The clean hydrogen dilemma

A landmark piece of legislation containing $369 billion in investment to combat climate change was approved by the White House in August. An important tax credit in that historic law was one for producing hydrogen in environmentally friendly ways.

The production of ammonia-based fertilizer, which is necessary for the world’s crop growth, and the refinement of crude oil into usable petroleum products are two of the numerous contemporary uses for hydrogen. But, it’s also compared to a “Swiss Army Knife of decarbonization” because it might be employed as a power source in sectors like aviation and heavy shipping that are notoriously difficult to transition away from fossil fuels.

The way federal agencies implement the tax credit will determine how much of an impact it has on emissions reductions. The devil is in the details, as is true for the majority of accounting-related issues.

Some energy companies argue on one side of the issue that making the regulations overly stringent could kill the clean hydrogen sector off before it even gets off the ground.

“Our view is that if you put too onerous of regulations in place… the price to produce green hydrogen will be uneconomic and the industry won’t scale, effectively making it dead on arrival,” said a representative for NextEra Energy, which generates clean energy from wind, solar, and nuclear sources and owns a significant utility in Florida. NextEra Energy also produces clean energy from other sources such as biomass and waste.

On the other hand, environmental policy organizations contend that if the regulations wind up being too loose, the new “clean” hydrogen economy may actually end up increasing carbon emissions rather than reducing them.

“Weak guidance could … force Treasury to spend more than $100 billion in subsidies for hydrogen projects that result in increased net emissions, in direct conflict with statutory requirements and tarnishing the reputation of the nascent ‘clean’ hydrogen industry,” according to an open letter sent from 18 organizations to federal agencies.

The hydrogen tax credit could end up going to producers whose hydrogen is not actually lower emissions than the alternatives, and could even have the indirect effect of increasing emissions from the electricity grid, according to Emily Kent, who covers fuel sources for the Clean Air Task Force, a climate policy shop that signed the letter. “With loose rules and weak life-cycle greenhouse gas emissions analyses for hydrogen production, the hydrogen tax credit could end up going to producers whose hydrogen is not actually lower emissions than the alternatives,” she said.

Raffi Garabedian, CEO of Electric Hydrogen, is in a tough position as a result of this discussion.

In addition to other investors, Bill Gates’ climate investment company, Breakthrough Energy Ventures, has provided cash to Garabedian’s enterprise, which is developing a type of electrolyzer to split water into hydrogen and oxygen. Demand for electrolyzers would increase if the tax credit regulations were interpreted loosely, as businesses would be rushing to take advantage of the new benefit.

But, in the long run, if the business really results in an increase in carbon emissions as opposed to a decrease, the public would eventually demand an end to the subsidies, thus casting a negative light on the concept of “clean” hydrogen as a whole.

But not for the wrong reasons, I’d love to sell electrolyzers to everyone. Not if it’s going to be set up and operated in a manner that produces more carbon than the alternatives, according to Garabedian.

In response to their request for public comment, the U.S. Treasury Department and the IRS are determining how the tax credit will be implemented. Major energy companies like BP and Shell, as well as trade groups like the American Gas Association and the Renewable Fuels Association, provided their thoughts.

The amount of the tax credit will vary depending on how much CO2 a certain hydrogen producer emits during production. Yet, the topic of contention is how to account for that CO2.

Electricity produced in a variety of methods, such as by burning coal or natural gas, or by utilizing wind or solar energy, is combined on the energy grid. A renewable energy certificate, often known as a REC, is a formal document that certifies a certain energy producer produced a specific volume of renewable energy.

But not every REC is the same. Some are measured in much smaller time increments, while some are measured once a year.

Which type of RECs should be allowed is the key point of contention over the hydrogen tax credit.

For instance, BP America requests that annual RECs be permitted in its public response to the IRS. The annual RECs are a more adaptable method of carrying out the tax law, which would aid in promoting the investment necessary to launch the sector. This is crucial for BP, which between 2023 and 2030 intends to invest between $27.5 billion and $32.5 billion in a variety of what the oil firm refers to as its transition growth engines, such as renewable energy and hydrogen production.

“The rule should be flexible to assist this budding business get off to a faster start. The maximum flexibility would be provided by being able to match annual hydrogen production demand with renewable energy generation, according to BP’s letter to the IRS.

According to NextEra, mandating hourly accounting would make it economically difficult to produce green hydrogen and would instead favor “blue” hydrogen, which is produced by burning natural gas or other fossil fuels.

