The Biden administration on Friday proposed strict criteria for clean hydrogen producers to claim a highly sought after federal tax credit that officials say will unleash a flurry of projects worth millions of dollars in the United States.
The draft guidelines, proposed by the U.S. Treasury Department, mark the latest turn in a months-long fiery debate on a topic that is as significant as it is complex: How to jumpstart a clean hydrogen industry in a way that reduces emissions without hamstringing a nascent sector.
The administration is proposing that producers would only be able to claim the full tax credit of $3 to make a kilogram of clean hydrogen from electricity from nearby grid systems if they can certify that wind, solar or other zero-emitting sources were added within three years of the production facility coming online.
What’s more, beginning in 2028, producers would be required to show proof before receiving credit that they’re making hydrogen within the same hour clean power is generated on the nearby grid, a concept known as hourly matching. Prior to 2028, the requirements would be less stringent on the matching criteria.
These first-of-their-kind tax credits, created as part of the 2022 Inflation Reduction Act, are seeking to kickstart what is essentially a non-existent sector to help reduce carbon emissions in everything from steelmaking to transportation. Most hydrogen made today, used in industrial applications like fertilizer, is from unabated fossil fuels.
“The Treasury’s proposal will help build the clean hydrogen industry while including environmental safeguards to implement the Clean Air Act,” John Podesta, senior advisor in the White House for clean energy innovation and implementation, told reporters in a press call Thursday.
Available for 10 years, Treasury said the tax credit can be used by producers whose facilities begin construction before 2033, meaning they will “remain available for some facilities well into the 2040s.”
These tax credits will subsidize clean hydrogen, with two such processes dominating: from natural gas equipped with carbon capture and storage equipment or from using zero-emitting sources to split water molecules in a process known as electrolysis. Currently, U.S. clean hydrogen made from renewable-powered electrolysis accounts for less than 1% of domestic production (and nearly zero natural gas with carbon capture).
The draft guidance, once in final form, will clarify which production process qualifies for the four tiers of the clean hydrogen tax credit, which is based on how much carbon dioxide is emitted during its making. “So, the lower the emissions the larger the tax credit,” Deputy Treasury Secretary Wally Adeyemo told reporters.
With these credits, the U.S. is aiming for its goal of producing 10 million metric tons by 2030 (about the same as the entire, dirtier hydrogen sector today). The guidance comes on the heels of the Energy Department selecting seven regional hubs to lay down the infrastructure for a clean hydrogen economy.
Among those benefiting will be clean energy producer Air Products and AES that a year ago announced plans to build a $4 billion clean hydrogen facility in Texas that will be powered by 1.4 gigawatts of wind and solar energy, Adeyemo said.
Electrolysis of water to make hydrogen requires a lot of energy, so ensuring that energy is clean is important, according to a senior administration official. Some studies, including those by Princeton University, have found that electrolysis would yield nearly double the rate of carbon emissions than unabated fossil fuels if coal- or natural gas-fired electricity is used instead of dedicated zero-emitting energy.
For months, developers, producers, energy utilities, environmentalists, think tanks and academics have hotly debated whether equal tax credits should be given to those making clean hydrogen from dedicated renewable power versus those making it with electricity hooked up to a mostly fossil-powered grid.
Renewable energy advocates led by American Clean Power Association (ACP) warned that the Treasury’s proposal would stifle the electrolytic production of hydrogen because it isn’t giving enough time for production to match generation.
“The rushed imposition of the most burdensome restrictions fails to acknowledge the market realities of new technology deployment,” ACP President Jason Grumet said in a statement.
By requiring new, additional electricity to power hydrogen facilities, the administration won’t give credit to projects relying on existing nuclear and hydro facilities unless they are renewing their licenses or expanding their generating capacity.
Two clean hydrogen producers—Air Liquide and Plug Power—relying extensively on hydropower and nuclear have warned their businesses will suffer if the administration places tight guardrails around the tax credit. The electric utility Constellation Energy also is relying on the subsidy to advance its clean hydrogen project at its nuclear power plant in Illinois.
Treasury will issue the final rule after taking comment for 60 days on the draft including a public hearing on March 25.