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Climate Law Raises DOE Stakes to Help Lower Hydrogen’s Hurdles

Aug. 25, 2022, 9:30 AM

A long-sought 30% tax credit for hydrogen production in the climate bill Democrats passed earlier this month could spark industry efforts to reach the scale needed to combat climate change, Biden officials and proponents of the technology say.

Energy experts are now closely watching how federal regulators will guide the industry’s growth on one central question: What counts as “clean” hydrogen production?

Hydrogen—the smallest and lightest molecule, and one that proponents say can clean up hard-to-decarbonize sectors—is riding momentum in Washington. Politicians have learned a complex color-coded system that indicates how hydrogen is produced, and industries like trucking, steel, and cement have warmed to idea of using hydrogen in their operations.

On Thursday, Energy Secretary Jennifer Granholm plans to tout the climate law during her visit to a laboratory in Charlottesville, Va., that advances clean hydrogen, following an announcement this week that the agency will offer $40 million in grants for clean hydrogen.

The Energy Department’s $8 billion hydrogen hub program, established last year by the separate bipartisan infrastructure law, will be set up just as the tax credits from the climate law will be rolled out.

What projects qualify under both programs will be a major decision, hydrogen supporters say.

“We’ve made a pretty big bet on hydrogen,” said Traci Kraus, director of government relations at Cummins, the Columbus, Ind.-based engine manufacturer that is now building electrolyzers for electric utilities and investing in hydrogen storage and hydrogen-fueled engines.

“What we’re hoping to see, as this moves forward, is that they’re able to execute relatively quickly and efficiently,” Kraus said of the Energy Department.

A National Strategy

Hydrogen has been used for years to power industrial processes. Nearly all U.S. hydrogen consumption derives from fossil fuels and goes into refining petroleum, metal treatments, fertilizer production, and food processing, according to the Energy Department. In recent decades, hydrogen has grown as an alternative vehicle fuel.

Now, 21st-century climate goals pose an unprecedented challenge: to make hydrogen a climate change tool, serving as an energy carrier for carbon-heavy industries like cement and steel or as a massive battery that can store and dispatch wind and solar power on the electric grid. The International Energy Agency forecasts a more than six-fold increase in global hydrogen supply and demand by 2050 to hit net-zero goals.

Some environmental groups and energy analysts argue hydrogen could lead to a greater climate impact if it leaks or causes more fossil fuel extraction. In July, the Environmental Defense Fund published a study warning that hydrogen is a “leak-prone gas with a potent warming effect that is widely overlooked, even by experts.”

Some answers could emerge from the DOE’s hydrogen hub program, which is aimed at demonstrating a wide range of production methods and applications.

The department plans to select at least four regional hubs, with at least one from “green” hydrogen produced by renewable energy; one from “blue” hydrogen sourced from natural gas and using carbon capture and storage; and one “pink” hydrogen project from nuclear power, according to a notice published in June. The department may make further changes as it finalizes the program.

The hub promises to dramatically lower costs by achieving scale across a wide variety of sectors, said Kraus, of Cummins.

“We want to make sure we’re matching the hub investment as the market moves forward so that it’s done in a coordinated way, and you don’t have sort of these one-offs popping up all over the country without a national strategy,” Kraus said.

Flexible Tax Credit

The hydrogen tax could set the stage for how the hubs are set up, said Art Howson, an attorney for Womble Bond Dickinson in Raleigh, N.C., who specializes in renewable energy project finance. Applicants for the hydrogen hub will likely seek to qualify for the tax credit as well, he said.

The credit amount equals $0.60 per kilogram if the facility produces qualified clean hydrogen that results in lifecycle greenhouse gas emissions of less than 0.45 kilograms of carbon dioxide per kilogram of hydrogen produced. If the carbon intensity rate is between 0.45 kilograms and 4 kilograms, the credit is offered at a lower credit rate.

The process of assessing carbon intensity remains to be spelled out by tax officials.

“The guidance the IRS puts out on how the carbon intensity of the hydrogen production facility is going to be measured is going to be really important,” Howson said.

The tax credit provides flexibility for current hydrogen production pathways methods to qualify, said Kristine Wiley, vice president of the Hydrogen Technology Center for GTI Energy, a Chicago-based research and training organization that has traditionally worked in the natural gas industry.

GTI Energy’s hydrogen center, launched in 2020 to consolidate decades of research, favors allowing regions to tap into their abundant resources—whether it’s wind power in the Great Plains or natural gas along the Gulf Coast, she said.

The tax credit, as drafted in the bill, “allows for flexibility in technologies and solutions so you’re not bound to a specific color of hydrogen, but you’re really focused on the carbon intensity, which means you can select the technology pathway that’s going to drive down that carbon intensity,” Wiley said.

Urgently but Deliberately

Deputy Energy Secretary David Turk has met with the Treasury Department to discuss tax credit implementation, he said during an event in Washington this month just before the bill’s passage. Turk said he also met this month with the Environmental Defense Fund to discuss how to define clean hydrogen. The EDF didn’t not make someone available for an interview for this story.

Recognizing that hydrogen can be a “greenhouse gas catalyst,” Turk said at the event, the department is making sure its funding guidelines are “as rigorous and thoughtful as it possibly can be on that front.”

Turk cautioned the department would need time to stand up hydrogen incentives—a key distinction from the Obama administration’s implementation of the 2009 stimulus package that prioritized fast construction projects.

“While we’re trying to move quickly because we need to move quickly, including on the clean energy transition, it’s not, like, shovel ready,” Turk said during the Aug. 11 talk hosted by Resources for the Future. “We’re trying to go about these things both urgently but deliberately.”

The DOE-sponsored research is moving quickly.

On a recent weekday morning, laboratory crews at the base of the Rocky Mountains were busy at work assembling test stands containing electrolyzers, designed to test hydrogen production using different methods and materials.

Officials at the National Renewable Energy Laboratory in Golden, Colo., hope to more than double the number of electrolyzer test systems to 40 by September 2023—an important step to meeting the Energy Department’s “1-1-1" goal to reduce the cost of clean hydrogen by 80% to $1 per one kilogram in one decade.

Bringing down costs is “really our primary focus,” said Keith Wipke, laboratory program manager for NREL’s Fuel Cell and Hydrogen Technologies Program. “If we can achieve that—or move the needle on it in any significant way—mission accomplished.”

“We really need to go fast,” Wipke said.

To contact the reporter on this story: Daniel Moore in Washington at dmoore1@bloombergindustry.com

To contact the editor responsible for this story: Chuck McCutcheon at cmccutcheon@bloombergindustry.com