The stakes for hydrogen just got higher

Decarbonizing the U.S. economy will hinge on successfully deploying clean hydrogen as a key element of the U.S. Environmental Protection Agency’s (EPA) proposed new standards to cut power plant emissions. The U.S. clean hydrogen industry is just beginning to develop, but with the right policy tools, it has the potential to transform not only the power sector, but challenging areas such as long-haul transportation, industrial processes, and heating. Now it’s up to regulators at the Internal Revenue Service (IRS) to develop key policy details that could escalate clean hydrogen production and slash the emissions required to produce it in the next 10 to 15 years.

To meet EPA’s proposed standard, larger (greater than 300 MW) natural gas plants that operate more than 50 percent of the time would have to co-fire with 30 percent clean hydrogen by 2032 and 96 percent clean hydrogen by 2038. Operators can also meet the proposed standard using carbon capture and storage (CCS) technology to capture 90 percent of emissions by 2035. They could also phase out the plants and replace them with clean hydro, nuclear, wind, or solar power.

Currently, the United States produces around 10 million metric tons of hydrogen, which is used almost exclusively in oil refining and ammonia production; since it is produced from natural gas and the emissions are not captured, this generates 44 million metric tons of carbon pollution each year, or about 3 percent of annual industrial emissions.

To maximize hydrogen’s climate benefit for consumption across sectors, production needs to become much cleaner. Cleaner methods of hydrogen production include capturing carbon emissions from natural gas-based production and electrolysis, which uses an electrolyzer and clean electricity to create pure streams of hydrogen and oxygen from water.

Hydrogen’s potential benefits extend beyond power generation. It can be burned directly to attain temperatures up to 2,800 degrees Celsius, enough for any industrial process, e.g., steel and glass production. It can also create electricity in a chemical conversion process when passed through a fuel cell, which is helpful for mobile or transportation applications.

Importantly, converting hydrogen into heat and electricity produces no greenhouse gas emissions, although it does produce nitrogen oxides when combusted, which are harmful to the environment, human health, and need to be mitigated. Another drawback is that all production methods consume more energy than the hydrogen might yield. Also, while hydrogen can be stored indefinitely and used on demand, transporting, and storing it is challenging (i.e., there is very limited infrastructure, and building dedicated hydrogen pipelines and storage facilities will be more costly than traditional fossil fuel infrastructure). Moreover, as a tiny molecule, it is prone to leakage; hydrogen is an indirect greenhouse gas that if permitted to leak in large quantities (i.e., if production and infrastructure do not account for this), could exacerbate global warming.

Until EPA proposed its power plant rule, attention had been focused on creating a clean hydrogen industry and reducing the production costs of clean hydrogen. In 2021, the bipartisan infrastructure law (BIL) included $8 billion for the creation of regional hydrogen hubs and the U.S. Department of Energy (DOE) launched its ‘Hydrogen Shot’ to bring clean hydrogen production costs down to $1/kg by the early 2030s. Last year, the Inflation Reduction Act (IRA) created a hydrogen production tax credit (PTC) that could provide up to $3/kg for the cleanest form of hydrogen production (i.e., hydrogen produced from water and zero-emission electricity).

The future of U.S. hydrogen production now depends on the Internal Revenue Service (IRS), which is due to issue guidance on a hydrogen PTC later this year. The rules that the IRS sets will impact how quickly a budding, clean hydrogen industry develops, if at all. Too many restrictions in the guidance for the hydrogen PTC could forestall a growing industry and prevent a key decarbonization tool from realizing its full potential. For example, some are advocating for additionality – a concept that would require new (i.e., additional), clean electricity generation be built for facilities that produce hydrogen to receive the PTC. They argue that without that provision that existing clean grid electricity will be diverted to hydrogen production and dirtier forms of electricity generation will pick up the slack, increasing power sector emissions.

While this concern has merits, it is overstated. Clean hydrogen production does not exist in any meaningful way in 2023. The DOE estimates that U.S. clean hydrogen production could reach 10 million metric tons by 2030, while other organizations suggest that clean hydrogen production would likely only meet that mark at a global level with production divided among China, Europe, and the United States. In the United States, the carbon intensity of the electric power grid has fallen dramatically in recent years. In 2021, it averaged just 852 pounds of carbon dioxide per MWh of electricity generated, not much higher than a typical natural gas combined cycle power plant. Some areas like California, New York, and New England are already below 550 pounds, while a few coal-heavy regions are still around 1,600 pounds. At the anticipated hydrogen production volumes, this would not amount to serious backsliding or material carbon dioxide emission growth. And, with numerous coal plant retirements announced, grid carbon intensity is very likely to tumble significantly in the next five years – further diminishing this concern.

However, placing additional burdens on a nascent hydrogen industry is a genuine risk to its overall development, where already there are many hurdles. Electrolyzer costs remain very high. The industry also faces challenges siting and permitting new, clean electricity and transmission and connecting it swiftly to the grid. Lengthy interconnection queues, local opposition, and legal challenges alone could avert industry development for years. Additionally, little in the way of infrastructure (i.e., pipelines and storage facilities) exists to transport and store hydrogen to new markets. Efforts are afoot in Congress and at government agencies to accelerate the pace of permitting reform. However, it is far from clear how effective any reforms that do emerge will be.

It Is also worth noting that requiring additionality is beyond the intent of Congress when it was crafting the IRA. Specifically, the legislation states that a clean hydrogen facility can claim the hydrogen PTC even if it uses electricity from an existing nuclear power plant using the nuclear PTC. Congress recognized that utilizing existing nuclear power is a highly efficient way of producing electrolytic hydrogen because one can make use of the steam and its carbon free electricity.

EPA’s proposed power plant rule offers the ability to build upon and accelerate the success of emission reductions from the U.S. electric grid. BIL and the IRA funding are already aimed at reducing costs and kickstarting an expanded clean hydrogen industry. Overly burdensome guidance from the IRS on the hydrogen PTC could stymie development of this important climate solution and jeopardize the availability of hydrogen to decarbonize the power sector and beyond. Once the hydrogen industry expands and stabilizes, more restrictions can be phased in over time to ensure the industry is as clean as possible. But please, let’s not undercut it before it has a chance to flourish.