US Treasury moves to restrict hydrogen tax breaks offered by IRA

The US has unveiled stringent new criteria hydrogen producers must meet to claim green subsidies under Joe Biden’s climate legislation, in a move that has disappointed developers who warn burdensome rules will stymie the nascent industry.

Guidance from the US Treasury issued on Friday would limit the $3-per-kilogramme credit to hydrogen that is made only from new clean energy projects, such as solar and wind, that are connected to the same regional grid as the hydrogen producer.

The guidance would also impose a strict interpretation of how developers prove their green hydrogen is clean. From 2028, developers will need to certify that the production is powered by renewables every hour — not annually.

The guidance has come under fire from industry groups, politicians and some large developers who claim strict so-called hourly matching would make projects too costly, even with the tax credits. Developers and others will have 60 days to comment on the proposals.

Jason Grumet, chief executive of the American Clean Power Association, called the Treasury’s plan to start hourly matching in 2028 a “fatal” flaw that would “discourage” a significant majority of companies from investing in production.

“For an administration that wants to reduce emissions and fight climate change, it makes no sense to kneecap the hydrogen market before it can even begin,” said West Virginia Democratic Senator Joe Manchin, an architect of the climate law, in a statement.

Green hydrogen, which is produced by splitting water using electricity, has been hailed as the Swiss army knife of the energy transition for its potential to decarbonise hard-to-abate sectors such as shipping and heavy industry. 

John Podesta, Biden’s top clean energy adviser, said the new tax credit would be “critical” in reducing US emissions.

The president’s landmark Inflation Reduction Act offers almost $370bn worth of tax breaks, subsidies and grants to clean energy developers and included a juicy credit for green hydrogen. Initially, developers said the tax break would make the US one of the most attractive places to produce the fuel.

More than $11bn has been committed to US green hydrogen projects through to the end of the decade, according to July estimates from Rystad Energy. The energy consultancy found that announcements in green hydrogen capacity have increased 53 per cent since the IRA’s passage last year.

Environmental groups and developers that supported stringent rules cheered the announcement on Friday, arguing that unless strict parameters are set on the fuel’s production, development of the sector would rely on fossil fuels, adding to emissions.

“There shouldn’t be a trade-off between scaling up the industry and safeguarding against increased emissions,” Claire Behar, chief commercial officer of Hy Stor Energy, which plans to build a plant in Mississippi and supports the restrictions on hydrogen production.

Research from Princeton University and consultancy BloombergNEF found that unless restrictions were placed on where green hydrogen sourced its electricity, the process could result in higher emissions rates than hydrogen produced from fossil fuels.

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