The Biden administration on Friday finalized a long-awaited plan to provide billions of dollars in tax credits to companies that produce hydrogen in hopes of building a new industry that could help fight climate change.
Hydrogen releases primarily water vapor when burned, so it could be used as an alternative to fossil fuels to make steel and fertilizer, or to power large trucks and ships.
But whether hydrogen is good for the climate depends on how it's made. Currently, most hydrogen is produced from natural gas, a process that emits large amounts of carbon dioxide that causes global warming. The Biden administration wants to encourage companies to use wind, solar and other low-emission power sources to produce so-called clean hydrogen.
In 2022, Congress approved favorable tax credits for companies that produce clean hydrogen. But the Treasury needed to issue regulations clarifying what exactly companies had to do to claim that credit. The agency released draft guidance in 2023, but many companies are waiting for the final rule before making investments.
The final guidelines, released Friday, follow months of intense lobbying from lawmakers, industry representatives and environmental groups and nearly 30,000 public comments. These include changes that will make it easier for hydrogen producers to claim tax credits, which could total tens of billions of dollars over the next decade.
“Clean hydrogen can play an important role in decarbonizing multiple sectors across the economy, from industry to transportation to energy storage,” said Department of Energy Deputy Secretary David Turk. “The final rule announced today sets us on a path to accelerate deployment.”
Initially, the Ministry of Finance imposed strict conditions on hydrogen subsidies. Companies could apply for tax credits if they used low-carbon electricity from new sources such as wind and solar to run machines called electrolyzers, which split water into hydrogen and oxygen. From 2028, these electrolyzers will have to operate during the same hours that wind and solar farms operate.
Without these conditions, electrolysers would draw enormous amounts of electricity from the existing power grid and reduce greenhouse gas emissions if coal- and gas-fired power plants had to run more frequently to meet demand. Researchers have warned that the number of cases could increase rapidly.
But many industry groups and members of Congress complained that the proposed rules are too strict and could throttle America's nascent hydrogen industry before it gets off the ground.
The concern is that the technology to match hydrogen production with hourly fluctuations in wind and solar power generation is still in its infancy. The reactor's owner also said the reactor was being stranded.
Therefore, the final rule includes several important adjustments.
Hydrogen producers will have an additional two years until 2030 to be required to buy clean electricity by the hour to match their output. Until then, you can claim the tax credit while still using the more relaxed annual basis.
Some states that require utilities to use more low-carbon electricity each year make it easier for hydrogen producers to claim benefits on the theory that these laws will prevent emissions from spiking. It will be. The Treasury Department said that currently only California and Washington meet this standard, but other states may become eligible in the future.
Under certain conditions, companies that own nuclear reactors that are scheduled for decommissioning for economic reasons will be able to claim credits for hydrogen production if it helps keep the nuclear power plants open. Existing nuclear reactors that are profitable will not be able to claim that credit.
The final rule also establishes standards that allow companies to use methane gas from landfills, farms, and coal mines to produce hydrogen (for example, if the methane was previously released into the atmosphere).
Deputy Treasurer Wally Adeyemo said the guidelines “incorporate valuable feedback from businesses planning to invest.”
Some hydrogen producers said many, but not all, of their biggest concerns were addressed in the nearly 400-page final guidance.
“There is some comfort that the rules overall have improved from the original draft,” said Frank Wallach, chief executive of the Fuel Cell and Hydrogen Energy Association, an industry group. “But there are a lot of details that need to be evaluated.”
Jacob Sussman, CEO of clean hydrogen developer Ambient Fuels, which has about $3 billion in projects planned across the U.S., said a lack of clear guidance is holding back investment. “Now that we have something really solid, we can get to work building,” he said.
Environmentalists said most of the safeguards in the original proposal to prevent a spike in emissions had been retained.
“The extra flexibility given to the green hydrogen industry is not perfect from a climate perspective,” said Eric Kamras of the Natural Resources Defense Council. “However, this rule maintains important protections that minimize dangerous air and climate pollution from electrolytic hydrogen production.”
The Department of Energy estimates that use of cleaner forms of hydrogen could increase from virtually zero today to 10 million tons per year by 2030.
But political uncertainty looms. Although the new Congress could eliminate tax credits, hydrogen generally has support from both Democrats and Republicans, and many oil and gas companies are investing in hydrogen technology. The Trump administration could revise credit rules, but that could take years.
Economics is another hurdle. Cleaner hydrogen production still costs between $3 and $11 per kilogram, according to data from BloombergNEF. In contrast, producing hydrogen from natural gas costs about $1 to $2 per kilogram.
The new tax credit is worth up to $3 per kilogram and could fill the gap in some cases, but not all. Technology costs should drop significantly.
Even with heavy subsidies for hydrogen production, it's unclear whether there will be enough buyers. Hydrogen companies around the world have canceled several large-scale projects in recent years due to lack of demand. Steelmakers and power companies that might be interested in this fuel are often put off by the expensive equipment needed to use it.
“These new rules will probably help, even if they don't go as far as many in the industry had hoped,” said Aaron Bergman, a fellow at Resources for the Future, a nonpartisan research group in Washington. says. “But we still have the challenge of finding people to consume the hydrogen we produce.”
