Hydrogen in your Hulu ads: Here’s why it matters
In an odd turn of events, the summer of 2023 might be remembered as the time when podcast and Hulu ads covered the fierce debate on the details of the new hydrogen tax credit, known by its section in the tax code: 45V.
Section 45V, the Clean Hydrogen Production Tax Credit (PTC), was passed into law in the Inflation Reduction Act (IRA) in 2022. It provides hydrogen producers with funding based on the carbon intensity of the hydrogen they produce, and it is intended to jumpstart supply of clean hydrogen in the U.S. to aid in decarbonizing key sectors that use hydrogen as fuel or feedstock. The tax credit is tiered such that the most lucrative tier allows producers to claim $3 per kilogram (kg) of hydrogen produced if their carbon intensity is less than 0.45 kg carbon dioxide equivalent (CO2e) per kg of hydrogen (a greater than 95% emissions reduction compared to conventional hydrogen).
While there are many ways to produce hydrogen, the most likely technology to succeed at reaching this most stringent tier is electrolysis, where electricity is used to make hydrogen from water. Electrolysis, however, is only emissions free if the electricity — or credits or purchase agreements representing electricity, such as Energy Attribute Credits (EACs) or Power Purchase Agreements (PPAs) — is emissions free. But current accounting standards are insufficient to guarantee that the electricity is emissions free and thus that the hydrogen produced from it is actually clean. Because of this complex accounting and the lucrative nature of the incentives provided by the credit, 45V has turned into a contentious implementation debate.
Why we need the “Three Pillars”
To ensure that hydrogen receiving these tax credits is truly clean, CATF has advocated for emissions accounting standards that have been colloquially named the “Three Pillars”:
- New Supply: projects must draw on new clean power that is not already serving the electricity grid’s existing energy demand;
- Hourly Matching: hydrogen production must be matched with generation from new clean power on an hourly basis; and
- Deliverability (or Regional Matching): it must be physically feasible to deliver power from the electricity producer to the hydrogen producer.
Without these three pillars, peer reviewed modeling shows that electrolytic hydrogen could have consequential emissions twice as high as producing hydrogen through unabated steam methane reforming (“gray” hydrogen), the predominant method of producing hydrogen today. Consequential emissions are the emissions impacts on the entire economy due to a decision. Accounting of consequential greenhouse gas (GHG) emissions differs from accounting of attributional emissions, which include only those emissions impacts within a specified boundary, such as a facility or a corporate entity.
To further explain this important difference, consider a new hydrogen production facility consuming electricity from an existing wind farm that previously supplied clean electricity to the grid. On an attributional basis, the electricity from the wind farm would still be carbon-free. However, on a consequential basis, diverting wind electricity from the grid has the consequence of ramping up other electricity supply—most likely in the form of unabated natural gas power plants—to fill the gap and power the previously existing electricity demand. This change could result in an overall increase in GHG emissions, despite the hydrogen producer using a carbon-free source of electricity.
This distinction is often a sticking point for advocacy around the issue. While it is difficult to expect individual companies to consider how their decisions impact broader economy-wide emissions and the market (i.e., consequential emissions), the Treasury Department is required to consider these impacts and to implement 45V in a manner that reduces overall emissions from hydrogen production. Opponents of the three pillars have argued that applying the pillars to hydrogen is arbitrary, citing that electric vehicle and heat pump incentives do not have similar requirements. However, Congress decided not to require lifecycle analyses for the electricity used in those incentives, and there are policy arguments in favor and against that decision.
All three pillars help ensure that hydrogen production does not inadvertently incentivize high-emitting generation. Without new supply, a project may divert clean power from the grid. Without hourly-matching, dirtier generation sources may supply electricity for hydrogen production during hours when variable renewable resources are not available. Without deliverability, projects may claim renewable supply that is locked behind grid constraints like congestion while actually being supplied by closer, dirtier generators.
Broader considerations for adopting the Three Pillars
A key concern with 45V is the potential scale of its impact. According to CATF analysis, the most lucrative tier of 45V could allow certain producers in regions with cheap, plentiful, zero-carbon electricity to produce hydrogen almost for free as electrolyzer capital costs decrease. While the transportation and storage costs of hydrogen may still be significant to an end-user, loose guidance without the three pillars could result in billions in taxpayer dollars subsidizing hydrogen that is not reducing GHG emissions.
