Considering the high risks, it is extremely important for Treasury – in collaboration with the White House, Department of Energy and Environmental Protection Agency—to get it right and require rigorous rules for GHG emissions accounting that require the three pillars.
But some groups and companies are arguing that the pillars are either infeasible or too costly to implement and would kill the “clean” hydrogen industry in the crib; some further argue that we should accept emissions increases in the near-term by adopting lax rules today in order to rapidly scale the “clean” hydrogen industry and unlock emissions increases down the road.
Those arguments are grounded in myths and misguided assessments. Let’s set the record straight:
Quick recap—new clean supply, hourly matching and deliverability are necessary to guard against significant emissions increases.
A wide range of research—including new analysis by our colleagues at Energy Innovation—has consistently shown that three pillars are necessary to ensure that electrolytic hydrogen production is truly zero or very low emissions (refer to this blog, our letter to the Biden administration and NRDC’s guest spot on Volts). Even a recent study by the Rhodium Group that erroneously argues that tight tax credit rules would be too costly at first concedes that absent the three pillars, emissions from hydrogen production would increase by more than 100 million tons between 2023 and 2030, the equivalent of the entirety of North Carolina’s annual power sector emissions. Claims in the corporate letter that much looser rules— notably, annual matching in lieu of hourly matching—would not drive increased emissions are simply false.
Myth #1: Treasury has neither the legal authority nor the legal obligation to enforce the three pillars.
False. Treasury has broad authority to require the three pillars, and they are legally necessary to meet the IRA’s requirements. Loose annual matching is not consistent with the statute, as claimed by some.
The IRA gives Treasury broad authority to issue regulations for calculating the lifecycle GHG emissions of hydrogen projects. Using this broad authority, Treasury may adopt a lifecycle analysis methodology that incorporates the three pillars of new clean supply, deliverability, and hourly matching. Indeed, Congress authorized Treasury to adopt any tool—either the GREET model or a “successor model” –that accurately measures lifecycle GHG emissions.
And as we explain in our legal analysis, the three pillars are legally necessary. The IRA defines a hydrogen project’s lifecycle emissions by referencing section 211(o)(H)(1) of the Clean Air Act, which effectively requires Treasury to account for induced grid emissions related to hydrogen production. For example, if a hydrogen project connects to an existing nuclear plant, via the grid or a direct connection (i.e., “behind the meter”), nuclear power is diverted away from the grid, driving up fossil fuel generation to meet some of the gap. Treasury’s analysis must account for the emissions linked to this reshuffling.
Under this accounting system, it would be near-impossible for hydrogen projects that do not satisfy new clean supply, deliverability, and hourly matching requirements to meet the very low 0.45 kgCO2/kgH2 threshold to qualify for the top credit. In other words, a hydrogen producer that does not adopt the three pillars cannot comply with the emission thresholds outlined in the IRA. Therefore, section 45V is only workable—and its emission thresholds are only meaningful—if Treasury implements the three pillars for all projects—both grid-connected and behind-the-meter.
Myth #2: Meeting the three pillars is too costly and will kill the clean hydrogen industry in the crib.
False. Hydrogen projects that comply with the 3 pillars can be cost-competitive from day one. There is no tradeoff between scaling up the industry and safeguarding against emissions increases.
Otherwise, the new white paper and nifty summary tool by Princeton’s ZERO lab have definitively settled the cost debate: it highlights 5 recent studies – conducted by academics, research groups, a foremost electrolyzer manufacturer, and two renewable energy developers—all of which conclude that projects can be competitive from day one while meeting the three pillars and that there is no tradeoff between scaling the industry and increasing emissions and flouting the IRA requirements (a tradeoff that some keep positing). Let’s unpack.
Electrolyzers do not need to run 24/7 to pencil out. Instead, they need to run somewhere between 50-70% on average. This is because electricity costs are the largest cost component for electrolyzers; at a certain threshold of high utilization, projects start running into expensive peak or near-peak electricity costs and the advantage of higher utilization diminishes.
There are several regions in the U.S. where a combination of wind and solar would enable electrolyzers that comply with the 3 pillars to hit that optimal utilization level and more. The 5 studies highlighted in the Princeton white paper find that when electrolyzers contract with oversized wind and solar projects, they can be very competitive from the outset with the $3/kg subsidy. For example, the new Energy Innovation study—included in the Princeton summary tool—demonstrates this dynamic (map below). And if global electrolyzer deployment is as rapid as many predict, then capital costs for electrolyzers will fall quickly in this next decade greatly expanding U.S. geographies where 3 pillar-compliant projects can be cost-competitive.