Canary Media’s Down to the Wire column tackles the more complicated challenges of decarbonizing our energy systems.
This is part two of a three-part Down to the Wire series this week on how the federal government should design rules for the hydrogen tax credit under the Inflation Reduction Act. Read part one.
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Truly “green” hydrogen needs to be made with truly carbon-free power. But will strong hydrogen tax-credit rules that require the use of truly carbon-free power make it harder to create a green hydrogen industry that can compete economically against fossil fuels?
Yesterday we walked through the case for the federal government to set rigorous rules for the 45V hydrogen production tax credits, which will be worth tens of billions of dollars; clean-energy advocates want to require producers to meet a high bar for the clean energy that fuels their process. Today we consider the opposing case, which argues that looser rules are needed to get the clean hydrogen sector off the ground.
Many of the parties calling for strict rules have cited an analysis by Princeton’s Zero Lab that finds that hydrogen made from grid electricity will lead to net increases in carbon emissions unless production is paired with clean energy on an hourly basis. It also indicates that hydrogen production that uses genuinely carbon-free power can be cost-competitive with hydrogen made with fossil gas, thanks to the generous size of the tax credits — even when the clean hydrogen producers are required to follow strict applications of the principles of additionality, deliverability and hourly matching (see part one for definitions of these terms).
But Zero Lab’s analysis is not the only one out there. Many of the companies submitting comments to the IRS say that requiring additional, deliverable and hourly matched clean energy to power electrolysis could push costs above those for hydrogen made with fossil gas, limit production to only those parts of the U.S. with the highest amounts of clean energy, and undermine the country’s push to become a leader in low-cost hydrogen production.
As Jesse Jenkins of Princeton’s Zero Lab told Canary Media, “There isn’t really much of a question about the veracity of the emissions analysis we’ve performed. The main response from those seeking to develop electrolyzer projects and make the most money is that this is too onerous and would raise project costs too high to be profitable.”
Even a recent report by energy consultancy Wood Mackenzie that’s being cited by NextEra and other opponents of strict rules finds that “green” hydrogen production could lead to increased carbon emissions. WoodMac determined that “absolute emissions increase marginally” under the scenario it modeled for low levels of hydrogen production in Arizona and South Texas — even though those two states have relatively high percentages of renewable energy in their grid mixes.
“It is expected that the outcomes would vary significantly on a regional basis and may also vary as hydrogen production scales well past the addition of a 250 MW electrolyzer in a region,” the report’s authors write in a March op-ed.
The arguments against strict clean-energy accounting: Cost and competitiveness
WoodMac’s analysis is more clear regarding its findings on the cost of hydrogen made via annual matching versus hourly matching of clean energy. It found that making hydrogen under hourly-matching requirements would be 60 to 175 percent more expensive than making it under annual matching — a cost increase that “could result in unfavorable economics for green hydrogen adoption.”
That cost increase is central to arguments made by Plug Power against strict rules for the hydrogen tax credits. The company, a maker of hydrogen fuel cells, is planning to invest more than $1 billion in hydrogen electrolysis facilities in California, Georgia, Texas and its home state of New York.
“Until all those renewables are available on the grid, you’re still going to have to [power production with] natural gas and other resources,” said Roberto Friedlander, the company’s director of investor relations. Plug Power plans to buy renewable energy credits for all its sites to meet “green” hydrogen production requirements, directly use solar power to make cleaner hydrogen in Texas and hydropower in New York, and eventually build clean power to supply its electrolyzers, he said.
But if eligibility for those tax credits is restricted to hydrogen produced with newly built clean energy delivered from where it’s produced to where it’s consumed on an hourly basis, Plug Power’s electrolyzers won’t be eligible for the credits and thus won’t be able to compete on cost with hydrogen made from fossil fuels, he said. That’s particularly true if today’s “gray hydrogen” producers are allowed to qualify by adding carbon-capture-and-storage systems to their steam-methane-reforming sites to produce so-called “blue hydrogen” — something that’s not cost-effective today, but would be eligible for tax credits if the Treasury Department’s final eligibility rules deem it sufficiently low-carbon to earn the incentive.
“You have to have government intervention to help these nascent clean-energy industries,” Friedlander said. “How else can you inspire people to take on the risk of these investments?”
These cost concerns are echoed broadly in comments to the IRS and Treasury Department from a range of companies and trade groups arguing against hourly matching.
BP America, a division of U.K.-based oil giant BP, stated in comments to the IRS, “Stringent requirements such as hourly zero-emission matching have the potential to devastate the economics of clean hydrogen production. Moreover, such restrictive requirements are likely not practical or feasible in these early stages. If a green hydrogen production facility can only produce during hours when wind and solar are available, the low utilization rate will dramatically increase the price of the hydrogen produced.”
