The Treasury Department is establishing rules for qualifying for the $3/kg Production Tax Credit (PTC), as defined in section 45V of the Inflation Reduction Act (IRA). The PTC will greatly boost the production and use of green hydrogen by creating a path to price parity with blue and gray hydrogen. However, Treasury aims to ensure that green hydrogen production does not negatively impact the environment by diverting renewables from the grid. The fear is that green hydrogen production could increase the generation of electricity with fossil fuels. When hydrogen production consumes solar and wind energy, this same electricity is not sent to the grid. The electricity diverted to hydrogen production must be replaced at some point, presumably by coal, oil, and natural gas. The result, in theory, is more greenhouse gases, which goes against the purpose of using hydrogen.
The tools Treasury will use to prevent this are temporal matching, additionality, and deliverability. Industry insiders are watching carefully as the impact will be immediate and could severely hamper the ability of green hydrogen producers to expand investment in the near term. But what exactly does this mean?
Green hydrogen is produced through electrolysis using water and renewable electricity without creating carbon emissions. Solar and wind energy is used to split the water molecule into oxygen and hydrogen. This is an energy-intensive process. Essentially, Treasury wants green hydrogen production to use only renewable energy from new sources (additionality), generated locally (deliverability), and only when the producers match their consumption with renewable electricity production (temporal matching). The concept is logical, aiming to avoid unintentionally incentivizing the production of green hydrogen that increases the use of fossil fuels.
Unfortunately, strict rules for qualifying for the PTC will hamper the expansion of the hydrogen industry. Additionality will defer the construction of green hydrogen facilities. The AES plant in West Texas, announced in January 2023, is not scheduled to go live until 2027. This timeline needs to be shortened.
Deliverability is a concern as not all locations can generate renewables at the same scale. The sun shines in Arizona more than in Ohio, and it is almost always windy in Nebraska, not so much in Mississippi. Our aging and inefficient grid exacerbates this issue. Temporal matching will lower the utilization and reduce the time electrolyzers can operate at optimum efficiency. The US solar industry believes the US solar capacity will triple in the next five years. As more renewable energy sources come online and the price of the electricity produced comes down, the ability to add green hydrogen production increases in tandem. Temporal matching will happen organically over time.
The artificial headwinds of temporal matching, additionality, and deliverability run counter to the intent of the provision in the first place. It cannot be overlooked that hydrogen has the ability to address some of the hardest sectors to decarbonize, regardless of how fast solar and wind projects expand. Hydrogen is a strong candidate to reduce diesel usage in heavy-duty trucking where battery electric vehicles cannot do the job. The benefits of quick refueling, larger cargo capacity, and longer range make hydrogen fuel cell trucks the superior choice for high-use applications. Hydrogen is also growing in popularity in backup power for data centers and microgrid support, where batteries cannot provide enough power for the required duration, and there is a desire to eliminate diesel generators.
Lower-cost green hydrogen can also compete with blue or gray hydrogen and replace its carbon-producing siblings for industrial processes like cement, ammonia, and fertilizer production. These three industry segments produce almost 9% of global carbon emissions. We have to ask ourselves if it is better to move quickly to penetrate these challenging markets while interest in hydrogen is so strong.
This does not have to be an either/or question because another option exists. Treasury should implement the requirements over time and not require these tenets from day one. There will be an immediate benefit of higher production capacity, leading to lower costs and improved efficiencies as economies of scale are realized. The phased approach will accelerate the pace at which hydrogen can penetrate heavy-duty trucking, steel, ammonia, aviation, and other industries. Increased availability and lower costs will encourage the use of hydrogen for backup power and microgrid support. Over time, the goals of additionality, deliverability, and temporal matching will become a reality as renewables like wind and solar expand. This approach strikes a balance that achieves the goal of expanding the hydrogen base while minimizing any negative environmental repercussions.
About the author
Chris Tully is a seasoned professional with over 30 years of experience in the power and hydrogen fuel cell industries. Chris was an early employee at Valere Power, a start-up in the telecom power industry. He also spent time with General Electric in Texas before joining Plug Power as the Vice President of Sales in 2014. At Plug, Chris was involved with all aspects of the hydrogen ecosystem, including fuel cells, service, infrastructure, and the hydrogen molecule. Chris lives in Richmond, Virginia, and is currently an independent consultant and founder of ANDnotOR.info.