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Treasury Walking a Tightrope

Updated: Feb 26

Three concepts have the power to slow and, possibly, reverse, the momentum in the US hydrogen market: temporal matching, additionality, and deliverability. It’s coming at a time when the hydrogen industry is beginning to develop solutions for niche markets in the great energy transition. These are markets where electrification is difficult and carbon-free alternatives don’t exist.

The Treasury Department is determining the 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 accelerate the production and use of green hydrogen by creating a path to price parity with blue and gray hydrogen. However, Treasury’s intents to assure 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. If hydrogen manufacturing consumes solar and wind energy is consumed, 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, the complete opposite of the reason for using hydrogen.

The tools Treasury will use to make sure this does not occur 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 made from 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. In essence, Treasury wants green hydrogen production using 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, and they are trying to avoid creating an incentive to produce green hydrogen that has an unintended consequence of increasing 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, 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’s 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 electrolyzes 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 can’t 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 back up power for data centers and microgrid support where batteries can’t provide enough power for the duration required, and there is a desire to eliminate diesel generators.

Lower cost green hydrogen also can compete with blue or gray hydrogen and replace its carbon-producing siblings for industrial processes like cement, ammonia, and fertilizer. Those 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 the 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 tenants from day one. There will be an immediate benefit of higher production capacity, which will lead 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 proliferate the use of hydrogen for back-up 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. It strikes a balance that achieves the goal of expanding the hydrogen base while minimizing any negative environmental repercussions.

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