Hydrogen’s Power Grid Demands Under Scrutiny in Tax Credit

The debate around Constellation Energy’s Nine Mile Point Nuclear Station highlights the tension—and legal liability—for the Biden administration as it works on guidance for the clean hydrogen production tax credit.

Advocates on opposite sides describe the clean hydrogen credit as among the Treasury Department’s highest-stakes interpretations for the climate and clean energy investment under the Inflation Reduction Act, following electric vehicle guidance released last week.

Constellation’s nuclear plant is an example of the broader debate. Constellation argues that its nearly 2-gigawatt nuclear plant is the ideal place to produce hydrogen, using carbon-free electricity.

A coalition of environmental groups argues using a clean energy source such as the nuclear plant would actually increase planet-warming emissions because some of the power would be diverted from supplying the electric grid and replaced by fossil fuel-fired plants. They want the Treasury to ensure that the guidance doesn’t allow subsidies for hydrogen to result in more greenhouse gas emissions, contrary to the law’s requirement.

The credit, worth as much as $100 billion, aims to scale up hydrogen production as a way to decarbonize heavy industry, transportation, and the power sector. The credit complements the Energy Department’s $7 billion program to demonstrate the hydrogen industry in as many as 10 regional hubs. The department is accepting final applications through Friday, after encouraging 33 of 79 total applicants in December.

President Joe Biden this week visited a Cummins Inc. facility in Minnesota retooling to manufacture electrolyzers, which are used to produce hydrogen. “Companies and utilities across the country will use those products to make clean hydrogen and trucks made in America with zero emission engines will be powered by clean hydrogen,” Biden said.

Make or Break

Today’s hydrogen comes from a carbon-emitting “gray” process powered by natural gas. “Green” hydrogen uses renewable electricity to split the oxygen and hydrogen molecules without releasing carbon.

Constellation Energy, along with other companies such as NextEra Energy, have told the Treasury Department in comment letters they want to access existing renewable energy power supplies while claiming the credit, worth as much as $3 per kilogram of hydrogen produced. Building new power plants can take years, they argue, and existing clean energy can help to lower costs today.

Green hydrogen has been three to six times more expensive to produce than gray hydrogen—a cost gap the Energy Department wants to close with investments in research and development.

But emissions can swing dramatically depending on what plants are feeding the grid. Hydrogen production relying on gas-fired electricity can result in as much as 20 kilograms of carbon dioxide per kilogram of hydrogen—which is five times the tax credit’s carbon intensity cap established by the law, according to a study by Princeton researchers published in January.

Making sure the energy needed for green hydrogen is from new clean energy sources—combined with requirements that emissions are tracked hourly and that hydrogen producers would be required to procure clean energy from sources within a practical distance—encompass “three pillars” that Treasury officials must put include in their guidance, a group of 18 environmental organizations and renewable energy developers told Treasury officials this year.

Treasury’s guidance will “make or break Biden’s climate goals,” said Rachel Fakhry, senior advocate in the climate and clean energy program at the Natural Resources Defense Council.

Refusing to impose the three pillars “would be clearly flouting statutory requirements, that would be abdication of responsibility,” Fakhry said. “And I wouldn’t be surprised at all if a lot of groups end up suing.”

Undercutting the Law

If new clean-energy power plants must be built to supply power for hydrogen production, the costs to produce green hydrogen would rise by 30% and “directly undercut the whole purpose of the hydrogen tax credit,” said Mason Emnett, Constellation’s senior vice president of public policy. Constellation warned Treasury officials in December that such a move amounts to adding a “requirement that Congress chose to omit.”

“In our mind, how Treasury determines the PTC requirements is really going to largely determine whether the clean hydrogen industry gets off the ground or dies on the vine,” Emnett said.

If there were a requirement to build additional plants, that could sink the Baltimore-based energy company’s plans to spend $900 million by 2025 on hydrogen production, he said. The company is part of an Energy Department hydrogen hub proposal in the Midwest, and it can also claim a nuclear production tax credit established by the climate-and-tax bill.

In February, Constellation, supplied by a $5.8 million Energy Department grant, started a 1.25-megawatt hydrogen production facility at Nine Mile Point in Oswego, N.Y. The facility supplies hydrogen for plant operations, replacing trucked-in deliveries of hydrogen made from fossil fuels.

After the facility started in February, Kathryn Huff, the department’s assistant secretary for nuclear energy, said the plant “tangibly demonstrates that our nation’s existing reactor fleet can produce clean hydrogen today.”

Florida-based NextEra Energy, which owns about 58 gigawatts of generating capacity and is the largest US utility holding company, has also pressed the Treasury for a flexible approach. Portions of the country, like the Northeast, would be significantly disadvantaged if existing nuclear and hydropower plants were prohibited from hydrogen production, said David P. Reuter, a spokesman for NextEra.

“We feel customers should be allowed to decide which renewable projects are best suited to meet their clean hydrogen project needs,” Reuter said. Too strict an interpretation would “force renewable energy developers to build projects where it may not make long-term economic sense.”

Wide Discretion

The Treasury Department hasn’t said when it plans to issue guidance. A Treasury spokeswoman declined to comment.

The department will likely strike a balance between the two sides that will stand up in court, energy and tax lawyers said.

“They have quite a bit of wiggle room in that statute,” said Elizabeth Crouse, a partner with K&L Gates.

Larger projects requiring lots of power will likely be built “behind the meter,” or supplied directly by power sources, Crouse said. For smaller projects, which are crucial to scaling up the industry, access to the existing grid will be important, she said.

“To me, the most important thing is to get the industry moving—that needs to be the paramount goal for Treasury,” Crouse said. “They shouldn’t go too extreme.”

On Treasury rules, “there’s quite a bit of deference” by the courts to the agency, said John Taylor, a partner in King & Spalding’s tax practice.

Challenging the rules “would be a difficult climb,” Taylor said, “and I think it’s one that the IRS would be aware of as they’re writing the rules.”