Incentivizing dirty hydrogen also poses a reputational risk for the burgeoning clean hydrogen industry. CATF has repeatedly espoused the potential of hydrogen or hydrogen-based fuels to decarbonize harder to abate sectors like fertilizer production, steel production, and some heavy transportation. Clean hydrogen will also be required to reduce GHG emissions from the existing high-emitting unabated hydrogen that is used for refining and will be used for fuels of the future, such as sustainable aviation fuels. However, without responsible development and deployment of clean hydrogen and the policies that support it, some of these nascent end-users may struggle to transition to hydrogen as a decarbonization tool.
Opponents of the three pillars may cite the phase ins and grandfathering within the European Union’s definition of renewable liquid and gaseous transport fuels of non-biological origin (i.e., hydrogen made with renewable energy) as justification for their inclusion in the U.S. However, the U.S. cannot afford these same compromises because it lacks an economy-wide emissions reductions program (like the EU Emissions Trading System) to mitigate some of the impact of these measures.
Multiple compliance pathways for the “New Supply” Pillar
One of the most heavily scrutinized of the three pillars is the “new supply” requirement. In general, this requirement means that new clean electricity would need to be placed into service no more than 36 months (or some designated timeframe) prior to the hydrogen production facility being placed in service. However, there are some alternative pathways to achieving “new supply” rather than building a brand-new generating facility. In particular, CATF has advocated that curtailed electricity, repowering, avoided retirement, and uprates would all qualify as new supply. In each of these cases, the electricity either would not have existed or would not have been used if not for the hydrogen production:
- Curtailed electricity: the electricity generating capacity exceeded electricity demand, thus the electricity would not have been used without the hydrogen demand, and the hydrogen producer would not be diverting it from meeting existing demand on the grid.
- Repowering and avoided retirement: the expected revenue from the hydrogen production induced the asset owner to invest capital into the electric generating unit; if not for the hydrogen project, the asset would have shut down or would not have repowered. Without the hydrogen project, this electricity would not have been available, and is thus not being diverted from existing demand on the grid.
- Facility uprates: increasing the electricity generating capacity of a facility would be considered “new” capacity, given that the extra electricity generation did not exist previously and would not have been used to meet previously existing electricity demand.
Applying the Three Pillars where they are needed
The three pillars—and more stringent carbon intensity methodologies broadly — should be applied to policies dependent on those policies’ statutory requirements and goals. In the case of 45V, the text of the statute requires accounting for “significant indirect emissions” associated with the hydrogen production, and the goal of 45V is to stimulate long-term deployment of clean hydrogen for use in reducing emissions. The three pillars are therefore necessary to meet the plain text and broader goals of 45V.
The three pillars should likewise apply to electrolytic hydrogen used to meet the Environmental Protection Agency’s (EPA) 111 (d) proposed rule on emissions reduction systems for fossil based electric generating units. Given that EPA must select the “best system of emission reduction,” and the goal of section 111 is to reduce emissions that cause or contribute to air pollution that endangers public health, a measure used to reduce emissions — such as co-firing hydrogen — cannot itself increase emissions of the pollutant being regulated.
On the other hand, the three pillars may not be an essential requirement for demonstration programs like the Regional Clean Hydrogen Hubs Program. In the case of a program like the hydrogen hubs, the long-term goal is still decarbonization, but the short-term goal is successful demonstration of first-of-a-kind, large-scale, state-of-the-art technologies to produce, transport, store, and use clean hydrogen. The three pillars may be a useful screening tool for weighing multiple project applications and better understanding the implications of projects, but they should not be a strict requirement for hubs funding, because they are not key to meeting the program’s goals. This is markedly different from the hydrogen production tax credit, where the sole criteria for long-term, deployment-support funding is whether or not the hydrogen is truly clean.
Treasury must adopt strict standards for 45V
CATF strongly encourages Treasury to adopt strict standards for the 45V hydrogen production tax credit in line with the three pillars of new supply, hourly matching, and deliverability as a responsible first step to kickstarting the U.S. clean hydrogen industry. These stringent guidelines would be immediately implementable, and there are already plans progressing for three-pillar compliant projects.
The latest 2023 United Nations Emissions Gap report showed that there is still significant progress to be made, as projected 2030 greenhouse gas emissions must fall by 42% to meet the 1.5°C pathway. We cannot afford for long-term, taxpayer-funded policies to support significant deployment of projects that do not aid in achieving our emissions reductions goals.
