The new hydrogen tax credits could revolutionize how clean energy is counted

The tax-credit rules for clean hydrogen proposed by the Biden administration last month have a specific purpose: to drive the development of a brand-new source of carbon-free fuel for long-term decarbonization needs, ultimately decreasing carbon emissions.

But it turns out that one of the new structures needed to underpin the rules will be important well beyond the hydrogen sector — it will help further the clean energy transition more broadly.

That needed structure is a system to track and match carbon-free power from generation to consumption on an hour-by-hour basis. ​“Hourly matching” is becoming a central — albeit controversial — part of the evolution of how clean energy is tracked, bought and sold by major corporate buyers and national governments, as well as how these transactions are accounted for — their ​“attribution,” in clean-energy tracking jargon — under international climate agreements.

The requirements proposed by the U.S. Treasury Department for hydrogen producers seeking to claim the most lucrative 45V tax credits under the Inflation Reduction Act essentially amount to the nation’s ​“first rule for carbon emissions attribution for grid-connected electricity,” said John Bistline, a program manager in the Energy Systems and Climate Analysis Group at the Electric Power Research Institute, a nonprofit organization largely funded by U.S. electric utilities.

That makes the proposed rules a precedent that ​“could be important for 24/7 carbon-free energy-attributes credits, energy storage policy” and other key policy developments for an increasingly low-carbon electricity sector, he said in an interview before the Treasury Department’s guidance was unveiled.

The ways that companies and government agencies now get credit for investing in clean energy won’t work in a future where renewable energy is the status quo, not a costly substitute for fossil-fueled electricity.

Today’s structures allow companies to buy clean energy and credit it against their consumption on an annual average basis. In other words, they can buy a year’s worth of wind or solar power generation, and credit that against their yearly electricity usage, no matter when or where that energy is generated and where the company uses electricity.

But that grossly oversimplifies the relationship between when that clean power is produced and when it’s used, making it difficult to accurately determine whether and how much carbon emissions have been reduced.

Annual averaging can allow companies to claim that solar power generated during the day is offsetting the carbon emissions from grid electricity they use at nighttime, for instance — a clear mismatch between accounting and reality, since that overnight power certainly isn’t coming from solar and may be coming from coal and fossil-gas power plants.

And overly broad rules for how companies source their clean energy can allow them to contract for wind power generated in the Great Plains or West Texas to reduce the carbon-emissions impact of grid electricity consumed in the U.S. Northeast or other far-off areas, even though no grid connections exist to allow that wind power to serve those loads.

Such loose structures may have been OK for the past two decades, as during much of that time renewable energy cost a lot more than fossil-fueled power, making any money spent to support it worth crediting. But new wind and solar power facilities are now cheaper to finance and buy power from than coal or fossil-gas power plants — and the clean-energy tax credits provided by the Inflation Reduction Act will make them cheaper still.

These underlying realities have made the status quo tracking and crediting structures for corporate clean-energy purchases increasingly untenable. Already, some major clean-energy buyers have been eschewing the looser contractual arrangements that allow them to claim renewable energy certificates from already-built wind and solar projects as offsetting the carbon impact of their electricity purchases, opting instead for ​“bundled” structures that include commitments to actually buy power from newly built renewable energy projects.

Some vanguard clean-energy buyers like Google and Microsoft have gone further. They’ve pledged not just to rely on newly built wind and solar power to reduce the carbon impacts of their electricity usage but to track the relationship between generation and consumption on an hour-by-hour, 24/7 basis.

The World Resources Institute (WRI), the nonprofit group behind the Greenhouse Gas Protocol — the international carbon-accounting standard that’s used today by nearly all corporate and governmental entities for carbon-emissions accounting and reporting — is now in the midst of working out new structures that will incorporate more stringent standards for future clean-energy accounting.

Whether those revised rules will require hourly tracking of electricity consumption is not yet clear. But according to Jesse Jenkins, head of Princeton University’s Zero Lab, ​“It’s pretty obvious that WRI is not going to allow the status quo to continue — and that status quo is annual accounting.”

The reason is simple, he said. The Inflation Reduction Act’s incentives have made renewable energy so cheap to build that wind and solar power don’t rely on ​“above-market payments” from corporate clean-energy buyers anymore — ​“it’s just the lowest-cost way to make electricity.”

That means hydrogen producers likely won’t have trouble signing contracts for enough newly built wind and solar to meet their needs on an annual basis, he said. But that kind of annual contract ​“simply shifts around on paper what would have been claimed by someone else and does not truly lead to additional clean energy capacity added to the grid.”

