New rules for America’s green-hydrogen industry are controversial

A CURIOUS LETTER sent on November 6th recently surfaced in Washington, DC. On that day, nearly a dozen American senators sent a stern note to Janet Yellen, America’s treasury secretary, Jennifer Granholm, its energy secretary, and John Podesta, the senior adviser to the White House on clean energy. It was about the legal guidance they expected from the Internal Revenue Service (IRS) on tax rules governing a generous new subsidy for “green” hydrogen. They insisted that the rules for this clean fuel, that can replace fossil fuels in hard-to-decarbonise industrial sectors like steel and chemicals, must be “a robust and flexible incentive that will catalyse and quickly scale a domestic hydrogen economy”.

That was but one heavyweight salvo in a months-long war waged by technology companies, environmental groups, energy lobbyists and business chambers over this previously obscure topic. To influence the handful of tax nerds and their political masters making this decision, millions have been spent on full-page advertisements in the New York Times and Washington Post, on podcasts and—to the bewilderment of punters looking for a mindless rom-com—on mainstream streaming services like Hulu.

Perhaps that was fitting, for the ruling looks to be a blockbuster. The long-delayed draft guidance on the 45V tax credit, as the proposal is formally known, was finally unveiled on December 22nd (the White House tried to bury the controversy in pre-Christmas distractions). Those senators calling for flexibility will not be pleased. There is always tension between growth and greenery in environmental regulation, and especially when it comes to writing rules for an industry that does not yet exist. The Biden administration has tilted strongly towards greenery in its proposals. In doing so it will probably kick up a hornet’s nest of industry protest.

The stage was set for this battle royal by the passage last year of the Inflation Reduction Act (IRA), America’s landmark climate law that offers the world’s most generous subsidy ($3/kg) for making the greenest sort of hydrogen from renewable energy, as well as smaller subsidies for making low-carbon hydrogen in other ways. Because Congress declined to cap this subsidy, potentially hundreds of billions of dollars are at stake in the coming decade. Though Europe led the world in developing clean hydrogen, the Hydrogen Council, an industry association, has found that the IRA lured many potential investors to its side of the Atlantic with proposed investments in hydrogen as of January at $46bn, up from just $29bn in May 2022.

The green trade-off arises because making the cleanest sort of hydrogen involves the use of electrolysers, fancy bits of kit that separate water into its constituent hydrogen and oxygen using a lot of electricity. As an influential study done by Jesse Jenkins and colleagues at Princeton University has shown, if those machines use grid power burning coal or natural gas then the resulting hydrogen (though clean in its end use) could pollute more over its life cycle than the hydrogen produced using fossil fuels today.

That is why it is vital to put in place three pillars as “guardrails” against greenwashing, argues Rachel Fakhry of the Natural Resources Defence Council, a prominent green group. One would require the renewable energy involved to be produced close to the point of use. Another, known as “additionality”, would require any clean power used to come from new, not currently operating, generation facilities. The final requirement is that the hydrogen produced be matched hour by hour with clean-energy production, rather than using annual matching of production. The IRS proposes strict criteria on all three fronts, earning praise from Ms Fakhry and other environmental advocates.

Predictably, some industry advocates are up in arms. Jason Grumet, boss of the American Clean Power Association, a big lobby representing renewables, hydrogen, technology and transmission firms, argues the new proposal contains “a fatal but fixable flaw”. While accepting the three pillars, he argues that the hourly matching provision is being imposed too aggressively and so will “discourage a significant majority of clean-power companies from investing in green hydrogen”. Potential financiers will worry that hourly matching is not even possible in all parts of America, and the reforms needed for it will take several years to come into effect.

Only a fifth of that $46bn in hydrogen projects identified by the Hydrogen Council has been firmly committed, in part because investors have been waiting for this tax ruling, and some of those will now be in jeopardy. Keith Martin, a 45V expert at Norton Rose Fulbright, a law firm, reckons “the Treasury has made it difficult to finance green-hydrogen projects” because it does not grandfather projects under construction before the introduction of the hourly-matching requirement in 2028. Bernd Heid of McKinsey, a consultancy, reckons the guidance could lead to an increase of $1/kg to $2.5/kg in the cost of producing green hydrogen compared with using annual time-matching and looser additionality standards, yielding a total cost of $2.7/kg to $4.5/kg depending on input costs. For comparison, the total cost of dirty hydrogen made from natural gas today is well under $2/kg.

Revealingly, though, some powerful industry voices do support this ruling. One is Andrés Gluski, head of AES, a utility investing in a $4bn green-hydrogen facility in northern Texas. He is confident his mega-project, which will use bespoke renewable energy made on site, will meet the tough new 45V proposals. Air Products, the world’s largest manufacturer of hydrogen, has made a $15bn global bet on clean hydrogen including a stake in that Texas facility. Seifi Ghasemi, its boss, applauds what he calls the “strong three-pillar” proposal which he reckons will stimulate investments while reducing emissions.

The schism suggests the trade-off between growth and greenery may not be as stark as it first seems. Guardrails are indeed needed to prevent greenwashing. This is especially true, notes Martin Tengler of BloombergNEF, an information firm, since making hydrogen with grid power is dirtier than, say, using grid power for electric vehicles (which are still cleaner than using petrol-fired engines). He argues that claims of a chilling effect on investment are overblown, and that although the pool of viable projects “is going to shrink, it is worth it”.

As the enthusiasm of the aspiring green-hydrogen tycoons reveals, there can be opportunity here in leapfrogging too. A big source of future revenue will be exports of green ammonia (a hydrogen derivative used in making fertiliser) to environmentally minded overseas markets like Japan and Europe, so long as it is demonstrably clean. Maria Martinez of Breakthrough Energy, a climate-policy organisation, argues that the draft rules put America’s hydrogen sector in alignment with Europe’s green rules, which will help those (like Air Products) keen to export there.

The new proposals are now open for public comment for two months. An almighty scrum will surely take place in the new year, involving fulmination from those senators whose advice was ignored. This will probably result in some modification of the strictest provisions. Even so, America looks likely to have pretty green rules for its nascent green-hydrogen sector. The open question is whether the resulting boost for leapfroggers will outweigh the loss from those laggards that drop out. 

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