DOE’s warning to IRS: Regs could hurt hydrogen industry

[Editor’s note: This story originally was published by Real Clear Wire.]

By Marty Durbin
Real Clear Wire

“You have to do everything everywhere all at once.” Those are the words of U.S. Energy Secretary Jennifer Granholm when describing federal efforts to rapidly build out a clean hydrogen economy.

Whether or not Granholm intended to reference the Oscar-winning movie about a family traveling through the multiverse while under IRS scrutiny, the Department of Energy’s (DOE) U.S. National Clean Hydrogen Strategy and Roadmap leaves no doubt that choices made today could result in a dramatically different future for the hydrogen economy (ironically, those choices will be made by none other than the IRS).

Released in June, DOE’s strategy sets a hydrogen production goal of 50 million metric tons by 2050 and presents a detailed outlook of future production, transport, storage, and use of hydrogen under a variety of scenarios (or parallel universes, to extend the movie metaphor).

The strategy examines the potential for hydrogen to enable emissions reductions in end-use applications that lack clean alternative power sources, such as chemicals, steelmaking, refining, heavy-duty transportation and long duration energy storage. DOE finds that achieving its production goal would reduce economy-wide greenhouse gas emissions by 10%, but the report also cautions that our ability to address emissions in these hard-to-decarbonize sectors will hinge on demand signals tied to federal policies. For example, the report states that:

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“Stakeholders on the production, demand, and financing sides highlight hesitancy to commit resources due to lack of price transparency and risks in clean hydrogen supply. Regulatory drivers at the state and federal level could help provide these long-term demand signals. Catalyzing long-term offtake would ensure that clean hydrogen production projects break ground while tax credits are active, allowing for production cost-downs in the 2020s and early 2030s” (emphasis added).

In other words, DOE warns that pending federal policies present a risk to the clean hydrogen investment necessary to drive down prices and stimulate industrial demand. While not explicitly mentioned in the report, the primary factor influencing these hydrogen supply risks is IRS implementation of the Inflation Reduction Act’s “45V” hydrogen production tax credit (PTC).

The credit, which would provide a tax incentive of up to $3 per kilogram of clean hydrogen produced, was written by Congress to rapidly jumpstart the U.S. hydrogen economy, which is widely considered critical to achieving long-term decarbonization goals. The IRS is preparing to release guidance in the coming weeks that will determine eligibility criteria for the credit, which has generated a firestorm of debate. The dispute is incredibly complex, and originates not from congressional language but rather a campaign by some to restrict credit eligibility based on three technical factors known as additionality, time matching, and geographic matching. In essence, the criteria would credit only hydrogen produced using electricity from newly built zero-emission sources in the same regional market and with electrons that can be verified on an hourly basis (for a detailed explainer of these concepts, see here).

Such a restrictive view looks only at the potential for increased power sector emissions due to significant new demand on the electric grid (because hydrogen production is very energy intensive). But for reasons explained in DOE’s strategy, this dynamic cannot be viewed in a vacuum.

A more holistic view reveals that the final IRS eligibility criteria will influence two general categories of emissions tradeoffs—one involving sectors (electric vs. industrial/transport/etc.) and one involving time (higher short-term emissions to enable lower long-term emissions, and vice versa).

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We believe the sensible way to handle these tradeoffs is to prioritize the most challenging sectors and the longer-term emissions horizon. The most compelling reason for this approach is that the electricity sector is clean and rapidly getting cleaner (thanks in part to generous IRA incentives), while difficult-to-decarbonize sectors such as steelmaking and heavy-duty trucking tend to have few emissions reductions options beyond hydrogen. In the absence of adequate supplies resulting from a flexible credit, hydrogen producers will be unable to drive down costs, leaving those sectors without the low-carbon fuel they need to meet emissions goals.

A newly released policy impact analysis by Plug Power (The Road to Clean Hydrogen: Getting the Rules Right) finds that restrictive IRS regulations in each of the three disputed eligibility areas would combine to increase clean hydrogen production costs by more than $3 per kilogram—effectively undermining 100% of the 45V tax incentive. According to the study, this could result in:

• A 45% decline in clean hydrogen investments by 2032;
• A loss of more than 515,000 potential U.S. jobs in a globally competitive industry of the future;
• A 60% reduction in clean hydrogen demand from certain hard-to-decarbonize sectors in 2040; and
• Millions of tons of lost GHG abatement potential

The bottom-line warning from the DOE and Plug Power reports is that failure to bring down prices will keep clean hydrogen out of reach of potential consumers. Or to paraphrase a different movie reference, it’s the Field of Dreams dilemma: “If you don’t build it [hydrogen supply], they [clean end-use applications] won’t come.”

In this sense, the 45V credit embodies “Bidenomics,” which the President himself recently described as making smart investments in America that lower costs and promote competition. Done right, they will not just build a foundation for decarbonizing heavy industry in the decades that follow, they could become a shining example of the new climate industrial policy that defines the President’s signature legislative achievements.

For this reason, we hope the Administration will reject calls for strict eligibility requirements on 45V and instead listen to the growing chorus of U.S. businesses—not to mention its own Department of Energy—that are eager to help build and grow this exciting new industry.

 

Marty Durbin is President of the Global Energy Institute (GEI) at U.S. Chamber of Commerce.