Not everyone in the hydrogen business wants to see weaker rules for federal tax credits

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The term “clean energy” often brings to mind gleaming solar panels, spinning wind turbines or water surging through a hydroelectric dam.  

Few people would imagine dark salt caverns a mile underground, but these geologic formations could play a key role in the development of emissions-free green hydrogen.

Hy Stor wants to use such salt caverns in Mississippi and elsewhere to store hydrogen made by splitting water molecules with electrolysis powered by new renewable energy. The fuel could then be stored in the caverns until electricity demand spikes and then used to generate emissions-free electricity when other renewables can’t meet demand. 

Hy Stor is among the companies that supports proposed rules for a potentially lucrative federal tax credit for “green” hydrogen fuel production. These companies provide a counterpoint to power companies and other industry players who are pressuring the government to relax provisions that demand green hydrogen production does not use existing renewable or nuclear power that would otherwise be used on the grid. 

Companies, including members of federally funded hydrogen hubs, have argued that under the proposed rules governing the tax credit known as 45V, not enough hydrogen will be produced to meet demand and help develop a zero-emission economy. 

But environmental advocates and academics point to studies showing that hydrogen production without stringent rules can actually lead to emissions increases. They, along with some industry sources, are calling on the U.S. Treasury Department to enshrine proposed requirements that hydrogen receiving tax credits meet “three pillars”: The renewable energy used to power electrolysis must be newly added to the grid, known as incrementality or additionality; it must be generated near the hydrogen plant, known as deliverability; and it must be generated around the same time it is used, known as hourly matching.

“Without the right rules in place, you’re going to see companies try to make as much hydrogen as possible, since the 45V tax credit is so lucrative,” said Dan Esposito, manager of the electricity program for the consulting firm Energy Innovation: Policy & Technology.

That, in turn, would place additional demand on the existing grid, much of which would be supported by coal and natural gas. 

“Not only are you making [greenhouse gas emissions] worse, you’re making it more difficult to clean up our electric system,” Esposito said. “The climate community is saying if we set weak rules it will be a disaster, this will not be clean hydrogen, it will just be a huge greenwashing campaign.”

Hy Stor is among the hydrogen companies and renewable energy developers that have sent letters supporting the rules as proposed. A March 1 letter to Treasury and White House officials from companies including Hy Stor says:

“Clear section 45V guidance that upholds the three pillars is necessary to guard against harmful climate impacts and significant emissions increases that might be driven by increases in fossil fuel-based generation to sustain electrolysis when renewable generation sources are not available. Weak section 45V rules would permit this perverse result, thus imposing significant climate and market risk that would undermine the achievement of U.S. climate goals, further the perception of political risk in U.S. climate regulation, and upset the hard-won momentum currently driving investment in the sector.”

That letter was also signed by renewable energy developers CWP Global and ACCIONA, ACCIONA affiliate Nordex Green Hydrogen, major hydrogen producers Air Products and Synergetic, geothermal energy provider Fervo Energy and others.

The action followed a Feb. 26 letter from seven federally funded hydrogen hubs to the Treasury Department arguing against the three pillars. That letter touts the job creation potential of the hubs, but adds:

“Unfortunately, these investments and jobs will not fully materialize unless Treasury’s guidance, in its current form, is significantly revised, as many of the projects generating these investments and supporting jobs will no longer be economically viable.”

Esposito noted that when the hubs were created by the 2021 Bipartisan Infrastructure Law, the Inflation Reduction Act, including the 45V tax credits, had not yet passed; it was signed by President Joe Biden nine months later. In other words, the federal government expected the hubs to be able to succeed even without tax credits, Esposito argues. 

“The public evidence suggests the hubs can do this the right way from the start,” he said. “They’re supposed to be centers of innovation, the whole point is they are research and development, so we shouldn’t give them the easiest path forward.” 

Salt to industry 

Hy Stor COO Claire Behar said that the company controls 10 salt domes in Mississippi and has necessary permits from the state oil and gas regulatory body to move forward with their hydrogen production and storage project. 

“We like to think our location at scale can really serve as a strategic hydrogen reserve, with years worth of hydrogen storage,” Behar said. 

Power generation companies, “green steel” mills, and other hydrogen-hungry industries could be co-located near Hy Stor. The company says these industries would basically be powered by renewables built specifically for this purpose, fueled by hydrogen that is created by renewables then stored for when it’s needed. 

“It is really about having that large-scale storage that is dispatchable, we’re able to deliver a 24/7 product,” said Behar. “Those end users understand that the zero-carbon solution will have to be hydrogen. We’re focused on both the industry already existing in our region — maritime, large industrial — and also attracting new greenfield customers.” 

Behar said requiring new renewable generation is crucial to define hydrogen production as clean. 

“We can’t be cannibalizing current demand by using those renewables” already on the grid, Behar said. “We need a strong 45V rule that will protect against harmful climate impacts. If we have weak or blurred rules, it can really carry significant climate and emissions risks that will undermine both the achievement of climate goals and industry credibility.” 

New technologies 

Start-up company Q Hydrogen argues that green hydrogen can be produced in ways that use much less energy and water than typical electrolysis. Q Hydrogen CEO Whitaker Irvin Jr. said his company never pushed for tax credits, and he thinks Q Hydrogen can produce hydrogen at a profit without such supports. 

