor’s ambitious plans in coastal Mississippi.

For now, the IRS has a titanic amount of reading to do before it produces a final decision on the 45V tax credit, which could come in a few months or many months. Then the Biden administration will have to decide whether to hold firm against subsidizing carbon-emitting hydrogen in the near term — or to carve out some allowances to ease the ramp-up for the regional developments it has already blessed with $7 billion.