Could tax breaks help green hydrogen fulfil its potential?

10-1: This is the ratio of carbon dioxide emissions for every gram of hydrogen produced in the United States. Multiply that by the fact that the United States produces 10 million tons of hydrogen each year, and the total hydrogen production is over 100 million tons. carbon dioxide emissions into the atmosphere each year.

In context, this number corresponds to 167,000 flights worldwide. Most of the hydrogen on the market is produced through a process known as “steam-methane reforming,” in which methane is allowed to react with steam boiling at over 1,000 degrees Celsius to form carbon monoxide, carbon dioxide, and hydrogen gas. The end product is called gray hydrogen. 

Needless to say, the process is both energy- and carbon-intensive. Enter green hydrogen, which enthusiasts like Bill Gates have turned into a Swiss army knife for removing carbon dioxide. 

A process known as electrolysis, which splits water into hydrogen and oxygen, can release large amounts of hydrogen to replace methane or other fossil fuels. The biggest obstacle to electrolysis was the price. Green hydrogen typically costs $2.50 to $6 per kilogram to produce, depending on the renewable energy source, while conventional gray hydrogen costs $1 to $2 per kilogram.

With the passage of the Inflation Reduction Act (IRA) in August 2016, this cost difference should be reduced. The $369 billion federal climate investment by the IRA includes solar, wind, batteries, green hydrogen, carbon capture, direct air capture, and more. 

For potential green hydrogen investors and developers, the IRA is exciting because clean hydrogen production can generate tax credits for the first time. Under the IRA’s so-called with the 5 volt clean hydrogen production tax credit, clean hydrogen producers can claim a tax credit of up to $3 per kilogram produced, which is between 50 and 120 percent of production costs based on current technology.

As long as the carbon intensity of the hydrogen produced during its life cycle is less than 4 kilograms, as calculated by the Greenhouse Gases, Regulated Emissions, and Energy Use in Technology (GREET) model, the producer can claim a tax credit of up to 60 cents for each kilogram produced. up to $3 per kilogram. Under the carbon intensity limit set by the IRA, green hydrogen has the greatest chance of meeting the requirements for these tax credits.

By reducing the price difference between gray and green hydrogen closer to zero, the IRA also creates the conditions to eliminate the “green premium,” the cost overrun that we traditionally see between new clean technologies and their fossil fuel incumbents. The structure of the tax credit can be seen in more detail in the table below:


After the approval of the IRA, leading hydrogen producer Linde announced plans to build its largest electrolysis plant to date to produce green hydrogen in Niagara Falls, New York. Other regions of the IRA can also increase green hydrogen. Since the biggest cost source of green hydrogen production is renewable electricity, more generous production tax credits (PTC) and investment tax credits (ITC) could encourage new solar and wind projects, which could drive down prices. The IRA is already making waves in the market.

Although the IRA has lowered cost barriers and set the stage for green hydrogen at scale, some challenges remain. The first relates to the difference in the carbon content of green hydrogen depending on where it is produced and where it is used. Considering the current efficiency of electrolysis equipment, at least 50 kWh are needed to produce green hydrogen.

Next, compressing hydrogen to a level that can be stored or piped requires an additional cost of 3 kWh per kilogram. Considering the estimated carbon footprint of solar panels at 46 g/kWh, emissions from the production process are likely to be 2.5 kg CO2/kg of green hydrogen produced.

hydrogen power

Unchecked, things become gray. According to the GREET model, if hydrogen gas is injected 750 miles away, which is the empirical average, additional emissions of 0.5 kg CO2/kg will be generated. Although CO2 emissions would be more than 10 times greater if it were transported by diesel cars on gas line trailers, it is true that the total carbon footprint of green hydrogen production can be significantly higher than that of gray hydrogen.

Carbon Intensity

Recognizing the increasing carbon intensity of hydrogen storage and distribution, clean hydrogen startup Modern Electron aims to promote distributed generation at the point of use. Working with gas companies such as Northwest Natural, Modern Electron plans to reduce carbon dioxide emissions from natural gas delivered to industrial customers by installing its technology at the intersection, heating the gas to separate it into solid coal and hydrogen, and recycling the hydrogen for electricity. generation of power. -emission heating for the end user.

While Modern Electron’s solution is not entirely clean, it claims that avoiding retrofitting or building new pipeline infrastructure helps eliminate carbon impacts throughout the life cycle of hydrogen production.

In particular, Director of Business Development Mothusi Pahl points out that the IRA’s current definition of “life cycle” only considers carbon intensity up to the point of production. From a cost perspective, distribution alone can triple the cost of hydrogen from the point of production to the point of use. As industry players navigate the deployment of green hydrogen, it is important to consider whether hydrogen should be produced on-site or off-site, and if it is produced elsewhere, how to transport and distribute it.

Investors also question the availability of the production inputs needed to produce green hydrogen. Martin Cilloniz, senior analyst at Avangrid, points out that most renewable energy projects in the Northeast are already signed into long-term power purchase agreements, and there are only a limited number of projects that can provide green electricity for green hydrogen production. In general, the existing renewable energy projects without a contract are located in places where the location-based limit prices of electricity are high; therefore, it is probably impossible to obtain electricity from them for the production of green hydrogen.

Although there are ambitious plans to develop green hydrogen facilities across the country, it remains uncertain how quickly new renewable energy projects can start and how long it will take electrolyser manufacturers to scale up existing production processes to reduce lead times. like a year A third concern relates to regulatory uncertainty. Which regulator has overall regulatory authority to transport green hydrogen through pipeline infrastructure? 

The Federal Energy Regulatory Commission (FERC), which approves the location of interstate natural gas pipelines, currently does not. Because the permitting process for new natural gas pipelines under FERC is complicated and lengthy, hydrogen developers have wondered if similar problems will arise for proposals to build new hydrogen pipelines, where FERC also has regulatory jurisdiction.

The costs associated with renovation and construction of new pipelines are estimated to be significant, and whether the costs are borne by the federal government, the pipeline company, or the consumer, they will have a significant impact on the likelihood of green hydrogen deployment.
Hydrogen pipeline regulators are moving through Congress with hearings in July, so no one knows who will pay for the new pipelines. 

There are currently approximately 1,600 miles of hydrogen pipelines and over 3 million miles of natural gas pipelines in use in the United States. By 2030. While the IRA has made huge strides to enable the economic production of green hydrogen, the challenges of hydrogen transport and distribution remain largely unsolved. As green hydrogen producers and buyers navigate different operating models, regulatory clarity and cost attribution will become even more critical to addressing key green hydrogen challenges.

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