But since tax credits are reality, he wants stringent rules making sure that only truly green hydrogen production is eligible. 

“The economic incentive is so astoundingly large, that if it does exist people can be creative and make [the three pillars] work,” Irvin said. 

Irvin explained that technology pioneered by his father to develop a more efficient heat pump can actually make hydrogen with low energy and water requirements, by using streams of air with wide temperature differential to create a chemical reaction. 

The company’s flagship facility is in the New Hampshire town of Groveton, drawing water from the Ammonoosuc River and electricity from a nearby hydroelectric plant, as well as backup power from the grid. 

The hydrogen produced can in turn create clean energy that can be sold to industrial users and deployed when needed, Irvin said. This could relieve demand on the grid from existing industries during peak demand times, and help attract new industries to a town that has struggled economically since a paper mill closed in 2007. Irvin said he ultimately hopes the hydrogen-powered plant on the former paper mill site can sell power into New England’s grid. 

He said Q Hydrogen would qualify for tax credits under the proposed IRS rules, since they use relatively little energy and since New England’s grid operator already employs technology that makes it possible to log when and where renewable energy is consumed and produced, helping to meet the hourly matching and deliverability pillars of the rules. This capability, along with ample water resources, are the reasons Irvin chose New England for the company’s first commercial-scale plant.

The company has a pilot operation in Park City, Utah, running since 2016, that can produce 10,000-50,000 kgs of hydrogen per day. Plants are also planned in Sweden and Germany, he said.  

In December 2022, Q Hydrogen wrote a letter to the Treasury Department in response to its request for input on the tax credits. The letter urges the department to require additionality and stringent accounting for emissions impacts, in awarding tax credits. 

“We don’t need [the tax credit] to be financially viable, but the industry does,” Irvin said. “That boost will allow for innovation, technological deployments, mass use at scale. I compare it to the early solar and wind days when subsidies were involved. I see this as the beginning of hydrogen becoming a real player in the market.” 

Hourly matching

The 45V rules as drafted require hourly matching documentation for renewable energy by 2028, showing that the renewable energy used to power hydrogen production was generated within the same hour. 

Currently, energy attribute certificates, or EACS — similar to renewable energy credits — are based on annual matching, denoting how much clean power a user theoretically buys and uses in a year. 

But if that power is mostly generated by solar in the summer, for example, the user is actually still relying on fossil fuel generation in the winter. Hourly matching can help ensure that renewable energy is literally powering an operation, but critics have said the software and other technology isn’t available to document hourly matching on a large scale any time soon. 

Toby Ferenczi is co-founder and CEO of Granular Energy, a software company that provides hourly matching certification to utilities around the world. He says such documentation is entirely feasible and will drive construction of more renewable energy, including for powering green hydrogen. 

“How do you as a consumer choose one type of electricity over another?” asked Ferenczi. “Whether you are a homeowner trying to buy clean energy for your home, or a tech company trying to buy clean energy for your data center, or a green hydrogen developer trying to buy green energy for your electrolyzer, it’s the same question.” 

Hourly matching does not prevent green hydrogen producers from diverting renewable energy from the grid and causing other customers to rely on fossil fuels. But affixing time stamps to renewable energy credits and mandating hourly matching for tax credits will create market value for renewable energy used in real time, Ferenczi argues, driving the construction of more renewables and energy storage. Batteries or other storage technologies can store renewable energy that would also qualify for hourly matching when dispatched. 

“Eventually tradable instruments can be priced according to supply and demand, with revenue streams for things like energy storage and flexibility, as well as more renewable energy,” Ferenczi said. “If you’re a green hydrogen producer, you could either sign lots of individual contracts with individual wind farms or solar farms, or just sign up for a product from your local utility or energy supplier” that can provide clean energy with hourly-matched credentials. 

Even hydrogen producers that have exclusive power purchase agreements, or PPAs, with new renewable developments or on-site renewables will still need energy from the grid when the wind isn’t blowing or sun isn’t shining, he argues. So hourly matching will help them ensure all their power is truly green. He thinks hourly matching is a potentially better way to create more renewable energy than PPAs with new renewable developments. 

“Additionality is first of all very difficult to prove. Even if you’re the one that signed a PPA, how do you know that someone else wouldn’t have signed that same PPA?” he asked. “Is it the person who signed the PPA who gets to claim the benefit, as opposed to the person who put up the equity or debt for the project or took the risk of developing the site at the very beginning? It’s very difficult to claim additionality and then assign the rights to those claims to any one individual.” 

Time-stamped EACs are kept in a registry operated by regional transmission organizations. While technology upgrades will be needed to handle hourly matching nationwide, Ferenczi said PJM and other transmission organizations — including New England’s — already have similar capability. 

Ferenczi said it is crucial that tax credit rules retain strong requirements to ensure “clean” hydrogen production doesn’t actually increase emissions, and called on regulators to make sure the proposed rules “aren’t watered down.” 

“They’re absolutely essential to preventing what could be a catastrophe in terms of carbon emissions, that pushes up the cost of electricity for everyone,” said Ferenczi, who previously founded an international NGO called Energy Tag focused on time-stamped EACs. “If we build a fleet of gas turbines to meet this increased demand [for electricity to make hydrogen] because you don’t have an hourly matching requirement, you’re going to have a perverse side effect which is the opposite of what you intended.”

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