Will US tax credits unleash growth of green hydrogen?

We all know the world of energy and natural resources is changing fast. People are demanding action on the climate crisis. Businesses and politicians are throwing their weight behind the energy transition, and technology is reshaping the world as we know it. However, we must ensure the result doesn't become too complex and confusing. That's where the Climate Transition Podcast comes in. In this series, DLA Piper's Energy and Natural Resources team speaks to special guests to help you make sense of it all. My name is Natasha Luther Jones. I'm the Global Co-Chair of the Energy and Natural Resources Sector here at DLA Piper. I'm also Co-Head of our International Sustainability and ESG offering, and I am your host for the series.

Today, we ask: Will US tax credits unleash the growth of green hydrogen? I'm Lindsay McLeod, a partner at DLA Piper in the Energy Practice, and I'll be your host for this episode. Green hydrogen plays an interesting role in the global energy mix. It's a technology with huge potential to help decarbonize sectors that depend on fossil fuels, including transportation and heavy industry, but current production capacity is limited. This is why policymakers around the world are seeking to provide financial incentives that can unlock production. In the US, the Federal Government announced in August 2022 in the Inflation Reduction Act that it would offer tax credits to help the green hydrogen industry. However, the industry had a long wait until the US Treasury and IRS spelled out further details in late December 2023. In this episode, we explore the details of those rules and look at how they could potentially affect new projects. Do they strike the right balance, or are they too strict? How do they compare to similar rules in Europe, and how fast can we expect US green hydrogen to grow now that we have further clarity? These are some big questions, and that's why I'm joined by a special guest who can help me answer all of these and more. Jason Evans is a Senior Director of Energy at 12, which uses green hydrogen in combination with its own proprietary carbon transformation technology to make low-carbon e-jet fuel. Previously, he's worked for firms including EdgeCore Digital Infrastructure and Amazon Web Services, where I had the privilege of working with him. Hi, Jason, thanks for joining me today.

Thanks so much for having me, Lindsay.

Okay, I'm gonna start it off easy. Can you tell us what 12 does and how it relates to the green hydrogen industry?

For sure. Just like you said, 12 is a technology company that has a proprietary carbon dioxide electrolyzer that takes carbon dioxide and transforms it into carbon monoxide, which can then be used to create fuels and materials that are effectively made from air instead of oil. One of the products that we're most excited about is our E-Jet aviation fuel. This is a fossil-free power-to-liquid sustainable aviation fuel, and the inputs are carbon dioxide, water, and renewable energy. We leverage our carbon dioxide electrolyzers alongside water-to-hydrogen electrolyzers to produce this sustainable aviation fuel. As you can tell, green hydrogen is a key ingredient, so we've been working on facilities where we can both own those hydrogen electrolyzers and create our own green hydrogen or partner with green hydrogen developers where we purchase that green hydrogen.

Clearly, you have a very cool job, but what were you doing before you joined 12?

I started in the energy industry in 2008. I ended up co-founding a solar development company. We were very early in the solar industry when the largest project in the US was about 14 megawatts. We ended up working on utility-scale solar projects from California to Massachusetts. In 2019, I moved over to the buyer side and joined you at Amazon, where I worked on renewable procurement, ensuring that Amazon could meet its Climate Pledge goals as well as its broader energy strategy for data center locations across the US and the Americas. Most recently, I moved to a data center developer where I led the energy vertical, focusing on energy strategy and ensuring our renewable goals were fulfilled. Now, I get to combine those experiences at 12 and help build really large, fully renewable loads and bring those online.

Well, I'll just say from firsthand experience working with you that 12 is incredibly lucky to have you. Diving into today's discussion, as you already know, Jason, on December 22, the Treasury Department and IRS published proposed regulations regarding the Production Tax Credit (PTC) for hydrogen under Section 45V of the Internal Revenue Code, as enacted by the Inflation Reduction Act. Under Section 45V, a PTC is available for each kilogram of clean hydrogen produced during the taxable year for the first 10 years after the hydrogen generation facility is placed into service. Alternatively, taxpayers can elect to claim an Investment Tax Credit (ITC) under Section 48 based on the investment in the hydrogen production facility. The Section 45V credit equals $3 per kilogram of hydrogen produced, multiplied by the applicable rate, which is based on the lifecycle greenhouse gas emissions rate of the hydrogen produced. This $3 per kilogram amount is reduced to 60 cents per kilogram if prevailing wage and apprenticeship requirements are not satisfied. To be eligible for the Section 45V credit, construction of the facility must begin before 2033. This PTC may be used by the taxpayer, sold to an unrelated party, or claimed as a refund under the direct pay rules. That was a tax mouthful, but one controversial part of the proposed regulations is how they set the standards for the maximum credit by adding three requirements. Can you tell us more about those three requirements?

Yeah, for sure. The Treasury guidance, like you said, focuses on understanding the carbon impact of producing hydrogen using electrolyzers. Since hydrogen is produced with electricity, it comes down to understanding the carbon impact of that electricity production. In other words, is it being produced with renewable or carbon-free electricity? The standard way to ensure the electricity used is renewable is using environmental attributes, typically RECs (Renewable Energy Certificates). In the greenhouse gas protocol, corporate customers making their electricity renewable purchase RECs from renewable power plants producing renewable electricity and apply those to their electricity usage. There are relatively few limitations on what those RECs need to satisfy in that context. Treasury's draft guidance, however, lays out stringent criteria for what RECs will count to make the electricity used to produce hydrogen renewable.

