US: hydrogen blending pilots proposed in 3 Californian distribution systems

In order to define pipeline injection standards, Californian natural gas companies have suggested a number of hydrogen blending pilot projects in operational distribution networks.

In a Sept. 8 filing with the California Public Utilities Commission, or CPUC, Southern California Gas Co. and San Diego Gas & Electric Co. each proposed demonstration projects to incorporate hydrogen into gas distribution networks on college campuses. A trial project that will offer a hydrogen-natural gas combination to business clients in Truckee, California was proposed by Southwest Gas Corp.

To implement the pilots and establish balance accounts to monitor and ultimately recoup their expenditures, the utilities are requesting CPUC permission. The demonstration projects would be the first of hundreds of gas companies’ suggestions to try blending low-carbon hydrogen in large concentrations—up to 20% of pipeline volumes—into customer-serving U.S. distribution networks.

Since at least November 2019, when the CPUC published a new phase of its biomethane regulation to address renewable hydrogen transport in gas pipelines, the commission has investigated hydrogen injection criteria. The CPUC declined the three utilities’ and Pacific Gas and Electric Co.’s demonstration of blending hydrogen in 2021, but it gave recommendations for future proposals.

Data-gathering demonstration projects

The new plan came as a result of research done at the University of California, Riverside, to assist the CPUC in creating standards and interconnection protocols that would regulate the injection of hydrogen into the state’s gas pipelines. In order to answer unanswered concerns about hydrogen’s effects on system integrity and end-use equipment at levels of more than 5% of the gas stream, the paper suggested conducting actual blending experiments.

The utilities planned to progressively increase the content of hydrogen to 20% in the live systems, starting with 5% by volume or less. According to the filing, the projects would collect information on “pipeline integrity and compatibility with blend concentrations, fluctuations in gas composition and concentrations, leakage (if any), [and] effects on metering, safety, and end-user appliances to ensure appliances functioned properly and without modifications.”

According to the utilities, the pilots might generate enough data to create interim injection rules, particularly for mixes with low concentrations.

On the campus of the University of California, Irvine, the SoCalGas pilot would concentrate on integrating electrolyzed hydrogen into a medium-pressure system using a combination of steel and plastic pipes. On the main campus of the University of California San Diego in La Jolla, California, SDG&E would perform their blending demonstration in a medium-pressure system made entirely of polyethylene plastic tubing.

However, it would give performance and safety data for mixes supplied at high elevation, taking into account Northern California’s more severe weather conditions, according to the petition. Southwest Gas’ Truckee pilot would also be conducted on an all-polyethylene system.

The expected project expenses for SoCalGas, SDG&E, and Southwest Gas were roughly $12.9 million, $12.2 million, and $10.2 million, respectively. The pilots, if permitted, could start in 2024 and endure for around 18 months apiece.

Pilots could initiate more extensive pipeline mixing

The utilities claim that lessons learned from experimenting with mixes in distribution systems would inform possible demonstrations in transmission lines, which are typically thought to be more difficult due to hydrogen’s ability to weaken steel under high pressure.

When exposed to mixtures with high amounts of hydrogen, steel, and polyethylene materials had effects, according to a University of California, Riverside study. Additionally, it was shown that mixtures had a higher rate of pipeline leakage than purely natural gas streams. The laboratory results would need to be validated in real-world circumstances, according to the study’s authors.

In terms of the growth of the market for renewable fuels, California has led the nation. A SoCalGas initiative to create a green hydrogen center and construct the largest pure hydrogen infrastructure system in the country has received support from several state and municipal officials as well.

TAX CREDITS FOR CLEAN HYDROGEN PRODUCTION

The Act amends the Code to create a new Section 45V, which introduces a PTC for the production of “qualified clean hydrogen” during a 10-year period commencing on the date of when the qualified clean hydrogen facility in question was placed in service.

Amount

The four-tiered incentive in any taxable year is calculated at an amount equal to $0.60/kilogram (kg) of qualified clean hydrogen produced multiplied by an applicable percentage based on the resulting lifecycle greenhouse gas emissions rate as follows:

kgs of CO2e Produced per kg of QCHApplicable Percentage
2.5 – 4 kg of CO2e20%
1.5 – 2.5 kg of CO2e25%
0.45 – 1.5 kg of CO2e33.4%
0 kg – 0.45 kg of CO2e100%

The amount of the credit shall be multiplied by five in the event the construction of the qualified clean hydrogen facility begins prior to 60 days after the US Secretary of the Treasury publishes guidance with respect to wage and apprenticeship requirements, and the prevailing wage requirements as set out in the Act are satisfied in the alteration or repair of such facility which occurs after such date. Or the prevailing wage requirements and apprenticeship requirements as set out in the Act are satisfied with respect to the construction, alteration, or repair of the qualified clean hydrogen facility in question (through the end of the PTC 10-year period).

