Paul Rodden • Season: 2023 • Episode: 270
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Welcome to The Hydrogen Podcast!
In episode 270, The three pillars debate continues to rage on despite no official word from the US Treasury Department who is arguing for the three pillars and who is opposing them and why. I’ll go over this heated topic on today’s hydrogen podcast.
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Transcript:
The three pillars debate continues to rage on despite no official word from the US Treasury Department who is arguing for the three pillars and who is opposing them and why. I’ll go over this heated topic on today’s hydrogen podcast.
So the big questions in the energy industry today are, how is hydrogen the primary driving force behind the evolution of energy? Where is capital being deployed for hydrogen projects globally? And where are the best investment opportunities for early adopters who recognize the importance of hydrogen? I will address the critical issues and give you the information you need to deploy capital. Those are the questions that will unlock the potential of hydrogen, and this podcast will give you the answers. My name is Paul Rodden, and welcome to the hydrogen podcast.
In an article in Canary media.com, Jeff St. John writes green hydrogen debate heats up ahead of tax credit decision, Jeff writes, the Biden administration plans to set strict requirements on the sources of carbon free electricity used by hydrogen producers seeking lucrative federal incentives. According to news reports, citing leaked information regarding long awaited rules for the IRA’s clean hydrogen Tax Credit Program. Politico and Bloomberg last week reported on leaked details of draft guidance from the US Treasury Department. Anonymous sources indicated that the Treasury Department will adopt tax credit requirements that climate advocates have pushed for rather than the approach backed by hydrocarbons and utility companies siding with the climate advocates or energy analysts corporate clean hydrogen buyers coalition’s state legislators and many companies competing in the nascent clean hydrogen field, who say strict rules are vital to avoid directing taxpayer dollars towards hydrogen production that would increase carbon emissions rather than reduce them.
On the other side are companies building hydrogen production facilities, as well as industry groups with members including hydrocarbon companies and utilities. They’ve been arguing for the past year that such strict rules could strangle early investment in green hydrogen, but a number of independent studies have cast doubt on these claims. The draft guidance in question will not be final and the Treasury Department has declined to comment on it. But as described in news reports, it would propose restrictions that would meet or even exceed those set by the European Union last year to require that the power used to make green hydrogen must be tracked on an hour to hour basis to the zero carbon resources that generated it. What’s more, it will require that those zero carbon resources must be newly built specifically to serve hydrogen production facilities, rather than being drawn from existing generation whose power is diverted from other uses. A quote from Dan Esposito Senior Policy Analyst with decarbonisation Think Tank energy innovation, if these provisions make it into the final version, we would consider that to be a monumental win for climate for consumers and for the hydrogen industry itself.
Bloomberg cited unnamed people with knowledge of Treasury’s plans, who said that the draft guidance would require hydrogen projects to be supplied with new clean power sources operating on the same grid as measured on an annual basis through 2027. Then switching to being measured on an hourly basis, starting in 2028, with no allowance for projects operational before then to continue using annual accounting, after that time, and politico reported that the draft guidance would require electrolyzers to use carbon free electricity from resources built no earlier than three years prior to ensure that the gigawatt scale demands of hydrogen production are supplied by new carbon free resources rather than using clean power already available on the grid.
If these leaked requirements do end up in Treasury’s draft guidance, which is expected to be formally released as early as this week, it would represent a victory for proponents of the so called three pillars framework for maximizing the decarbonisation potential of green hydrogen production, which is predicted on hourly matching deliverability and additionality of clean electricity supplies. Without those three requirements in place, companies could earn federal tax credits for hydrogen production that could actually increase overall carbon emissions compared to doing nothing at all, or could even double the emissions of producing hydrogen with hydrocarbons. According to some studies, and a quote from Rachel Fakhry, who leads the hydrogen and energy innovation portfolio at the Natural Resources Defense Council. The evidence here was far too loud for the administration to ignore.
We’re really hoping the administration will hold the line on this. So what’s the logic behind the three pillars? The inflation reduction act 45 V tax credit offers tiers of incentives for hydrogen produced with low carbon emissions, including methods that use electricity to convert water into hydrogen via electrolyzers so called green hydrogen. The tiers are based on carbon emission levels, producers seeking the most lucrative $3 per kilogram tax credit Must emit no more than point four five kilograms of carbon dioxide per kilogram of hydrogen produced. That’s far less than the roughly 10 kilograms of carbon dioxide that’s emitted per kilogram of gray hydrogen produced from natural gas, which is how the vast majority of the world’s hydrogen is made today. In fact, to hit the point four or five kilogram target electrolyzers have to use almost entirely carbon free power. For every hour.