The first requirement is regionality, meaning the renewable energy project providing the RECs must be in the same grid as the hydrogen facility. This aligns with the grids used for procuring renewable energy, like PJM, SPP, and ERCOT. The second requirement is additionality, meaning the renewable energy project providing the RECs must have come online no earlier than three years before the hydrogen facility begins operating. These need to be new projects coming onto the grid. Finally, the most focused-on requirement is time matching. Typically, RECs must be produced in the same year as consumption, but Treasury has gone a step further, stating the RECs relied upon must be produced in the same hour as the consumption. So, hour by hour, every single megawatt hour consumed must be matched with a REC. There's talk of allowing some resources that don't meet the three pillars, like existing hydro or nuclear, but those pathways haven't been defined yet. We're processing this guidance and figuring out what these criteria mean for our energy procurement, hoping to see additional guidance in the coming quarters on existing resources.

It sounds like you are still processing what this might mean. Can you give me an early preview? How do you expect the rules will impact your procurement strategy?

Our procurement strategy will change dramatically based on the IRS guidance. We aim to match typically intermittent resources, like solar and wind, with our hydrogen production, ideally running our hydrogen production 24/7. These are significant capital investments for hydrogen electrolyzers, and we want to keep them running as much as possible. To match production hourly, we need to procure complementary solar and wind resources. However, solar and wind production varies, leading to the need for over-procurement to ensure enough power every hour of every day. This means procuring hundreds of megawatts of solar and wind to cover bad solar days and years. Operationally, this is a big challenge, requiring predicting production from solar and wind projects and adjusting hydrogen electrolyzer production capacity daily and hourly. This requires sophisticated work in smart metering, dispatching, and tracking to enable hourly matching, involving coordination between utilities, standards-making bodies, controls manufacturers, and RTOS. This coordination will take time.

What about storage? How does that come into play? Is that something you could potentially utilize or not?

Storage is an option and is beneficial because, unlike electrolyzers and some chemical processes, it allows for immediate adjustments. You can charge and discharge batteries quickly, providing flexibility when solar projects go offline or overproduce. However, the Treasury guidance lacks details on how storage should be used, whether at the hydrogen electrolyzer plant, co-located with the solar plant, or elsewhere. This lack of clarity makes it challenging to integrate storage into our strategy.

Considering our procurement strategy, I see a need for sophisticated work in smart metering, dispatching, and tracking to enable hourly matching, requiring coordination between utilities, standards-making bodies, controls manufacturers, and RTOS. This coordination process won't be fast. Additionally, the Treasury's current guidance evaluates production at a facility-wide level, creating significant financial risks if hourly matching is missed slightly, reducing the PTC from $3 to $1. This all-or-nothing approach poses challenges for financiers. Furthermore, intermittent hydrogen production affects downstream consumers relying on continuous hydrogen production, impacting processes like our aviation fuel production. Hydrogen storage is expensive and space-consuming, compounding these challenges. We need more clarity on Treasury rules to ensure green hydrogen production aligns with regulations without penalizing downstream consumers.

What could the federal government do to help you or provide more clarity? What would make this less painful for you?

The biggest need is understanding how the IRS will handle existing carbon-free resources. The

 guidance doesn't address using resources like large-scale hydro or nuclear, which are key for ensuring 24/7 matching with carbon-free electricity. In regions like California, we have ample wind and solar but limited large-scale hydro and nuclear. Greater clarity on integrating these resources and recognizing their role in carbon-free electricity is essential. Additionally, the transition to 24/7 matching requires significant work across the energy industry, including utility partnerships and support for infrastructure and interconnections to ensure hydrogen plants can operate continuously. This is crucial for making hydrogen a viable option for industries and consumers.

Taking a step back, how does this compare to the current rules in Europe?

Europe and the US are in a similar situation, aiming to ensure renewable energy use for green hydrogen production. However, the US guidance is stricter, especially regarding hourly matching and additionality. Europe's focus on ensuring the use of renewable energy, with flexibility in hourly matching, makes it easier for green hydrogen producers to align with renewable resources. The stricter US rules create challenges for hydrogen producers, requiring over-procurement and sophisticated tracking. A more balanced approach, considering the role of existing carbon-free resources, could align US policies with Europe's, supporting green hydrogen production without excessive burdens.

So, what kind of green hydrogen growth do you see in the US? And how do you see it growing with the current rules? 

The current IRS guidance makes it challenging to build a business case for green hydrogen. Companies and consumers need clarity on using carbon-free electricity for hydrogen production. More clarity on the Treasury rules, especially regarding existing carbon-free resources and hourly matching, would help build a robust green hydrogen market. Additionally, support for renewable energy infrastructure, including storage solutions, is crucial for enabling continuous hydrogen production. A balanced approach, considering the role of existing resources and flexible matching criteria, would support the growth of green hydrogen, making it a viable option for industries and consumers.