From Promise to Pause: The Tax Credit Turmoil in Green Hydrogen

From Promise to Pause: The Tax Credit Turmoil in Green Hydrogen

August 22, 2024 0 By Erin Kilgore

Current State of Green Hydrogen Investment

*Article Updated: The Biden administration has identified green hydrogen as essential for decarbonising heavy industries. However, prolonged debates over tax credit qualifications have put critical investments on hold. Federal tax credits, potentially providing up to $3 per kilogram of produced green hydrogen, are under scrutiny, with initial guidelines deemed too stringent by industry players.

Industry and environmentalists debate these rules, with Fred Krupp of the Environmental Defense Fund emphasizing the need for strict guidelines to attract genuinely green projects. Businesses advocate for more relaxed rules initially to support the nascent sector and drive down costs through large-scale operations.

The federal government has allocated $8 billion to establish regional hydrogen hubs, aiming to connect producers with customers. However, hub leaders are becoming restless, advocating for revised guidance as current ambiguities threaten to derail potential investments and job creation.

The Treasury Department is considering feedback but has not provided a timeline for resolution. This impasse extends beyond the U.S., affecting companies like Thyssenkrupp Nucera and Siemens Energy AG, which have faced delays due to regulatory uncertainties in both the U.S. and Europe.

Another case scenario that is being played out involving the tax credits is happening in Washington. With an ambitious, multi-billion dollar plan to develop clean hydrogen in the Pacific Northwest faces significant hurdles. A key project in Centralia, Washington, a proposed hydrogen plant by Fortescue, has now stalled due to high costs. This delay affects other projects, like Puget Sound Energy’s plan to use hydrogen for power generation. All due to high costs and uncertainties around hydrogen tax credits. 

The fundamental issue remains that green hydrogen is significantly pricier than its natural gas-derived counterpart. Scaling up production is necessary to reduce costs, but this won’t happen until tax rules are finalized. As a result, early projects are stymied by regulatory vagueness, impeding America’s pursuit of a hydrogen-powered future.

Challenges in Tax Credit Implementation

The Treasury Department’s stringent requirements for hydrogen tax credits have added complexity to the implementation process. The credit, up to $3 per kilogram for green hydrogen, is bound by a rigorous framework known as the “three pillars,” which aims to ensure the environmental integrity of hydrogen production.

Green hydrogen - H2 Production - Clean Energy

The Three Pillars:

  • Hydrogen must be produced using new clean energy sources
  • Production must align with electricity generation times
  • Strict carbon intensity requirements must be met

Environmental advocates argue that maintaining these standards is crucial for attracting genuinely green projects. Industry proponents, however, argue for a more flexible approach, especially in the early stages of sector development. They contend that easing these stipulations temporarily will catalyze initial investments and operational scaling, potentially lowering green hydrogen costs in the long run.

The ongoing debate reflects deep-seated differences in prioritizing immediate industrial growth versus sustaining long-term environmental safeguards. The Treasury Department has pledged to carefully consider the diverse range of comments it has received but has not provided a definitive timeline for finalizing these critical rules.

“[Hydrogen incentives are] the most complex of the credits, technically and legally.” – John Podesta, Biden’s senior adviser for international climate policy

As deliberations continue, the broader hydrogen industry remains in limbo, with billions in potential investments hanging in the balance.

Potential Impact of Delayed Policy

The effects of delayed policy on the hydrogen sector are significant, hampering investment decisions and potentially impeding U.S. decarbonization efforts. Frank Wolak, CEO of the Fuel Cell and Hydrogen Energy Association, expressed industry frustration, noting that deferred investments lead to reduced commitment.

The uncertainty surrounding tax credits is exacerbated by the upcoming electoral cycle. Even if new guidelines are published soon, businesses may defer investments until after the elections, especially given potential policy changes under a new administration.

International comparisons highlight the pitfalls of U.S. delay. Companies like Thyssenkrupp Nucera and Siemens Energy AG have already adjusted their strategic forecasts due to insufficient regulatory momentum in both the U.S. and Europe. This situation underscores the need for timely and clear regulations to foster a thriving hydrogen ecosystem.

The lack of definitive policy affects national competitiveness and risks ceding ground to international counterparts who are moving faster in setting clear guidelines. Germany, for instance, has implemented substantive policies and investments, positioning itself at the forefront of the hydrogen economy.

The broader implications extend beyond economic impacts, potentially undermining the environmental benefits associated with green hydrogen. Without clear guidelines, projects meant to harness renewable energy sources remain in developmental limbo.

Future Projections and Strategic Considerations

If the Treasury Department relaxes its regulatory approach, the hydrogen sector could experience significant growth. Easing the “three pillars” framework could unlock investments currently sidelined by regulatory uncertainties, facilitating the construction of new green hydrogen plants and the scaling of existing projects.

Andy Marsh of Plug Power Inc. suggests that many companies are awaiting regulatory easing to commence or expand operations. Relaxed guidelines could catalyze market growth, enabling initial investments to progress and potentially driving down green hydrogen production costs.

In the medium to long term, a more flexible regulatory environment could lead to green hydrogen becoming more competitive with natural gas-derived hydrogen. This cost parity is crucial for broader adoption across hard-to-electrify industries such as steel and cement manufacturing.

Strategic Priorities for the Hydrogen Industry:

  1. Comprehensive infrastructure investment
  2. Public-private sector collaborations
  3. Engagement with emerging technologies
  4. Continuous innovation in production processes
  5. Strategic deployment of hydrogen hubs</shydrogen news ebookpan>
  6. Development of a skilled workforce

The strategic deployment of the $8 billion allocated for hydrogen hubs will be critical. These hubs should be located to maximize synergy between producers and end-users, enhancing the commercial viability of green hydrogen.

Long-term investments should also focus on creating a skilled workforce for the hydrogen economy. Aligning educational institutions and training programs with industry demands will ensure the sector is supported by competent and specialized professionals.

In conclusion, relaxation of Treasury guidelines could herald a transformative phase for the hydrogen industry. By fostering initial investments and enabling scale economies, regulatory easing has the potential to significantly lower green hydrogen costs and facilitate broader adoption across industries. Strategic infrastructure investments, ongoing technological innovation, and skilled workforce development will be vital in leveraging federal support effectively and shaping the future trajectory of the U.S. hydrogen market.

*Article Correction –  It was previously reported in this article that Hy Stor Energy’s Mississippi project, intended to utilize on-site wind and geothermal energy, was facing bureaucratic delays over tax credit guidelines. We would like to clarify that this is incorrect. The Mississippi Clean Hydrogen Hub is progressing as planned and remains on schedule to become operational by 2027. Additionally, Hy Stor Energy is not requesting any changes to the existing tax credit rules, Hy Stor Energy sent earlier this month in response.

 

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