“Requiring time matching that is too granular (such as hourly) would devastate the economics of green hydrogen by providing a significant advantage to blue hydrogen and dependence on fossil fuels, and does not align with legislative intent to accelerate progress towards a clean hydrogen economy,” David P. Reuter, chief communications officer at NextEra, told CNBC.

Reuter cited research from the international consulting firm Wood Mackenzie that demonstrated how hourly matching would drive up the cost of hydrogen production while annual credits would let the electrolyzers that produce it function continuously.

An hourly approach would be restrictive and ensure that a budding sector is killed off before it even gets off the ground, according to Reuters.

On the other side of the argument, groups concerned with climate change, such as Electric Hydrogen and the Clean Air Task Force, contend that adopting more lenient guidelines would defeat the Inflation Reduction Act’s climate goals.

According to environmental organizations, the approach of using natural gas in a steam methane reformer process today is really better for the climate than using fossil fuels to power an electrolyzer to create hydrogen.

These climate-focused organizations are pushing for hourly REC criteria and something called “additionality and deliverability,” which would help guarantee that the energy required to run an electrolyzer to produce hydrogen is actually clean energy.

Firstly, hourly accounting would only permit hydrogen producers to claim renewable energy credits if clean energy is produced at the same hour as they are consuming it, such as when the wind is blowing, the sun is shining, or a nuclear power plant is generating energy on the pertinent transmission system.

For instance, Google, which has been a leader in adopting clean energy, has embraced this hourly method of energy accounting.

Only a few marketplaces offer hourly RECs at this time. But, Beth Deane, the chief legal officer of Electric Hydrogen, told CNBC that she anticipates other registries will offer their own hourly RECs as soon as need for the more exacting accounting criteria is raised outside of the discussion surrounding hydrogen tax credits.

According to the open letter from the climate groups, it takes 12 to 18 months to set up an hourly matching accounting system but at least 24 months to begin large-scale hydrogen production.

M-RETS, a non-profit organization, and the biggest North American credit tracking system, is able to offer hourly REC tracking across North America as a service in the interim.

“Additionality” refers to the inability to count credits for renewable energy that would have been produced anyhow.

Deliverability means that credits can only be given for clean energy that is genuinely produced in a site that is connected to the hydrogen producer’s electrolyzer by a transmission line that is not already crowded.

It is “a closer approximation of reality” to require hydrogen manufacturers to match their energy usage on an hourly and location-specific basis, according to Deane.

“When it’s on the grid, an electron is an electron. It doesn’t have a color, but it does have a history. You’re trying to make the history match up so that you can have some support for your claim that it is clean and can be qualified for a tax credit.”

Professor Jesse Jenkins of Princeton, an expert on macro-energy systems, concurs that a more exacting accounting is required.

Our peer-reviewed study is quite conclusive on this front: hourly matching, additionality, and physical deliverability are all necessary to make sure grid-linked electrolysis can adhere to the strict standards established by the IRA Act. Our analysis shows that eliminating even one of those requirements causes considerable emissions.

Wilson Ricks, a research assistant in Jenkins’ lab, explains that without these three accounting standards, hydrogen producers could run their electrolyzers continuously while using fossil fuels at night or when there is no wind energy and then claim that this was offset by receiving credits from solar or wind farms that would have generated that energy anyhow.

Another element is the anticipated mismatch between the supply and demand for RECs. According to Ricks’ calculations, by the end of the decade, there will be more RECs produced than the market desires. As a result, hydrogen producers may use current RECs without encouraging the development of any new clean energy sources.

According to predictions, there would be “a tremendous national gap” between the entire demand for clean certifications and the total number of clean certificates produced by the year 2030, according to Ricks. “Even the size of it surprises me. If this is any indication, hydrogen producers will have plenty of space to purchase annual RECs without having to put any new zero-carbon power online.

Federal organizations haven’t chosen a position yet. In order to “further the aims of boosting energy security and combating climate change,” the Treasury and IRS will implement the tax advantage, a representative for the Treasury told CNBC.

In the long term, according to Garabedian, his position is about safeguarding his business, the standing of the sector, and the tax credit.

“We must execute it properly. Otherwise, the idea of green hydrogen as a whole will be exposed. If we’re going to be committed to this goal of decarbonization, we have to act in the long-term correct way,” Garabedian told CNBC. “It would be a shame if this caused us to emit more carbon than we did previously. And as a result of that travesty, the public, NGOs, and environmentalists will all become aware of it, leading to the termination of the subsidy. There is a practical benefit to maintaining the high ground. There is also a moral justification.

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