US clean hydrogen rules receive mixed response

The United States government has released guidelines on what can be considered clean hydrogen, but not everyone is onboard.

A Nikola hydrogen EV is shown at the Los Angeles Auto Show. (Source: Reuters/David Swanson)

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At the end of December, the U.S. Internal Revenue Service (IRS) announced the rules that would govern which hydrogen production methods are eligible for Production Tax Credits (PTC) from the billion-dollar subsidy program that forms part of the Inflation Reduction Act (IRA).

The guidance is a first major step in implementing the PTC, also known as 45V for its place in the tax code, and aims to lay out a clear set of rules on what constitutes clean hydrogen as the industry gears up to expand production as part of efforts to decarbonize the U.S. economy.

The so-called ‘Three Pillars’ of clean hydrogen production include; additionality (projects are powered by new electricity generation sources); hourly matching, (hydrogen can only be produced during the same hours as the electricity is generated), and; deliverability, (hydrogen produced is from the same grid region as the power to produce it.)

“Overwhelmingly, studies have shown that if you don't have those pillars, hydrogen production will inevitably induce a lot of emissions on the grid and that's in violation of the IRA emissions limits,” says Rachel Fakhry, Policy Director for Emerging Technologies at Natural Resources Defense Council (NRDC).

“For months before the proposal was dropped, there was a lot of lobbying by utilities, large companies, and some policymakers to go for maximum flexibility. Frankly, up until the last moment, it was up in the air where the administration would land, but they decided on the side of evidence.” 

The IRS has given a period of 60 days from the December ruling to take comment on the decision, though that period may be extended to 90 days. After that, the IRS must publish the final ruling, which could come weeks or even months after the closure of the comment period.

Tax credits from the IRA to hydrogen producers should be up and running by the third or fourth quarter, says Fakhry.

Electrolyzer Deployment Scenarios 

(Click to enlarge) 

Source: Rhodium Group

Industry concerns

The nuclear power industry is one of the main groups lobbying for a change to the 45V rules.

The rules limit available credits to projects which use electricity from plants built within the last three years (additionality), which, with only one new reactor brought online in recent years, would prevent most U.S. nuclear plants from participating

Using current reactor load to produce electrolytic hydrogen would require removing that power from the grid, potentially forcing a ramp up of fossil-fuel generation to take its place.

The nuclear industry, meanwhile, believes that the always-on, virtually unwavering generation of electricity by nuclear reactors are a perfect fit for electrolytic hydrogen production and an exception should be made for nuclear power in the 45V PTC.

In a 19-page open letter to the IRS, nuclear proponents argued that the electric vehicle industry has flourished in the United States in the last few years without a requirement that EVs must only be powered by new, clean power, and the hydrogen industry can do the same.

Meanwhile, the Department of Energy’s Regional Clean Hydrogen Hubs (H2Hubs) program requires that at least two proposed hubs use nuclear power, something that would not be feasible if additionality rules exclude the technology.

“It's clear that Congress intended for existing nuclear to be eligible for that credit … the provisions in the IRA that support next generation nuclear are very much worth maintaining,” says Senior Vice President of Policy Development and Public Affairs at the Nuclear Energy Institute John Kotek.

“Anything that undermines the availability of those credits, would represent a setback for not only our industry, but the U.S.’s decarbonization goals as well, and so we'll do everything we can to ensure that we preserve the gains that we've achieved.”

The implications of shifting current nuclear capacity from supplying the grid to producing hydrogen, however, could be disastrous for decarbonization efforts, according to a study by research provider Rhodium Group.

In the extreme position of taking all U.S. nuclear generation, which supplies a fifth of all U.S. electricity and around 60% of U.S. emission-free power, for hydrogen production would increase net cumulative emissions by 1.3-4.7 billion metric tons from 2024-2035, the Rhodium Group says.

The Treasury has allowed extra power from uprated nuclear plants to be included, though only the power added to the overall capacity, and has requested comments on whether nuclear power stations that face retirement could be redirected to hydrogen production.

Looming elections

U.S. federal elections in November are hanging heavy over all large long-term industrial projects, including the IRA, as deep political divisions threaten complete policy turnaround whenever a new party enters the White House and legislative chambers.

As such, and despite disagreements over the application of the 45V PTC, the current administration will be working hard to put the rules in place before the elections.

“If the worst-case scenario for (the Democrats) happens and there's a Republican unified control of Congress, the Republicans can just go in and undo any executive actions and the 45 V guidance could be one,” says Ben King, Associate Director with Rhodium Group's Energy & Climate practice.

This potential transfer of power and general animosity toward President Joe Biden’s key policies by political rivals mean it is important to ensure money starts to flow to clean hydrogen projects as soon as possible.  

“The Biden administration is going to be highly motivated to try to get this adopted by late summer at the absolute latest,” says King.

By Paul Day