By Rachel Meidl

in recent days record breaking extreme heat provided a glimpse of what’s to come as global temperatures continue to rise, prompting an unprecedented surge in clean energy investment as governments around the world race to reduce carbon dioxide (CO2) emissions and secure a competitive advantage in the emerging net-zero economy.

In the United States, the Biden administration is investing billions – and according to some estimatestrillion – dethrone China as the world’s largest producer of clean energy and achieve net-zero carbon emissions by 2050. Almost a year ago, Congress significantly boosted this effort by passing the largest climate-related investment in US history, the Inflation Reduction Act (IRA), which provides numerous clean energy tax credits for both individuals and businesses, including the world’s largest clean hydrogen production tax credit to date.

Commonly referred to as 45V, this tax break offers a simple and clear incentive to existing and emerging US hydrogen producers: up to $3 for every kilogram (kg) of clean hydrogen produced while emitting no more than 0.45 kg of greenhouse gases.

Increasing the production of electrolyzed pure hydrogen is key to the clean energy transition, which has long been recognized for its potential to replace fossil fuels for decarbonizing heavy industry, powering vehicles and aircraft, generating electricity and more. Its production means that an electric current is passed through water to separate its basic elements, hydrogen and oxygen, through a process called electrolysis, which takes place in an electrolyser. If the electricity for the electrolyser comes from zero-carbon sources such as nuclear, hydro, wind, solar or fossil fuels with carbon emissions captured, the result is pure hydrogen, regardless of the technology deployed.

The problem is that with the technologies available today, electrolyzed pure hydrogen is extremely expensive, costing about $4-8/kg to produce, compared to about $1/kg for hydrogen produced from natural gas using steam methane reforming, which currently accounts for 95% of US hydrogen production.

The 45V tax credit is poised to close that cost gap with lucrative incentives to jump-start clean hydrogen production, which the US Department of Energy (DOE) wants to ramp up. 400% in less than 30 years to reach 10 million metric tons (MMT) per year by 2030 and 50 MMT by 2050.

But first, the Treasury Department must issue implementing guidelines that will determine how hydrogen producers account for their emissions to qualify for the credit. That guidance must be issued by August 16 at the latest, and with the deadline looming there are growing fears that the Treasury will back down to a vocal group of hydrogen critics who want to introduce a new and strict additionality requirement that would limit eligibility for 45V to only those manufacturers using electricity derived from new built clean energy – mainly solar and wind. This means that all other existing clean energy sources – including solar and wind projects currently in operation – would not be eligible.

Roughly 40% of US electricity generation it already comes from carbon-free sources such as nuclear and hydropower. By excluding them from the benefits of 45V, additionality would devalue these sources and limit overall US clean hydrogen production.

Additionality would also complicate an otherwise simple and straightforward tax break that is currently the envy of America’s competitors, especially in Europe, where experts confirm that – if implemented as Congress intended – 45V would allow the US to leapfrog ahead in the global race to develop a profitable clean hydrogen value chain.

Instead, hydrogen critics lobbying for additionality want the Treasury to follow the same complicated path the EU has taken, which would effectively force the US to compete with its hands tied behind its back against China, Saudi Arabia, the UAE and other non-EU countries that have not imposed the same restrictions.

Moreover, it would also be contrary to the intentions of Congress. Congress specifically stipulated that eligibility for 45V is tied to the life-cycle carbon intensity of the hydrogen produced—not the source or technology used to produce it.

The implications of such a restrictive requirement on a nascent industry cannot be overstated. Hydrogen projects would be delayed while manufacturers wait for new wind and solar plants to be planned, approved, permitted, built and connected to the grid. That would take years after the 10 for which the 45V tax credit is allowed. Just getting approval to start construction on a new solar or wind farm in the U.S. currently takes an average of four years less than one fifth of approved projects that actually passed the so-called network connection queue.

The accompanying economic, environmental and social consequences must also be considered. Consider, for example, the availability of water, which is used as a feedstock for electrolyzers. To ensure the success and sustainability of clean hydrogen over time, water quality, water treatment, localized desalination programs, and community-specific regulations governing water use, rights, and jurisdiction must be developed.

The IRA’s intention is to grow the hydrogen industry and harness its potential for large-scale decarbonisation. This will remain unfulfilled if additionality requirements are implemented.

The production of cleaner hydrogen will continue to achieve economies of scale as companies gain first-hand experience with different technologies, adapt and innovate. As true life-cycle data becomes more readily available to aid decision-making in the future (data beyond emissions, which represent activities from mining/extraction to end-of-life), policies can then be strengthened and refined, and definitions of “clean” can be narrowed as investment increases. While the emissions profile is important, it does not in itself translate into sustainability unless a broader set of metrics is captured, assessed and verified.

Only part of the life cycle activities are currently captured and there are huge data gaps in terms of sustainability. Given the lack of data and the nascent nature of the industry, it is premature to rule out technologies early on, when the hydrogen economy hasn’t even had a chance to scale.

The Treasury must provide a policy framework that allows clean hydrogen to provide complementary benefits to other clean energy solutions so that the US can compete on the global stage. Creating guidelines that are strategic and progressive, yet practical and flexible, by following the legislative text in the IRA, will unleash national innovation capabilities without limiting the benefits and a diverse hydrogen economy can offer.

For more details about the issue, go to Baker Institute Policy Brief

According to Rachel MeidlLP.D., CHMM, Energy and Environment Fellow at the Baker Institute at Rice University

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