Hydrogen funding and tax credits

Hydrogen funding and tax credits

December 14, 2021 | By Keith Martin in Washington, DC and James M. Berger in Los Angeles

Developers are already circling money for hydrogen projects after a boost in funding in the infrastructure bill that President Biden signed in November. Such projects would get a further boost if the “Build Back Better” plan that passed the House just before Thanksgiving also passes the Senate.

Tax Credits

The “Build Back Better” bill would give anyone producing “clean hydrogen” the choice of production tax credits of up to $3 a kilogram for 10 years on the hydrogen produced or an investment tax credit of up to 30% of the cost of the electrolyzer and other equipment.

The investment tax credit is claimed entirely in the year the electrolyzer or other equipment is put in service. The hydrogen producer must choose between the two credits on offer. It cannot claim both.

The credit amounts vary depending on the quantity of CO2 emitted to produce a kilogram of hydrogen.

To claim credits at the full rate, the production process must lead to less than 0.45 kilograms of CO2 emissions per kilogram of hydrogen.

The following table shows the tax credit amounts where the CO2 emissions exceed that amount.

No credits could be claimed on hydrogen produced with more than six kilograms of CO2 emissions per kilogram of hydrogen.

The CO2 emissions are measured on a lifecycle basis, meaning taking into account all of the emissions from feedstock through the point the hydrogen is produced (rather than also through consumer use).

The production tax credit amount would be adjusted annually for inflation. 

Hydrogen producers would have the option to be paid the cash value of the credits under an IRS refund process with a one-year time lag.

Production tax credits could only be claimed on hydrogen produced after 2021 on facilities placed in service through 2026. The ITC could only be claimed on electrolyzers put in service between 2022 and 2026, but not on costs accrued before 2022 in cases where the electrolyzer was under construction before 2022.

The tax credits will be only a fifth of these rates unless contractors and subcontractors working on the project pay at least “prevailing wages” as determined by the US Department of Labor and use apprentices for at least 10% (increasing to 15%) of total labor hours, both during construction and when making any repairs or alterations during the full period production tax credits are claimed or, where an investment tax credit is claimed, during the five-year period the ITC is subject to recapture. Apprentices are supposed to be used to train more workers for jobs in the green economy.

New domestic content requirements that apply to other federal tax credits will not apply.

The House bill would also allow owners of wind, solar and other renewable energy power plants to use the electricity they generate to make clean hydrogen and still claim separate PTCs on the electricity output, thus doubling up on PTCs for generating wind or solar electricity and then using the electricity to make green hydrogen. Normally, PTCs can only be claimed if the electricity is sold to an unrelated person.

The bill would also allow solar companies to claim PTCs instead of ITCs on solar projects. Solar projects have not had the option to claim PTCs since 2006.

There will be changes in the House bill, although not necessarily in the proposed hydrogen tax credit, when the bill is taken up in the Senate. Senator Schumer, the Senate Democratic leader, hopes to unveil the Senate bill before Christmas. The Democrats are still two votes short of the votes needed for the bill to pass the Senate. The Senate debate on the bill could slip into early next year.

Hydrogen Hubs

Turning to the infrastructure bill, project developers will be most interested in the $8 billion the bill authorizes for grants to fund regional clean hydrogen hubs that are supposed to be networks of clean hydrogen producers, potential consumers and connective infrastructure located near each other.

The hubs are meant to show how clean hydrogen can be produced, delivered and used.

Congress hopes the hubs will eventually become the backbone of a national clean hydrogen network and facilitate a clean hydrogen economy.

The goal is to establish at least four regional hubs. The US Department of Energy is supposed to solicit proposals by May 14, 2022. At least four proposals are supposed to be selected within another year after that.

The regional clean hydrogen hubs will be selected using certain criteria in the legislation.

The bill requires the hubs to have feedstock diversity, with at least one hub producing clean hydrogen from fossil fuels, one hub producing clean hydrogen using renewable energy and one hub producing clean hydrogen using nuclear energy.

The second criteria is end-use diversity. One hub should use clean hydrogen for electricity generation, one hub should use clean hydrogen in the industrial sector, one hub should use hydrogen for heating and one hub should use hydrogen for transportation.

The hubs are to be located in different regions of the country, using resources that are abundant in that region.

At least two hubs are to be in regions that produce natural gas. Finally, priority will be given to hubs likely to create employment for skilled training and long-term employment to the greatest number of residents of the region.

The grants are to accelerate commercialization, and demonstrate the production, processing, delivery, storage and end-use, of clean hydrogen.

With the various requirements for location, feedstock and end-use, the clean hydrogen hubs provisions are likely to incentivize various types of projects from electrolyzers to natural-gas fueled hydrogen production with carbon sequestration.

There is almost no detail in the bill beyond the general guidelines. DOE will add detail when it solicits proposals.

Electrolysis

The infrastructure bill also authorizes $1 billion for research and pilot-scale demonstrations of ways to improve the efficiency, increase the durability and reduce the cost of producing clean hydrogen using electrolyzers.

Electrolysis is the process of using electricity to split water into hydrogen and oxygen.

The goal is to reduce the cost of hydrogen produced using electrolyzers to less than $2 per kilogram of hydrogen by 2026. DOE estimates that the current cost is approximately $5 to $6 per kilogram.

The focus will be ways to improve electrolyzers by using new membranes or electrolytes, better component design, and coupling electrolyzers with clean hydrogen storage technology and integrated systems that combine hydrogen production with renewable or nuclear power generation.

Applications can be expected from various types of companies, from those involved in research and development to equipment manufacturers and renewable energy developers. The mention of integrated systems means there should be funding for companies that want to pair large renewable energy projects with an electrolyzer.

Manufacturing and Recycling

The final program with new funding is a clean manufacturing initiative that was allocated $500 million for grants, contracts and cooperative agreements for research and pilot-scale demonstrations to advance new clean hydrogen equipment manufacturing and clean hydrogen technology reuse and recycling.

Part of the focus will be on ways to improve the manufacturing process and use of resources. Priority will be given to the use of domestic supply chains and nonhazardous materials and location in economically distressed areas of major natural gas-producing regions.

The remaining focus will be on reuse and recycling, with priority given to applicants who can recover raw materials from clean hydrogen technology components, minimize environmental impacts, address barriers to commercialization and develop alternative materials.

Other Provisions

The infrastructure bill also includes a few other important hydrogen-related sections.

First, “clean hydrogen” will be defined differently for purposes of the spending provisions than for tax credits. For spending, the term means hydrogen produced with a carbon intensity of no more than two kilograms of carbon dioxide-equivalent per kilogram of hydrogen produced. This standard is to be reviewed, and possibly adjusted, in five years.

The bill also directs the 17 national energy laboratories under DOE to work together to carry out the hydrogen programs and coordinate with other institutions, such as colleges and universities, research institutes and industrial research units.

The bill directs DOE to develop a technologically and economically feasible national clean hydrogen strategy and roadmap, which is to be updated every three years.

The strategy and roadmap will set US goals by certain dates for hydrogen output, suggest a strategy for clean hydrogen production from various resources (including natural gas, coal, renewables, nuclear and biomass) and identify barriers to transitioning to a clean hydrogen economy.

While no funds are directly allocated to the development of the strategy and roadmap, the establishment of a roadmap could help determine how quickly the nation transitions to a hydrogen economy (if at all).