They operate this according to Jesse Jenkins, head of Princeton’s zero lab and co author of a 2022 study that provided one of the earliest warnings of the potential of emissions increasing impact of lax rules for the 45 V tax credit. He goes on to say if just 2% of your energy comes from gas plants, or 1%. From coal plants, you’ve busted that point four or five kilogram limit. While lower tax credits are available for hydrogen produced with higher carbon emissions. The $3 per kilogram top to your credit is seen as vital to making green hydrogen cost competitive with hydrocarbon derived hydrogen. According to industry estimates green hydrogen currently costs between five and $6 per kilogram compared to $1 to $1.50 for hydrogen produced via gas. The big unknown is how the Treasury Department will set the guidelines for determining how much co2 is emitted during hydrogen production.
That’s why the department’s guidance which has been repeatedly postponed from an initial expected release date of earlier this year, has prompted high profile lobbying campaigns from industry groups that could stand to reap 10s of billions of dollars of taxpayer large s depending on how the tax credit is structured. Some of these groups have argued that imposing strict rules for clean energy accounting will stifle the early investment needed for clean hydrogen to scale up to meet the demands of a zero carbon future. Green hydrogen is considered vital decarbonizing sectors, such as steelmaking, chemicals, manufacturing and heavy transportation. The Biden administration has set a goal of producing 10 million metric tons per year of low and zero carbon hydrogen by 2030. From almost nothing today, and a quote from Frank Wolak, president and CEO of the Fuel Cell and Hydrogen Energy Association said overly strict tax credit rules would deal a major setback to the evolution of hydrogen in the United States, and a real setback to the goals of decarbonisation, and the IRA.
He also goes on to say we want the most flexibility and interpretation of the intent of the IRA as it has been written, which is no additionality no geographic deliverability with annual average, what we’re advocating for is what is consistent with the practices in the renewable energy industry, which have been consistent for the past 20 years don’t create a double standard. The problem with that approach, according to proponents of the three pillars approach is that the methods are now used to measure the carbon intensity of electricity purchased by companies as set an international standards such as the greenhouse gas protocol, failed to differentiate between clean energy procured on an average annual basis and the actual electricity being generated and consumed from hour to hour. Under annual averaging methods. Now in play, an electricity buyer could purchase an amount of solar power equivalent to its annual electricity usage and claim it as carbon neutral even for the share of electricity it consumes overnight when solar is not feeding into the grid. Nor do today’s structures require buyers to prove that the carbon free energy they’re sourcing can be physically delivered to where they consume electricity.
Examples include companies signing contracts for wind power generated in Texas, which operates a power grid that’s largely disconnected from the rest of the country to claim carbon neutrality for electricity consumed and operations outside of the state. Finally, today’s structures do not take into account whether clean energy being procured is additional that is whether wind and solar farms or hydroelectric, geothermal, or nuclear power plants would have been built and kept running, even if a company did not commit to buy the power they produce. Without such additionality requirements, hydrogen producers could purchase clean power already being generated, which would mean that other electricity buyers will be forced to use electricity that comes from other sources.
And today, those sources are largely hydrocarbon derived. So who’s fighting the three pillars and who isn’t pushed back against the three pillars approach has come primarily from companies planning to invest in hydrogen production sites that are unlikely to be able to earn the full tax credit if strict rules are put into effect. Those include plug power, who’s a maker of fuel cells and electrolyzers that plans to invest more than a billion dollars in hydrogen electrolysis facilities. Those sites are in California and Texas, where solar and wind power are growing quickly. But they’re also located in Georgia, which produces most of its electricity from hydrocarbons. And the company’s home state of New York or its facility would rely on existing hydropower, the clean hydrogen future Coalition, a group that includes BP, Chevron, Exxon Mobil and shell as well as trade association For us fossil gas producers, and the nuclear energy industry has been lobbying heavily against stricter rules for 45 V, which could negatively impact the profitability of projects that rely on hydrocarbons for hydrogen production. Florida based utility holding company and clean energy developer NextEra Energy has argued that applying the three pillars to the 45 V tax credit program would drive up costs and limit production to a handful of locations.
Next era plans for hydrogen to play a major role in the decarbonisation goals of its subsidiary utility, Florida Power and Light, which will use it to replace hydrocarbon gas and power plants. An application of hydrogen that energy analysts say runs a high risk of resulting in increased carbon emissions. NextEra Energy is a member of the American clean power Association trade group, which has come out against stricter rules for the 45 V Program. And a Monday statement ACP CEO Jason Grumet said, It is surprising and disappointing that the administration would propose such a rigid approach that is at odds with decades of learning about new technology deployment. He continues to say the administration’s failure to provide an economically viable phase in for the transition from annual to hourly matching will make initial green hydrogen production, significantly more costlier than higher polluting options. He also says companies and investors will not risk the 10s of billions of dollars required to deploy a first wave of commercial facilities.
