Hydrogen startups are regarded as a promising solution to phase out fossil fuels in heavy industries and long-distance transportation. However, they have faced delays over the past few years as they awaited official guidelines from the U.S. Treasury regarding valuable tax credits.
This wait concluded today, as the Treasury released final regulations for hydrogen producers to be eligible for tax credits under section 45V of the Inflation Reduction Act.
“We are thankful for the final rule,” said Beth Deane, chief legal officer at Electric Hydrogen, in an interview with StartupSuperb. “Without it, the industry was essentially stagnant.”
The regulations, which have taken over two years to formulate, have modified some aspects of the initial proposal, providing existing nuclear and fossil fuel plants with a temporary reprieve.
Given the diverse methods of hydrogen production, the regulations form a complex framework intended to prevent hydrogen producers from unintentionally increasing pollution levels.
Hydrogen is primarily sourced from two processes:
- Electrolysis: This method uses electricity to split water molecules into hydrogen and oxygen.
- Steam Reformation: This process employs heat and steam to decompose methane molecules, resulting in hydrogen and carbon dioxide.
These processes have numerous variations. Steam reformation can result in carbon dioxide emissions (known as grey hydrogen) or capture and store emissions (resulting in blue hydrogen). Electrolyzers can be powered by renewable sources (green hydrogen) or nuclear energy (pink hydrogen). This diversity has led to the term the hydrogen rainbow to describe the various types of hydrogen.
The essence of the 45V regulations is to ensure that new hydrogen production does not contribute to higher greenhouse gas emissions on the grid. To achieve this, the Treasury Department mandates that producers monitor emissions generated for each kilogram of hydrogen throughout its lifecycle. For instance, blue hydrogen producers must consider the environmental impact of methane leaks from natural gas pipelines.
Producers will also be required to obtain renewable or clean energy from their operational region. By 2030, they must demonstrate that the power used in hydrogen production was generated within the past hour.
In general, hydrogen production methods that result in lower greenhouse gas emissions will receive larger tax credits, amounting to as much as $3 per kilogram. The costs for green hydrogen typically range between $4.50 and $12 per kilogram, according to BloombergNEF, indicating that maximum credits may render the process competitive with hydrogen derived from fossil fuels in various areas.
The updated guidelines also offer advantages to nuclear and fossil fuel power plants. Previously, hydrogen producers had to source energy solely from new nuclear facilities to qualify. Now, existing nuclear plants can contribute up to 200 megawatt-hours of electricity. Additionally, certain fossil fuel power plants that have recently implemented carbon capture technology will now be eligible.
While the new regulations are welcomed, they are not without flaws, given the multitude of stakeholders involved. From Electric Hydrogen’s perspective, Deane hopes for greater flexibility in terms of electricity sourcing options and the amount of additional clean or renewable energy that producers are mandated to secure.
However, Deane emphasised that the industry’s primary desire is for certainty. “We want a rule that can remain steady and might be adjusted later,” she stated. “Our strong encouragement to the incoming administration is to uphold this rule.”