There is much excitement around the generous US tax credits for clean hydrogen production, but companies are waiting for clarity around their implementation from the US Treasury before finalising investments. 

The Inflation Reduction Act (IRA) introduced section 45V production tax credits of up to $3/kg for hydrogen produced at sites that emit less than 0.45kg of CO₂e for every kg of hydrogen. The level of credits falls steeply for facilities with higher levels of emissions—just $1/kg is available for producers that emit in a range of 0.45–1.5kg of CO₂e, dropping to $0.75/kg for emissions of 1.5–2.5kg of CO₂e and $0.60/kg for emissions of 2.5–4kg of CO₂e. 

As an alternative, producers could take an investment tax credit of 30pc, but the production credit will almost always be preferable. Thinktank Resources for the Future (RFF) estimates the investment tax credit would make sense only for electrolysers with load factors below 30pc. 

“Anything is going to be supportive, but people are more waiting for the Treasury guidance than the hub funding” Beuttel, Bloom

In practice, the 45V tax credits will be used mostly by electrolytic hydrogen projects. Blue hydrogen projects are more likely to opt for the existing 45Q tax credits for CCS. The IRA increased the credits for industrial uses to $85/t, from $50/t. This is equivalent to a credit of around $1/kg for blue hydrogen production, the RFF estimates. As blue projects would struggle to keep emissions below the 0.45kg threshold, such projects are more likely to take the carbon capture credits, RFF says. 

Indeed, some large investments in blue hydrogen projects have already been announced on the back of the IRA. Chemicals firm OCI in September 2022 announced it would begin construction of a 1.1mn t/yr blue ammonia project in Texas, a project with an estimated total investment of “below $1bn”. OCI noted the 45Q credits “strengthened the attractiveness” of this project.

The 45V and 45Q tax credits could help developers displace grey hydrogen in industries with existing hydrogen demand, but more support may still be needed to push hydrogen into other sectors in the long term.

Rick Beuttel, vice-president for hydrogen business at fuel cell and electrolyser manufacturer Bloom Energy, tells Hydrogen Economist the ‘carrot’ approach of tax credits will spur a big tranche of investment in the “early lighthouse” projects. “Ultimately, none of these projects happen without offtake, so the first projects will likely be focused on replacing existing grey hydrogen,” he says. 

These will “keep the industry busy for a while… but to take the next step and drive a more holistic discussion around using clean hydrogen and where it best fits as a decarbonisation tool, there needs to be more.” Policymakers may later need to add the ‘stick’ of a carbon price or carbon tax, Beuttel says. 

Waiting for guidance 

The Treasury was due to issue guidance around the 45V credit in April, but this timeline is widely understood to have slipped. “Depending on who you ask you get a different answer, but the latest conjecture is it will be this summer,” Beuttel says.

The Treasury is considering whether to require additionality, meaning electrolysers would need to be supplied by new, additional renewable resources rather than existing assets or ones that would have been built anyway. It must also decide whether to include a deliverability requirement—meaning power would need to be generated and consumed in the same local or regional grid. 

There will certainly be some requirement to show temporal matching of the running hours of electrolysers and the renewable assets from which they source their power. The strictest would be an hourly matching requirement, where the renewable power would need to be produced and consumed almost instantaneously. The most lenient would be an annual requirement, where the electrolyser’s consumption need only match the output of the renewable plant on average over the course of a year.

“Companies are waiting to make sure they do not rush off, invest and sign offtake agreements on the expectation of getting the credits, and then realise you need hour-by-hour time matching,” Beuttel notes.

Debates over matching

The Washington-based Fuel Cell and Hydrogen Energy Association argues for annual matching and against any requirement that the renewable energy source and electrolyser be located in the same regional transmission zone. More stringent requirements could be appropriate in future, but “at this time, when technologies are in their early stages of growth, flexibility is needed”, the group says.

Electrolyser manufacturer Nel has called for monthly matching at first but says the level of granularity could increase over time. It has also suggested that additionality should not apply before 2027.

The Treasury faces “a difficult task” to find a balance between being robust on emissions and not stifling electrolyser investment, says Aaron Bergman, a fellow at the RFF. “Because the 45Q credit is so straightforward, making the 45V tax credit more challenging may cause more producers to go with hydrogen from fossil fuels, as opposed to electrolysis,” he adds.

“Because the 45Q credit is so straightforward, making the 45V tax credit more challenging may cause more producers to go with hydrogen from fossil fuels, as opposed to electrolysis” Bergman, RFF

Only hourly matching would have “sufficient rigour” for reducing emissions, argues Rachel Fakhry, senior advocate at environmental advocacy group the National Resources Defence Council. A Princeton study of the California market found an annual matching requirement could lead to electrolysers qualifying for the full $3/kg tax credits despite having actual CO₂ emissions of around 20kg, five times above the minimum threshold. Electrolysers would likely procure cheap solar power but would be able to run during peak evening hours, increasing the call on peaking coal and gas plants, the study said.  

Fakhry also describes additionality as non-negotiable. If electrolysers are simply allowed to use existing renewable assets, fossil electricity would likely ramp up to fill at least a portion of the gap, Fakhry argues. She notes the same Princeton study found that even an hourly matching requirement would be useless without additionality and would likewise lead to actual emissions five times above the threshold. 

The publication of the Treasury’s guidance may not put an end to these debates or the uncertainty for investors.

Any additionality requirement would almost certainly be challenged in court—and this challenge would be very likely to succeed, says Matthew Price, a partner at law firm Jenner & Block. Congress could have easily written an additionality requirement into the law if so desired, he argues, adding the wording of the law, particularly its call for tax credits for ‘any qualified hydrogen’ would also appear to preclude an additionality requirement.

“The Treasury’s priority should be to develop the new hydrogen economy as quickly as possible,” Price tells Hydrogen Economist.  “Other IRA programmes will work together with other federal and state policies to help ensure the decarbonisation of the electric grid. Entangling the two through an additionality requirement—which will end up being litigated—will create continued regulatory uncertainty and will impede the achievement of Congress’s climate goals.”

Hubs 

The IRA tax credits are not the only major federal support for hydrogen in the works. The Bipartisan Infrastructure Law included $9.5bn of support for hydrogen, including $8bn to develop hydrogen hubs. 

Applications closed in early April, and the Department of Energy (DoE) plans to decide on the locations of the hubs in autumn 2023.

Beuttel does not believe companies will hold back investments until the hub locations are announced. “Nine months ago, I would have said people are going to wait as the general perception was there would only be four or five hubs,” he says. However, the DoE is now likely to support up to ten hubs, meaning there will be less money for each individual hub.

“Anything is going to be supportive, but people are more waiting for the Treasury guidance than the hub funding,” Beuttel says.

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Author: Killian Staines