Lucrative tax credit for producing clean fuel won’t be so easy to get

WASHINGTON – The Biden administration on Friday issued its long-awaited plan to provide lucrative tax breaks to companies that make hydrogen, a clean-burning fuel, proposing new rules aimed at ensuring the policy does not inadvertently lead to an increase in the planet’s emissions. warming emissions.

Hydrogen is widely seen as a promising tool for tackling climate change, as long as it can be produced without generating greenhouse gases. When burned, hydrogen emits mostly water vapor and could be used instead of fossil fuels to make steel or fertilizer, or to power large trucks or ships.

But producing hydrogen requires energy, and little so-called clean hydrogen exists today. Currently, most hydrogen is produced from natural gas in a process that emits planet-warming carbon dioxide.

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Congress passed a tax credit last year to encourage companies to produce more hydrogen from renewable energy and other carbon-free sources, sparking fierce lobbying by companies focused on who should be able to claim the credit.

Experts have warned that some companies could claim to use wind or solar energy to produce hydrogen and at the same time indirectly cause an increase in emissions, and urged safety measures to prevent this. Some industry groups wanted more lenient rules around credit, so that a broader range of projects could qualify.

In guidance released Friday, the Treasury Department largely supported those urging tighter restrictions.

To qualify for the full tax credit, businesses would typically need to use clean electricity from newly built sources, such as wind and solar farms, to run electrolyzers that split water into oxygen and hydrogen. Starting in 2028, these electrolyzers would have to operate during the same hours that the wind or solar farms were operating.

Many hydrogen developers and environmental groups praised the proposal. Without those restrictions, they said, hydrogen producers could draw large amounts of energy from the existing grid and cause an increase in greenhouse gas emissions if coal- or gas-fired power plants had to run more frequently.

“The United States has the highest tax subsidy in the world for hydrogen, so we think it should have the greatest rigor in what is considered clean,” said Eric Guter, vice president of hydrogen at Air Products & Chemicals Inc., the largest producer of the world. of hydrogen. The company is developing a $4 billion project with AES in North Texas that will use wind and solar energy to generate hydrogen.

But other industry groups criticized the rules, saying they could prevent many early hydrogen projects from being developed.

The American Clean Energy Association, which represents major wind, solar and transmission companies, said the requirement to match hydrogen production with clean electricity every hour by 2028 was too strict.

That provision “will deter a significant majority of clean energy companies from investing in green hydrogen facilities and manufacturing,” Jason Grumet, the group’s chief executive, said in a statement.

The Treasury Department will accept public comments for 60 days and could make changes before finalizing the plan.

Some nuclear power producers, for example, had called for tax credits to be available for hydrogen produced from existing nuclear plants. But the administration postponed a decision on that issue and instead asked the industry for more information. Very few nuclear power plants are expected to be built in the near future.

Cost is currently the biggest obstacle to producing hydrogen cleanly. While some companies around the world have used wind, solar or nuclear power plants to run electrolyzers and produce emissions-free hydrogen, that process costs between $4 and $6 per kilogram of hydrogen. That’s two to three times more expensive than doing it with natural gas.

The hydrogen tax credit aimed to close that gap and jump-start a new industry, providing up to $3 for every kilogram of “clean” hydrogen companies produce over the course of a decade.

But defining what is considered “clean” turned out to be controversial.

Most of America’s electricity still comes from coal and natural gas plants, so if a company simply connected a bunch of electrolyzers to the existing grid to produce hydrogen, emissions would likely increase. Similarly, if a hydrogen company tried to use electricity from an existing wind or solar farm, other coal or gas plants might have to run more frequently to make up for the lost energy. Without safeguards, several studies suggested, tax credits could inadvertently cause the emission of hundreds of millions of additional tons of carbon dioxide.

To avoid that outcome, the Treasury Department proposed several restrictions. To get the full tax credit, hydrogen producers would have to turn to new sources of clean electricity built in the last three years. That could include a new wind farm or investments that expand the capacity of an existing nuclear plant. Those plants would have to be located in the same network region as the hydrogen factory. And starting in 2028, electrolyzers could only operate during the same hours that clean energy was available.

Some hydrogen companies said the proposed rules could be difficult to follow. Wind and solar power don’t run all the time, and trying to match hydrogen production with hourly fluctuations in renewables would increase costs, they said.

“This policy will make things more difficult for everyone,” said Jacob Susman, chief executive of Ambient Fuels, a clean hydrogen developer that had been planning about $700 million in new projects. Still, he said his company would try to work with the new rules.

Other companies and experts said new rules on time equalization could spur innovation. An American startup, Electric Hydrogen, is making an electrolyzer designed to ramp up and down solar and wind production. The new rules could give that type of technology an advantage over less flexible electrolyzers made in China, the company said.

“There will be a lobbying blitz around the final rule,” said Rachel Fakhry, policy director for emerging technologies at the Natural Resources Defense Council, an environmental group. “We are watching closely to make sure there are no new loopholes that are harmful to emissions or consumers.”

It’s still unclear how much clean hydrogen the United States will actually produce in the coming years. Although the Biden administration has laid out a strategy to produce 50 million tons of clean hydrogen by 2050, more than 50 times what is produced today, major obstacles remain, including establishing systems to transport hydrogen and finding buyers for the fuel. .

To that end, the Department of Energy is also spending $7 billion to create hydrogen hubs across the country to connect producers and buyers, while establishing programs to stimulate demand for hydrogen and reduce the cost of electrolyzers. .

“There are a lot of tools in our clean hydrogen tool belt that we didn’t have before,” said David Turk, deputy secretary of energy. “There is a great opportunity here.”

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