Clean Hydrogen Rules Retain Strictness, But Market Demand Is Still in Doubt

Last week, after a year of intense lobbying and 30,000 comments, the Biden administration finalized regulations governing production tax credits authorized by the Inflation Reduction Act of 2022 for a new U.S. industry—the production of “clean hydrogen” by using wind, solar, or other low-emission sources of electricity.  

The economic viability of this new industry depends on these tax credits (up to $3/kg of clean hydrogen produced), but as I wrote here when the draft rules were released, its climate success hinges on driving emissions as close to zero as possible, as fast as possible—and preferably out of the gate.

How do the final rules stack up?

Overall, the strict rules that were initially proposed were mostly maintained. Most importantly, they kept a set of requirements known as the “three pillars” for producers using electrolysis. Informed by this seminal Princeton University research, the rules require producers to use clean energy from newly built sources in the same region and match every hour of production with simultaneous clean energy generation. The final rule delayed implementation of this requirement, however, until 2030.

The rules also established criteria for state clean energy standards, allowing projects to be built without accompanying new clean energy generation. California and Washington currently meet those criteria.

A significant compromise expanded the definition of clean hydrogen to include hydrogen made with methane released from landfills, animal manure, wastewater, agricultural waste, and coal mines that would otherwise be emitted into the atmosphere. For a deep dive on the implications of this important change, see this post from Kleinman Center Senior Fellow Danny Cullenward and colleagues.

The final rules allow producers to use up to 200 MW of electricity from existing nuclear power plants that are at risk of retirement. Producers will be also able to use battery storage to meet hourly matching requirements.

The final rules made a substantial change to credit calculation for hydrogen producers using natural gas with carbon capture and storage, which make up nearly 80% of projected U.S. supply, thanks to additional CCS tax credits. The value of production tax credits for those projects will initially be calculated by a life cycle model using a national average of carbon emissions from upstream gas production. The final rule responded to objections by providing that the Treasury Department would use actual upstream emissions measurements in future updates to the model.

Fifteen months ago, the Biden administration awarded $7 billion to develop regional hydrogen hubs—including two in Pennsylvania. But in the wait for the guidelines to be finalized, not much has happened since, except for some projects unraveling—in Texas and the Northeast, for example. Now, the projects that are left face a new administration that could, at least, revise the rules.

But prospects for clean hydrogen involve more than just political uncertainties.

CCS tax credits, which have bipartisan support, may have spurred project planning, but CCS itself still faces many questions about its effectiveness, costs, and risks. Production tax credits may succeed in making clean hydrogen competitive with hydrogen made from natural gas. Other federal support could succeed in driving down the cost of clean hydrogen production. Federally-funded state industrial decarbonization grants could help jumpstart clean hydrogen applications. Time will tell.

But a fundamental question remains. Where will the demand for clean hydrogen come from?

Today, the primary demand for hydrogen is for petroleum refining and ammonia production. The pathway to commercializing other hydrogen uses and a new U.S. Department of Energy plan to get there could be dead-ended by the new administration. Today, just 12% of clean hydrogen production capacity planned for commissioning by 2030 has a known offtaker.

The uncertainties for clean hydrogen are far from over.

John Quigley

Senior Fellow, Kleinman Center

John Quigley is a senior fellow at the Kleinman Center and previously served on the Center’s Advisory Board. He served as Secretary of the PA Department of Environmental Protection and of the PA Department of Conservation and Natural Resources.