Last year’s Inflation Reduction Act (IRA) highlighted clean hydrogen’s important role in addressing climate change by offering generous incentives for the burgeoning technology.
Now, the U.S. Treasury has to define what "clean hydrogen" actually means, and with $100 billion in hydrogen tax credits on the table, organizations are keen to have a say. The Treasury has already received over 200 comments, on which it intends to issue guidance by the summer.
In a nutshell, the debate is raging internally within the energy industry, with different players advocating for varying degrees of the cheapest, fastest definition that would encourage large investment and large returns. On the other hand, climate experts, researchers and NGOs worry that if done wrong, these incentives could lead to more emissions. NRDC estimates that weak guidance could lead to subsidizing projects with twice the emission intensity of conventional hydrogen.
Here are the definitions divided into four buckets.
Co-locating electrolysis with clean energy
How it would work: An electrolyzer is placed somewhere close to a clean energy plant (solar, wind, hydro, nuclear), and runs directly off clean energy.
I confess, before thinking about this, I pictured this to be how green hydrogen would work, as "green" generally refers to hydrogen created from exclusively clean energy. "Clean" hydrogen, on the other hand, has a bit more flexibility, as it could include hydrogen made from dirty energy with carbon capture.
The upshot: While demonstrably clean, this method is not scalable at the level needed for clean hydrogen to displace conventional hydrogen today — much less ramp up to other applications.
"[Co-locating electrolysis with clean energy] will work in a very small number of geographies, and at an extremely high cost," said Lee Taylor, CEO of REsurety, who spoke to me about these four buckets. "You just won't get the growth of the hydrogen industry if it all has to be co-located on site."
Who supports it: Because of these limitations, this is not seen as a viable definition to qualify for the tax credit.
Annual energy matching
How it would work: A hydrogen producer uses grid energy (regardless of how the power is generated) for electrolysis, and purchases an equivalent amount of clean electricity on an annual basis anywhere in the U.S., either through a power purchase agreement (PPA) or renewable energy credits (RECs).
The upside: At its best, this strategy deepens renewable penetration in some portions of the grid. This is how Scope 2 accounting works today and would be easy to implement.
The corporate procurement equivalent: This is the methodology used by the first generation of corporate renewable energy procurements, and the methodology used by RE100.
The downside: The carbon content of megawatt hours can vary greatly depending on time and location, potentially leading to a net increase of emissions. For example, if an electrolyzer is located where energy is dirty and aims to balance that with more renewables in a cleaner portion of the country, it will likely add more emissions than the clean power is saving. That’s a problem that’s set to get worse.
"The gap between a very clean grid and a very dirty grid is just getting bigger and bigger as we deploy more and more renewables, often in the same location," explained Taylor.
Who supports it: Major energy providers interested in diversifying into hydrogen, such as NextEra, Chevron and BP, say this is the method that would inspire the most investment. In its submission, NextEra argued that requiring more granular accounting "would devastate the economics of clean hydrogen production" and said it would not invest.
Hourly energy matching
How it would work: Hydrogen producers align energy consumption to clean energy production on an hourly basis, in the same geographic locations.
The upside: If done correctly, this could mean hydrogen producers are only using energy when clean energy is available.
The corporate procurement equivalent: This is the same philosophy of the new generation of corporate clean energy procurements and is often called 24/7 carbon free energy, which companies such as Microsoft and Google are working on.
The downside: Electrolyzers need to be in a tight geographic location to clean energy projects, which limits where projects could be cited and drives up costs (similar to the constraints in co-locating facilities).
To make this implementable, the Treasury would likely have to loosen the location restriction to an area broad enough that it could diminish its decarbonization benefit due to transmission constraints, according to Taylor.
This conundrum is captured in the following slide from REsurety, which illustrates how a facility near Houston has a higher emission intensity than the wind and solar resources, despite being part of the same regional transmission organization (RTO).
Who supports it: RMI, MIT Energy Initiative and NRDC (among others) see this method as a way to encourage investments in emerging clean energy technologies and may avoid emission and air pollution increases that could affect local communities where electrolyzers are located.
How it works: Sometimes called "Marginal Emissions Accounting," this framework requires hydrogen producers to reduce emissions anywhere on the grid equivalent to the emissions increased, on an annual basis.
The upside: This method looks directly at the things we want less of — emissions — rather than using electricity as a proxy to (hopefully) fully offset. It allows clean energy to be built into the dirtiest of grids, providing more cost-efficient strategies to decarbonize.
The corporate procurement equivalent: This is similar to the philosophy of the Emissions First partnership, a group of corporate procurers looking at the emissions impacts of energy strategies, rather than matching MWhs.
The downside: Data availability and methods for calculating marginal emissions are limited and require approximations, according to RMI. Additionally, the emissions of a grid over time will change over a project’s lifetime, which may lead to less certainty from developers.
Forward guidance from the Treasury will shape the future of the U.S. hydrogen economy. Determining the definition of clean energy will serve as a microcosm of the evolution of corporate renewable procurements and how we think about Scope 2 accounting. The decision the Treasury makes could impart a lasting impact that shapes future thinking of climate benefits from clean energy projects.
It begs the question of how forward-leaning we want our clean energy policy to be. Should it be rooted in what we’ve done until now, or rethink how we account for emissions into the future?
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