The US’ newly passed Inflation Reduction Act (IRA) sets a new standard for state support for clean hydrogen and challenges other nations to ramp up their subsidies amid intensifying global competition for private capital to scale up the industry.

Congress passed the act over the weekend, clearing the way for it to be signed into law by President Joe Biden. The Biden administration expects the IRA to unleash about $370bn of investment in energy and climate change schemes.

For the clean hydrogen sector, the headline figure is a ten-year production tax credit (PTC) rate that starts at $0.60/kg and potentially rises to up to $3/kg subject to meeting requirements on carbon intensity, staff wage levels and the use of apprenticeships.

“This positions the US as among the most competitive places in the world to develop green hydrogen projects across the value chain,” says law firm Shearman and Sterling in an analysis of the act.

“It will inevitably spur other countries to develop subsidies of their own to ensure domestic production, and the IRA should therefore be viewed as a significant boost to the development of a worldwide hydrogen economy.”

“We can say that the US is going to be one of the cheapest places in the world to produce clean hydrogen” Volldal, Nel

Norwegian electrolyser manufacturer Nel says the IRA completely transforms the outlook for green hydrogen in the US.

“Only two weeks ago, Biden's bill looked dead. Now it is alive and kicking, we can say that the US is going to be one of the cheapest places in the world to produce clean hydrogen," said Nel CEO Hakon Volldal after Congress passed the act.

In July, Nel said it had booked €45mn ($46mn) for a 200MW electrolyser stack for a US customer, its largest single order to date.

Shearman and Sterling says the potential for developers to access a PTC of up to $3/kg implies a halving of the cost of green hydrogen in many parts of the US, although it also cites other estimates that put the cost as low as $0.73/kg in the northwest.

“In either case it immediately makes green hydrogen a competitive source of energy compared to its fossil fuel alternatives,” the firm says. The US government has set a goal of producing clean hydrogen for $2/kg by 2025 and $1/kg by 2030.

Awards of hydrogen PTCs depend heavily on lifecycle carbon intensity. Projects qualifying for the base PTC of $0.60/kg must not exceed 4kg of CO₂/kg of hydrogen produced. A sliding scale then awards $0.75/kg for a carbon intensity of 1.5-2.5kg CO₂/kg of hydrogen produced and $1/kg for 0.45-1.5kg CO₂/kg of hydrogen produced and the full $3/kg for less than $0.45kg CO₂/kg of hydrogen produced. Project construction must start before 2033 to qualify.

Technology choices

With PTC awards based on carbon intensity, the scheme is ostensibly technology-neutral.

Importantly, developers of blue hydrogen projects cannot claim additional tax credits for carbon capture and storage (CCS). Early interpretations of the impact of the IRA on technology choices vary.

$0.60/kg – Base rate for hydrogen PTC

“You do not get the $3/kg unless the lifecycle emissions are below a certain threshold, and so blue hydrogen would be at the bottom of that, if it qualifies at all,” says Keith Martin, co-head of projects at law firm Norton Rose Fulbright. And developers cannot double up on CCS credits on the same project, he adds.

Looking across the wider transition technology landscape, the potential PTC for clean hydrogen could potentially sideline parts of the battery storage sector, despite the IRA’s significant support for that sector too, according to some Norton Rose Fulbright clients who posted questions during a webinar hosted by the firm.

“The hypothesis is that the $3/kg [PTC] for hydrogen production may be so rich that it makes hydrogen far more preferable to battery storage and [so] that may become the way we store energy,” says David Burton, a partner at Norton Rose Fulbright.

The IRA’s subsidies for renewable power and storage infrastructure mean the entire upstream value chain for green production is now subsidised by the US government, according to Shearman and Sterling.

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Author: Stuart Penson