NextEra’s comments to the IRS use the same phrasing as BP America’s in claiming that hourly time-matching would “devastate the economics of clean hydrogen production,” adding that it “would not align with legislative intent to accelerate progress towards a clean hydrogen economy.”
NextEra — the parent company of utility Florida Power & Light and clean-energy developer NextEra Energy Resources — has made hydrogen central to reaching its goal of zero carbon emissions by 2045. The company’s large-scale hydrogen electrolysis plans include a project in Florida at its Gulf Clean Energy Center fossil-gas power plant that would be powered by Florida Power & Light solar projects and a project in Arizona in partnership with industrial-gas producer Linde, NextEra Chief Communications Officer David Reuter said in an email.
“An hourly match requirement would drive up the price of clean hydrogen and reduce investment by equipment manufacturers,” he wrote.
NextEra also stated in its IRS comments that an internal analysis it conducted indicated that hourly clean-energy matching “would increase the cost of green hydrogen production by around 70%–170% versus annual matching, eliminating the ability of the [production tax credit] to make green hydrogen cost competitive with other forms of hydrogen.”
That cost estimate was echoed in comments from the Edison Electric Institute, a U.S. utility trade group, which used language nearly identical to NextEra’s. Like the cost estimate from Wood Mackenzie, it is significantly higher than the estimates from Zero Lab, which found cost premiums for hydrogen produced via hourly matched clean energy on the Western U.S. electricity grid would be only 20 to 50 cents higher than a base price of $2.50 to $3.50 per kilogram.
Location matters: Deliverability and geography
NextEra and Edison Electric Institute lay out some key reasons why they say hourly matching will drive up costs. One has to do with location, or more precisely, the fact that some parts of the country have less clean energy than others.
Edison Electric Institute noted that requiring hourly matching would disadvantage producers in some geographical areas. “Although hourly matching may be achievable more quickly in certain regions of the United States with the appropriate renewable generation mix, it will take longer in many other parts of the United States,” it wrote.
And NextEra wrote that hourly clean-energy matching would require green hydrogen projects to “buy time-correlated renewables during periods of under-generation, which corresponds to higher market price periods.”
But proponents of strict hourly matching rules point out that the availability of clean energy ought to be a primary factor in deciding where to produce green hydrogen. That’s not just because clean energy is a vital input to producing carbon-free hydrogen, they say. It’s also because electricity prices — a major factor in hydrogen costs — are usually lower at times when clean energy is plentiful and higher at times when electricity demand spikes and a higher proportion of fossil fuels are used to make up the balance.
“The levelized cost of hydrogen is very much driven by the cost of energy,” said Beth Deane, chief legal officer at Electric Hydrogen, which is advocating for stringent tax-credit rules. “And the fortunate thing is that the cost of energy is also lowest when the carbon[-intensity of grid electricity] is lowest — when you have a grid that’s pouring off energy because it’s not needed.” Those price differentials are likely to become more pronounced as the country adds increasingly more low-cost solar and wind power to meet its climate goals.
In its comments to the IRS, Electric Hydrogen cited data from the California grid, which is awash in low-cost solar power at midday but sees energy prices spike when gas generators are cranked up to serve peak demand on hot summer evenings. This graphic from Electric Hydrogen cites data from CAISO, California’s grid operator, showing that the cost and carbon-intensity of electricity are generally correlated in that state. But this dynamic is not currently replicated across all parts of the country.
Deane pointed out that some of the arguments against strict hourly matching are being put forward by companies that have already made plans to invest in hydrogen production in areas that lack ample renewable resources today. Plug Power’s first hydrogen facility is being built in Georgia, a state with a current power mix of 47 percent natural gas, 16 percent coal, 24 percent nuclear and 8 percent renewables. Florida, the home of NextEra-owned utility Florida Power & Light, gets 75 percent of its power from natural gas, 5 percent from coal, 13 percent from nuclear power and less than 1 percent from renewable energy.
Under current accounting methodologies based on annual renewable energy credits, those plants would be able to claim to be powered by clean energy produced anywhere in the country — including clean energy that has no connection to the grid that actually powers them.
That’s why calls for hourly matching of renewables are being married with calls for deliverability, or requiring that the clean energy being claimed is physically capable of reaching the electrolyzers using it.
Such deliverability rules would, by their nature, privilege hydrogen being produced in more renewable-rich regions. The American Clean Power Association, an industry trade group that counts NextEra Energy Resources as one of its members, said in its comments to the IRS that if electrolyzers can only produce during hours when clean energy resources are available, “the low utilization rate can dramatically increase the price of the hydrogen produced.”