Definitions

According to the Act, hydrogen that is “generated by a technique that results in a lifecycle greenhouse gas emissions rate not larger than four kilograms of CO2e per kilogram of hydrogen” is considered to be “certified clean hydrogen.” This hydrogen must be created in the United States by the taxpayer in the regular course of business for use or sale, and it must be independently validated.

Additionally, the plant must be owned by the taxpayer, start construction before January 1, 2033, and generate qualified clean hydrogen in order to qualify as a “qualified clean hydrogen production facility.”

No Duplication of 45Q Tax Credits

According to the Act, a plant that is eligible for a carbon capture tax credit under Section 45Q in any current or past taxable year is not eligible for a PTC under Section 45V for qualifying clean hydrogen generated there. In cases where Section 45Q credits are available, a taxpayer cannot combine Section 45V with Section 45Q credits. [4]

TAX CREDITS FOR INVESTING IN CLEAN HYDROGEN

The Act adds an ITC for clean hydrogen in addition to the PTC for qualifying clean hydrogen by enabling taxpayers to classify some clean hydrogen production facilities as energy property under Section 48.

Amount

In any taxable year, the four-tiered incentive is equivalent to the following energy percentage of the cost basis of any designated clean hydrogen production plant put into operation during that taxable year:

kgs of CO2e Produced per kg of QCHEnergy Percentage
2.5 – 4 kg of CO2e1.2%
1.5 – 2.5 kg of CO2e1.5%
0.45 – 1.5 kg of CO2e2%
0 kg – 0.45 kg of CO2e6%

If the energy project in question has a maximum net output of less than one megawatt of electrical or thermal energy, if construction of the project begins 60 days after the Secretary of the Treasury publishes guidance regarding wage and apprenticeship requirements, or if the prevailing wage and apprenticeship requirements as outlined in the Code are satisfied with respect to the project, then the amount of the credit will be multiplied by five.

Additionally, as stated in Section 48, such energy projects are also qualified for the 10% domestic content bonus credit amount and the 10% increase in credit rate for energy communities, which might result in significant incentives for clean hydrogen project development.

Definitions

A project that consists of one or more energy characteristics (such as designated clean hydrogen production facilities) is referred to as an “energy project” for the purposes of the bonus multipliers outlined in Section 48.

The term “specified clean hydrogen production facility” refers to a “qualified clean hydrogen production facility” that is put into operation after December 31, 2022, for which (A) no tax credit has been granted under Section 45Q (carbon capture tax credit) or Section 45V (QHC production tax credit), (B) the taxpayer makes an irrevocable election to have the energy ITC apply, and (C) an unaffiliated third party has confirmed that the lifecycle greenhouse gas emissions are below a specified threshold.

No Duplication with Tax Credits 45Q or 45V

In order to prevent taxpayers from stacking these credits on top of the energy, ITC of Section 48, the new hydrogen credit under Section 48 stipulates that no credit shall be allowed under Section 45Q or Section 45V for any taxable year with respect to any specified clean hydrogen production facility.

Storage of hydrogen

The Act also adds a new Section 48 ITC for “energy storage technology,” which is defined as “property (other than property used primarily in the transportation of goods or individuals and not for the production of electricity) which receives, stores, and delivers energy for conversion electricity (or, in the case of hydrogen, which stores energy) and has a nameplate capacity of not less than 5-kilowatt hours.” The Section 48 ITC, together with the related wage/apprenticeship bonus multiplier, domestic content bonus credit amount, and increase in credit rate for energy communities, are now applicable to freestanding hydrogen storage technology.

Transparency and direct payment

The provision of the option to claim the clean hydrogen PTC value established under Section 45V through a tax return as if it were an overpayment of taxes is another key step toward advancing the hydrogen economy. Direct pay is only accessible for some non-taxable companies for the majority of credits, although it is available to all taxpayers for the Section 45V credit. Theoretically, by using this direct pay mechanism, project sponsors and developers will be able to keep more of the tax credits associated with hydrogen instead of having to split them with other tax equity investors. Additionally, under the Act, these credits relating to hydrogen would also be eligible for transfer to unrelated parties in a non-taxable cash transaction as a substitute (another route that could simplify and reduce the costs associated with hydrogen-related technology and production facilities).

When taken as a whole, the Act’s provisions relating to hydrogen offer significant benefits to both investors and developers. Although it is too early to predict how this market will evolve, experts in the field of renewables think the Act will have a significant influence on the shift from a fossil-fuel-driven economy to a clean hydrogen economy.