Potential stimulus for carbon capture and clean hydrogen

Potential stimulus for carbon capture and clean hydrogen

June 23, 2023 | By Scott Burton in Los Angeles, Bob Greenslade in Denver|Houston, and Edward Lewis in Houston

The next phase of the ongoing war over electric power plant emissions has arrived.

Proposed new regulations the US Environmental Protection Agency issued in late May to reduce greenhouse gas emissions from power plants will create more demand for carbon capture and sequestration and low-carbon hydrogen at coal- and gas-fired power plants to achieve emissions reductions if they are ultimately adopted.

They have to pass first through a gauntlet of court challenges.

Proposed Standards

EPA is proposing two sets of standards for fossil fuel-fired power plants to reduce greenhouse gas emissions: one for new and reconstructed power plants and another for existing and modified plants.

The specific requirements depend on a number of factors, such as fuel type, use and expected retirement date, but as a general matter both sets of standards rely heavily on carbon capture and sequestration and co-firing with clean hydrogen as the core mechanisms for reducing power plant emissions.

If adopted, the new rules will have an immediate impact on development of new fossil fuel-fired power plants and consideration of renewable energy projects as alternatives. Although only a proposal at this time, the proposal date establishes whether an affected power plant will be treated as "new" or "existing."

Therefore, any fossil fuel-fired power plant that commences construction on or after May 23, 2023 will be considered "new." As a result, developers will need to consider the additional costs of compliance when deciding whether to move forward with their projects or consider alternatives.

The proposals are controversial.

For example, EPA's proposed "low-GHG hydrogen" definition may exclude so-called "blue" hydrogen, meaning hydrogen produced from natural gas combined with carbon capture and sequestration, as a permitted way to reduce emissions. This will meet resistance from stakeholders who believe electrolytic "green" hydrogen production is inadequately demonstrated to assure large-scale commercial availability.

Proposed fuel shifting from coal to natural gas, and broad adoption of carbon capture and sequestration also are far from uncontroversial.

Potential Stimulus

Cost and feasibility of carbon capture and sequestration are likely to be a primary area of argument. Opponents will assert that widescale CCS still is too costly, not adequately demonstrated and, therefore, cannot be imposed as an emissions control standard.

If the CCS provisions survive, they will provide certainty as to the future need for increased CCS capacity resulting in a stimulus effect for the nascent CCS industry.

Likewise, the clean hydrogen co-firing provisions will also be challenged. These provisions would require that a certain amount of the fuel used be replaced by low-GHG hydrogen. Opponents will argue that this mechanism has not been adequately proven at high percentages of co-fired hydrogen fuel.

The effect of the co-firing provisions on the hydrogen industry may depend on where EPA lands on the issue of what qualifies as low-GHG hydrogen.

EPA proposes that this would include only hydrogen produced through a process that results in a greenhouse gas emission rate of less than 0.45 kilograms of CO2 equivalent per kilogram of hydrogen on a well-to-gate basis, consistent with the most stringent system boundary established in section 45V of the US tax code. Section 45V provides a tax credit of up to $3 a kilogram for producing clean hydrogen. (For more detail about the hydrogen tax credits, see "Hydrogen Tax Credits" in the October 2022 NewsWire.)

If the proposed definition is adopted, then it will probably cover only green hydrogen produced by electrolysis employing electricity provided by non-emitting power plants, such as solar, wind, nuclear and hydroelectric plants.

Whether the definition will be expansive enough to include blue hydrogen produced from natural gas with CCS remains to be seen. However, if it does, the EPA effort to reduce emissions could provide a stimulus effect for both green and blue hydrogen, with an additional stimulus for CCS due to the additional demand associated with blue hydrogen production.

Long History

The new proposed rules are merely the latest chapter in a decades-long back and forth over air emissions standards for power plants.

The greenhouse gas aspects of this regulatory trench warfare are more recent, commencing with two Obama-era rules in 2015. The first established standards for new, reconstructed and modified fossil fuel-fired power plants, notably including a partial carbon capture and sequestration standard for new coal-fired power plants.

The second 2015 rule, known as the Clean Power Plan, generated significant controversy because it included requirements to reduce greenhouse gas emissions from existing fossil fuel-fired power plants by shifting generation to lower-carbon options, such as solar and wind.

The generation-shifting aspect of the Clean Power Plan was vacated by the US Supreme Court in a 2022 decision called West Virginia v. EPA. (For more detail about what the Supreme Court said, see "Effects of West Virginia v. EPA on Power Sector.")

The court noted the significant economy-reshaping impacts likely to result from EPA's proposed approach and held that the Clean Air Act did not provide clear authorization for such economy-wide impacts.