Models developed by Jenkins and his colleagues were among the first to determine that carbon emissions could rise if facilities producing hydrogen are allowed to use annual clean-energy accounting to claim that the hydrogen they produce is clean enough to win the most lucrative tier of the 45V tax credits. Other analysts have come to similar conclusions.

Jenkins’ Zero Lab team has also been modeling different voluntary clean-energy procurement strategies that are being considered to be included in the next version of the Greenhouse Gas Protocol, which will end up determining how most corporate and government clean-energy structures work in years to come. They have found that these too could result in increased rather than decreased emissions if annual accounting continues to be allowed, Jenkins noted.

If today’s status quo accounting method ​“doesn’t work for voluntary claims and marketing, it certainly doesn’t work for taxpayer subsidies going to projects that by statute have to be squeaky clean,” he said.

The pros and cons of making the switch to hourly matching for hydrogen

Though energy analysts argue that the hourly-matching requirement is critical, it’s become a flashpoint for some industry groups, which contend that it will unfairly impose a more restrictive clean-energy standard on clean hydrogen production than on other parts of the economy.

“To tell the hydrogen industry, ​‘You must adopt hourly matching, whether or not that hourly-matched market really materializes,’ really puts the industry at a disadvantage,” said Frank Wolak, CEO of the Fuel Cell and Hydrogen Energy Association, one of the groups that opposes the Biden administration’s proposed rules. ​“The hydrogen industry shouldn’t be rewired to adopt a system that hasn’t been universally adopted across the country.”

While accounting practices that track clean energy from generation to consumption on an hourly basis are not widespread, they are being used on a voluntary basis by clean-energy buyers like Google and Microsoft, using tracking methodologies developed by a host of companies and standards developed by industry consortia such as the EnergyTag Initiative.

Some of the biggest U.S. electricity markets are already offering the data needed to implement this hourly-tracking approach. Last year, PJM, the country’s biggest grid operator, started offering hourly time-stamped energy certificates across its 13-state market stretching from the mid-Atlantic coast to Chicago. The Midwest Renewable Energy Tracking System, one of the most prominent providers of renewable energy certificate tracking, has offered hourly tracking data to corporate clean-energy buyers for years.

These new crediting mechanisms can go by various names, but the Treasury Department has designated the term ​“qualifying energy attribute certificates (EACs)” for the structures it intends to use for the 45V hydrogen tax credits. Under Treasury’s proposed guidance, hourly tracking must be used to earn tax credits from 2028 onward.

One big question for hydrogen producers seeking to use these emerging EACs is how quickly the accounting system can be put in place. Can hourly-matching EACs be ready in time to meet that 2028 deadline?

In its December guidance on new tax-credit eligibility rules, Treasury cited a June 2023 survey of nine existing energy tracking and certification systems in the U.S. The survey found that two systems are already tracking on an hourly basis, but that ​“software functionality in these two systems remains limited.” Four other tracking systems gave a timeline of one to two years to implement hourly tracking, one gave a timeline of three to five years, and the two remaining ones declined to give a timeline.

Not all industry players think that hourly clean-energy tracking structures will be ready by 2028.

The American Clean Power Association trade group argues that hourly matching shouldn’t be required until 2032 and that projects that start before that deadline should be allowed to continue to use annual accounting for their entire lifespan.

ACP has polled its members and reports that many will not move forward with clean-hydrogen projects under an hourly-time-matching regime. That’s because operating only when clean energy is available will reduce the number of hours per year that expensive electrolyzers can make hydrogen, extending the time needed to pay off the cost of building hydrogen production facilities.

ACP estimates that an hourly-matching restriction would raise the cost of making clean hydrogen by 20 to 150 percent above the cost under an annual-matching scheme, depending on the region, ​“making green hydrogen production uneconomic for most applications.”

It’s worth noting that ACP’s members include NextEra Energy, a clean-energy developer and owner of Florida Power & Light, a vertically integrated utility in Florida with plans to reduce its carbon emissions using clean hydrogen. Some of FPL’s earliest clean hydrogen demonstration projects would be uneconomic under a strict hourly clean-energy matching regime.

But other companies that are supportive of the Biden administration’s hourly-matching proposal say that a 2028 deadline is hardly a challenge for hydrogen projects that are designed from the start to operate profitably under the rules.

“Some stakeholders contend that 2028 is too aggressive a timeline to transition to hourly matching. We just don’t find that credible,” said Paul Wilkins, vice president for policy and government engagement at Electric Hydrogen, a startup developing electrolyzer technology that’s expected to be used by green hydrogen developers including Intersect Power and New Fortress Energy. ​“PJM and [the Midwest Renewable Energy Tracking System] are already offering hourly [renewable energy certificates]. Four years seems like enough time for other tracking registries to scale up.”

