New rules for America’s green-hydrogen industry are controversial

A CURIAL LETTER sent on November 6 recently surfaced in Washington, CC. That day, nearly a dozen U.S. senators sent a stern note to Janet Yellen, the U.S. Treasury secretary, Jennifer Granholm, her energy secretary, and John Podesta, the senior House adviser. White for clean energy. This was the legal advice they expected from the Internal Revenue Service (IRS) on the tax rules governing a generous new subsidy for “green” hydrogen. They insisted that the rules for this clean fuel, which can replace fossil fuels in hard-to-decarbonize industrial sectors like steel and chemicals, must be “a strong and flexible incentive that will catalyze and rapidly develop a national hydrogen economy.

It was just one major salvo in a months-long war waged by tech companies, environmental groups, energy lobbyists and chambers of commerce over the previously obscure subject. To influence the handful of IRS nerds and their political masters who make this decision, millions have been spent on full-page newspaper ads. New York Times And Washington Poston podcasts and, much to the amazement of punters looking for a mindless romantic comedy, on mainstream streaming services like Hulu.

Perhaps this was appropriate, as the decision was shaping up to be a success. The long-delayed draft guidelines for the 45V tax credit, as the proposal is officially known, were finally unveiled on December 22 (the White House attempted to bury the controversy in pre-Christmas distractions). Senators who demand flexibility will not be happy. There is always a tension between growth and greenness in environmental regulation, especially when it comes to writing rules for an industry that doesn't yet exist. The Biden administration has leaned heavily toward green in its proposals. In doing so, it risks sparking a veritable nest of protests in the industry.

The stage was set for this battle royale with last year's passage of the Inflation Reduction Act (IRA), the landmark US climate law, which provides the world's most generous subsidy ($3/kg) to produce the greenest hydrogen from renewable energy, as well as smaller subsidies to produce hydrogen low-carbon hydrogen by other means. Because Congress has refused to cap this subsidy, hundreds of billions of dollars could be at stake over the coming decade. Although Europe is at the forefront of clean hydrogen development, the Hydrogen Council, an industry association, has found that the IRA has attracted many potential investors to its side of the Atlantic with proposals for hydrogen investments amounting to $46 billion in January, compared to just $29 billion in May 2022.

The ecological tradeoff arises because making the cleanest hydrogen involves the use of electrolyzers, sophisticated kits that separate water into its hydrogen and oxygen constituents using a lot of electricity. As an influential study by Jesse Jenkins and colleagues at Princeton University showed, if these machines use grid energy burning coal or natural gas, the resulting hydrogen (although clean in its end use) could pollute more during its life cycle than the hydrogen produced. using fossil fuels today.

That's why it's essential to put three pillars in place as “guardrails” against greenwashing, says Rachel Fakhry of the Natural Resources Defense Council, a leading green group. The renewable energy involved would need to be produced close to the point of use. Another, known as “additionality,” would require any clean energy used to come from new production facilities, which are not currently operating. The final requirement is that the hydrogen produced must be matched hour by hour with clean energy production, rather than relying on annual production. THE IRS proposes strict criteria on all three fronts, earning praise from Ms. Fakhry and other environmental advocates.

As might be expected, some industry defenders are up in arms. Jason Grumet, head of the American Clean Power Association, a major lobby representing renewable energy, hydrogen, technology and transportation companies, says the new proposal contains “a fatal but fixable flaw.” While accepting all three pillars, it argues that the hourly matching provision is imposed too aggressively and will thus “discourage a significant majority of clean energy companies from investing in green hydrogen”. Potential financiers will worry that time matching is not even possible in all parts of America, and that the reforms needed to do so will take several years to take effect.

Only a fifth of the $46 billion in hydrogen projects identified by the Hydrogen Council have been firmly committed, in part because investors have been waiting for this tax ruling, and some of them will now be at risk. Keith Martin, a 45V expert at Norton Rose Fulbright, a law firm, believes that “the Treasury has made it difficult to finance green hydrogen projects” because it does not grandfather projects under construction before the end of the year. introduction of the hourly matching requirement in 2028. Bernd Heid of McKinsey, a consultancy, estimates that these guidelines could lead to an increase of $1/kg to $2.5/kg in the cost of hydrogen production green compared to using an annual schedule and more relaxed additionality standards, which would result in a total cost of $2.7/kg. kg at $4.5/kg depending on input costs. For comparison, the total cost of dirty hydrogen made from natural gas today is well below $2/kg.

It is telling, however, that some powerful industry voices support the move. One of them is Andrés Gluski, director of AES, a utility that is investing in a $4 billion green hydrogen facility in North Texas. He is confident that his mega-project, which will use tailor-made renewable energy manufactured on site, will meet the demanding new 45 V proposals. Air Products, the world's largest hydrogen manufacturer, has bet $15 billion on the clean hydrogen, including a stake in this Texas plant. Seifi Ghasemi, his boss, applauds what he calls the “three strong pillars” proposal which he says will boost investment while reducing emissions.

This schism suggests that the trade-off between growth and greenness may not be as difficult as it first appears. Safeguards are indeed necessary to prevent greenwashing. This is particularly true, notes Bloomberg's Martin TenglerNAVE, an information company, because producing hydrogen with grid energy is dirtier than, for example, using grid energy for electric vehicles (which are still cleaner than using gas engines). essence). He believes that claims that it would have a disincentive effect on investment are exaggerated and that, although the number of viable projects “will decrease, it is worth it”.

As the enthusiasm of aspiring green hydrogen tycoons reveals, there may also be an opportunity to take a leap forward. A big source of future revenue will be the export of green ammonia (a hydrogen derivative used in fertilizer manufacturing) to environmentally conscious foreign markets like Japan and Europe, provided that it is clearly clean. Maria Martinez of Breakthrough Energy, a climate policy organization, says the draft rules align the U.S. hydrogen sector with European green rules, which will help those (like Air Products) wanting to export there.

The new proposals are now open for public comment for two months. An all-powerful melee will surely take place in the new year, involving the fulminations of senators whose advice was ignored. This will likely result in some changes to the stricter provisions. Despite this, America appears to have some pretty green rules for its burgeoning green hydrogen sector. The open question is whether the resulting boost to those who advance early will offset the loss caused by latecomers dropping out.

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