Just before Christmas, the US Treasury and IRS issued rules on how certain tax credits in the Inflation Reduction Act should be considered. These 45V tax credits are critical to the growth and evolution of the hydrogen industry, but not everyone agrees on how these credits should be managed. Should they prioritize growth of a needed carbon-free fuel industry? Or should they ensure that dirty, fossil fired power stations aren't powering staying operational longer than needed?
In this episode, Paul outlines the issues at stake and the resultant ruling laid down by Treasury on these credits. As the climate industry ramps up new and important technologies such as hydrogen, carbon capture and others - these wonky debates on business models, value chains and tax implications are going to be increasingly important.
Just before Christmas, the US Treasury and IRS issued rules on how certain tax credits in the Inflation Reduction Act should be considered. These 45V tax credits are critical to the growth and evolution of the hydrogen industry, but not everyone agrees on how these credits should be managed. Should they prioritize growth of a needed carbon-free fuel industry? Or should they ensure that dirty, fossil fired power stations aren't powering staying operational longer than needed?
In this episode, Paul outlines the issues at stake and the resultant ruling laid down by Treasury on these credits. As the climate industry ramps up new and important technologies such as hydrogen, carbon capture and others - these wonky debates on business models, value chains and tax implications are going to be increasingly important.
This is 8 minutes a podcast helping you understand the energy and climate challenge. In just a few minutes I'm your host, Paul Schuster, Lost in the holiday rush with some news from the US Treasury. Last month, Right before Christmas, the department dropped long-awaited rules on how they planned on handling tax credits for new hydrogen projects. All right, I know that a podcast on tax credits may seem a bit wonky, but hydrogen is a super important tool in our fight against climate change, and these new rules have generated a lot of controversy, challenging how best to grow a nascent industry without inadvertently supporting dirty fossil plants in the process. Today I'll unpack the implications on these new tax rules and the trade-offs that they portray, and what's next for the growth of the hydrogen industry. 8 minutes it's how long it takes the sun's race to Earth, or well, tonight my Michigan Wolverines play the Washington Huskies for the national championship in college football. I may spend 8 minutes not yelling at my TV stream this evening, but I can't guarantee anything. Let's go blue.
Speaker 1:
There are a lot of tools in our toolbox to fight against climate change Renewable energy, batteries, EVs but while most of these are maturing industries in their own right, hydrogen is still very new and emerging, but hydrogen could be an important part of decarbonization, especially for heavy industrial applications where alternatives simply aren't there. Using a zero carbon fuel such as hydrogen instead of natural gas or oil or propane can be very intriguing, Not the least because hydrogen is very abundant. For one thing, there's a lot of H2O in the world and smarter engineers than me are doing a great job of figuring out how to split those water molecules using clean green electricity to produce clean green hydrogen. In fact, hydrogen is so important to decarbonizing industry that the Biden administration includes hydrogen incentives into both the Infrastructure Investment and Jobs Act, as well as the Inflation Reduction Act In the IIJA. The Act set aside $7 billion to support the development of hydrogen hubs around the country. Hydrogen distinct hubs from Appalachia to California won those grants, supercharging their investment into this new technology. The hope is that these investments will drive down the learning curve and technology cost curve for the electrolyzers and process systems needed for hydrogen production, Because, at least as today, hydrogen is still really expensive compared to just burning gas. But if the cost of electrolyzers and solar panels and other equipment can fall, then we can start to make both a climate case as well as an economic case for new hydrogen, which is where the IRA stepped in as well, because the IRA tries to make hydrogen more affordable through a series of tax credits for the fuel. The firm DNV estimates that green hydrogen currently costs around $5 per kilogram and the IRA offers up as much as $3 of that in tax incentives. I mean, a 60% discount is nothing to scoff at, right. But those tax credits called 45v tax credits in our federal tax code come with some caveats, specifically around how much emissions are created in the value chain to produce that hydrogen in the first place. The IRA was a bit vague on how to think about this or how to calculate it, so a lot of stakeholders are anxiously looking to the Treasury Department and the IRS to help deliver the rules on how to fully capture those tax incentives. And this is where the debate started, because there were a couple of different directions as to where those rules could have gone in either facilitating the growth of the new industry or ensuring that that growth didn't come at the expense of increased value chain emissions.
Speaker 1:
Let's break it down. See, the type of hydrogen we're talking about requires electrolyzers to break apart water molecules, and these electrolyzers well, they use a lot of electricity. In ideal world, we could just get that electricity from an electrical grid that's fully clean and renewable, but today's environment is much more complicated. Power from the grid is likely to be, at least partially, from natural gas or even coal facilities, which means grid-powered. Hydrogen is not very green. To begin with, the alternative will contract directly for that renewable energy, like from on-site solar panels or off-site power generation, where we can use the renewable energy certificates to offset the power we're purchasing from the grid.
Speaker 1:
But then the devilish details start to arise. For instance, how do we account for power during nighttime hours, when solar power isn't being generated and the power from the grid's likely to all be from fossil power generation? For years, renewable energy accounting simply trued up total energy usage on an annual basis. If you needed a ton of energy at night, you would simply buy more renewable certificates during the day. The power usage versus power generated wouldn't necessarily match perfectly, but it could be trued up every year, so at least be directionally correct. More recently, though, there's been a lot of movement in the industry to shift more to an hourly matching rather than an annual matching. That means that if you're going to claim to use renewable energy at night, you have to actually find a wind farm or a hydro facility or a battery storage plant that's actually generating power. At that time it makes it a lot tougher to find that power, but the impact on the emissions is far more substantial. And if we really want to drive impact, we should ensure that those renewable facilities that we're purchasing clean power from are quote unquote additional in nature. That means that they aren't just an existing wind farm that we decide to buy power from.
Speaker 1:
The idea with additionality is that we buy power from a new renewable facility that requires the grid to stop providing power from some other facility, and that other facility is likely to be a fossil fuel, coal or gas plant. But if the renewable power isn't additional, it keeps those fossil plants open and running longer than they otherwise would be. So these are the dual issues that the Treasury Department was challenged with additionality and this idea of hourly matching. On the one hand, requiring both of those requirements would ensure that the hydrogen being produced would be actual clean fuel. It wouldn't be inadvertently keeping dirty fossil plants running longer than necessary. But on the other hand, it's a lot more expensive to meet additionality and hourly matching. What about cheap, carbon free nuclear power that could be used any time of the day to create hydrogen. It meets the hourly requirements but unfortunately not the additionality issue. Or wind facilities and solar facilities that meet the additionality requirement but may necessitate an overbuild or costly storage in order to meet the hourly matching.
Speaker 1:
Stakeholders on both sides have convincing arguments, both from a totality of emissions perspective as well as from the viewpoint of keeping costs down in the near term in order to at least get the hydrogen up and running first. In the end, the Treasury took the approach of requiring both additionality and hourly matching. A lot of stakeholders were incredibly happy with the decision and a lot weren't. There was no easy answer for Treasury to take. Look, I know, getting deep into wonky tax credits may not be super exciting, but the reality is that a lot of the technology that we need to combat climate change well, we have that technology. We know how to produce hydrogen using clean, renewable energy, but the economics, the business models, the processes required to bring these technologies to market, the next wave of debate is really going to be around how we implement these next generation technologies, which means understanding wonky tax code implications. I'm Paul Schuster and this has been your 8 News.