Uncertainties on the path from annual to hourly clean-energy matching

Still, the gap between today’s energy-tracking structures and what will be required to meet the Biden administration’s proposed hydrogen tax-credit rules does bring up another issue — one of investor confidence. Simply put, will clean-energy investors have enough confidence that the hydrogen projects they’re being asked to finance can meet the hourly-matching requirement and thereby earn the top-tier tax credits?

“If I’m a lender who’s lending several hundred million dollars — or even billions — to a green hydrogen plant, I need to know that it will qualify for the tax credits,” said Keith Martin, an attorney with law firm Norton Rose Fulbright and an expert on clean-energy tax equity. ​“If one of the requirements to qualify is to match on an hourly basis the hydrogen production with the renewable energy [used to power the plant], people will evaluate the risks. What are the risks of claiming a 45V tax credit? And who should take that risk? Is it the owner of the hydrogen plant? The buyer of the tax credits?”

A lot of variables will add to that uncertainty, said Drake Hernandez, head of hydrogen and low-carbon fuels at consulting firm Charles River Associates. Project financing for clean-hydrogen projects is much more complicated than financing for renewable-energy projects, he noted. Solar and wind projects earn tax credits based either on the investment in the project or the megawatts of energy it produces. But hydrogen producers will need clear and enforceable contracts with clean-energy generators to deliver power on an hour-by-hour basis.

The price of renewable electricity tends to be cheaper than fossil-fuel-generated electricity today, a trend that’s almost certain to continue over the coming decades, he said. But today’s clean-energy prices are based on annual-averaging accounting. There’s no historical data on which project financiers can predict future hour-by-hour prices for clean energy.

“Historically, on an annual true-up basis, you could purchase a [renewable energy certificate] at less than $2 a megawatt-hour,” he said. But that price may be much higher for a qualified EAC for electricity that a hydrogen producer needs during hours when clean energy is otherwise hard to come by. Hernandez offered this hypothetical: ​“I’m a hydrogen player and need to claim the power I’ve consumed meets all the requirements for 45V. What am I willing to pay for that? It becomes a bilateral negotiation issue” between clean-energy generators and hydrogen producers.

Many green-hydrogen project developers are already working directly with renewable-energy developers, as is the case with the roughly $4 billion clean-energy and electrolyzer project being proposed by leading industrial gas producer Air Products and energy company AES in Texas. Some developers are even looking to build clean energy dedicated solely to providing power to their electrolyzers, as Hy Stor Energy is planning to do for its proposed green hydrogen hub in Mississippi. These approaches can enable hydrogen producers to avoid uncertainty over what they will have to pay for the power they’ll need from hour to hour.

But some hydrogen producers will still seek to rely on clean power delivered over the broader regional grids they’re connected to, which means they’ll need to understand how their new loads will impact emissions on the grid and pricing in the energy markets, Hernandez said.

“It’s a fundamentally different world,” he said. ​“And it’s going to be all about understanding your risk exposure as you set up your supply agreements for renewable power.” Charles River Associates has developed a new risk-assessment modeling software platform to help answer those questions, he noted.

Still, the current absence of official hourly accounting mechanisms shouldn’t be a hard stop to green hydrogen investment, backers of the Biden administration’s proposed rules say. They point to the European Union, which has seen hydrogen project pipelines increase since February of last year, when it instituted rules very similar to the Biden proposal.

“We have big companies ready to invest billions of dollars” under Biden’s proposed system, Jenkins said. ​“But they have to know what the rules look like before they go forward. That’s what we saw in Europe — and now that the rules are clear, investment has moved forward.”

The hourly-matching requirements being proposed by the Treasury Department — if they remain intact through the comment and final rulemaking processes — should lay the groundwork for a broader segment of corporate buyers to match their new clean-energy purchases to their consumption on an hour-by-hour basis, as could be required under the pending changes to the Greenhouse Gas Protocol, said Morgan Rote, director of U.S. climate policy at the nonprofit Environmental Defense Fund.

An hourly-matching system that underpins clean hydrogen production could also help inform another effort by the Biden administration — it is working with utilities to obtain hourly-matched clean energy for at least half of its target of 100 percent carbon-free electricity for federal government facilities by 2030.

“This is a system we need to get developed in the U.S. so that all these voluntary or partial procurement systems can talk together and work together, so we have a holistic view of what we’re using and when we’re using it,” Rote said. ​“It’s good for 45V to be giving us a reason to work on this.”