Absent a meaningful number of first movers, a new industry will not develop a survey of ACP members considering green hydrogen investments found that a majority would not move projects forward under an hourly matching regime, which would increase the cost of hydrogen production by 20 to 150%, depending on the region. But many other companies investing in green hydrogen production have come out in support of stricter rules. Hy Stor energy plans to build a hydrogen production and storage complex and Mississippi powered by solar and wind farms. Energy Company AES and industrial gas producer Air Products plant a hydrogen production facility in Texas to be powered by about 1.4 gigawatts of new renewable energy and renewable energy developer intersects power has lined up more than $6 billion in project finance to build renewables to supply gigawatts worth of clean hydrogen production. Again, in a quote from Jenkins, we hear from some particularly loud industry voices that it will not be possible to develop projects under those rules. But we have a whole host of industry players who are developing projects under those rules, and are moving billion dollar projects forward, who sees the rules as absolutely vital to get the industry off the ground in a sustainable way.
Mike Sloan CEO of synergetic, a green hydrogen developer that resigned its membership and ACP last week in protest of the trade group’s stance on the 45 year tax credit, agreed with the statement. He said the reality is the incentives are quite high. And you can get a lot done with the incentives on the table right now. But you can’t build projects everywhere. In particular, it doesn’t make sense to build green hydrogen production in parts of the country that aren’t primed for the development of ample and low cost renewable energy. He says we’re developing sites primarily in high production areas that have good wind and solar, setting up rules that allow hydrogen producers to earn the full tax credit in areas where they can’t actually get clean electricity not only runs the risk of increasing overall carbon emissions, he said it also runs the risk of leaving the industry ill prepared to survive once the 45 V tax credits expire, which is slated to happen 10 years after the project begins production under current rules.
That’s because the cost of electricity is a key variable in determining the cost of green hydrogen. That’s according to Sloan and the lowest cost power in the future will come from an increasingly low cost, wind and solar power, green hydrogen production projects that are designed to use that power when it’s available. But using electrolyzer technologies that can ramp up and down to meet surges and sags and supply for example, will be far better prepared to thrive in that future than those that are cost effective only when they can run around the clock on whatever power is available from the grid. He continues to say quite a lot of projects that will get built will not be viable in a post credit environment. Is that where we want the tax credits to go to projects that only exist because of the tax credits. Okay, now, I know I’m going to be a bit long today but since this is without a doubt the most important development for global hydrogen production, I felt it needed more coverage.
And with this article, we get a bit clearer idea of who is on both sides of the three pillars debate. Both sides of this coin offer legitimate talking points. And as someone who is technology agnostic for hydrogen development, there seems to be a clear middle ground thermallytic hydrogen production with CCUS, or methane pyrolysis offer low to zero carbon emissions at a much lower price point to electrolytic. Start with smaller incentives for these projects to get started and allow them to mature the hydrogen supply chain and a quick response to all those saying these projects will increase co2 emissions. No they won’t. The studies stating that there will be a co2 increase with these technologies have been widely discredited. But along with those development technologies leverage the existing power available at nuclear sites. This will generate the zero carbon hydrogen desired by the environmental groups and give an opportunity for further refining and scaling of the electrolyzer suppliers.
Then, as renewable development increases, the three pillars can take a more firm hold on the full weight of the 45 V tax credits that can be released. But I will also say this in agreement with Mike Sloan, the CEO of synergetic, we ultimately don’t want to rely on tax credits for hydrogen development. These will one day dry up and the hydrogen industry needs to be able to stand on its own. So let’s ensure that happens the right way and develop a solid hydrogen foundation that allows capital to be invested without fear of regulatory restrictions, as well as technology advancements occurring as demand increases.
Alright, that’s it for me, everyone. If you have a second, I would really appreciate it. If you could leave a good review on whatever platform it is that you listen to Apple podcast, Spotify, Google, YouTube, whatever it is, that will be a tremendous help to the show. And as always, if you have any feedback, you’re welcome to email me directly at info@thehydrogenpodcast.com.
So until next time, keep your eyes up and honor one another. Hey, this is Paul. I hope you liked this podcast. If you did and want to hear more. I’d appreciate it if you would either subscribe to this channel on YouTube, or connect with your favorite platform through my website at www.thehydrogenpodcast.com. Thanks for listening. I very much appreciate it. Have a great day.
