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Explainer: Can Tax Incentives Help Green Hydrogen Outgrow Its Promise?

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In Brief

Hydrogen burns clean, but making energy from it often requires burning fossil fuels. 

The Inflation Reduction Act forks over tax credits to speed and spread methods for creating hydrogen from clean sources. 

What business models have emerged or should emerge to capitalize on these credits' confidence? Our writer explores the terrain. 

10-to-1: this is the ratio of carbon dioxide emissions associated with every gram of hydrogen produced in the US. Multiply that by the 10 million metric tons of hydrogen produced in the US every year, hydrogen production contributes to over 100 million metric tons of carbon emissions to the atmosphere annually.
To put this into context, this figure is equivalent to flying around the world 167,000 times. The majority of hydrogen in the market today is produced via a process known as steam-methane reformation, which involves reacting methane with boiling steam of over 1,000°C to create carbon monoxide, carbon dioxide and hydrogen gas. The final product is called grey hydrogen. Needless to say, the process is both energy- and carbon-intensive.
Enter green hydrogen, which enthusiasts including Bill Gates have rendered as something of a decarbonization Swiss Army knife. A process known as electrolysis, which splits water into hydrogen and oxygen, can release volumes of hydrogen to replace methane or other fossil fuels. The major barrier to electrolysis has been cost. Green hydrogen typically costs $2.50/kg to $6/kg to produce depending on the renewable power source, while conventional grey hydrogen costs $1 to $2/kg.
With the passage of the Inflation Reduction Act (IRA) on August 16, this cost discrepancy should narrow. The $369 billion of climate-focused federal investment from the IRA covers solar, wind, battery storage, green hydrogen, carbon capture, direct air capture, and the list goes on… For potential green hydrogen investors and developers, the IRA is exciting because producing clean hydrogen can now generate tax credits for the first time. Under the so-called 45V clean hydrogen production tax credit in the IRA, producers of clean hydrogen can claim a tax credit of up to $3 per kilogram produced, between 50% and 120% of the production cost based on current technology.
As long as the lifecycle carbon intensity of the hydrogen produced falls below 4kg, computed using the Greenhouse Gases, Regulated Emissions, and Energy Use in Technologies (GREET) model, the producer can claim tax credits for every kilogram produced, ranging from 60 cents to $3 per kilogram. Under the carbon intensity threshold established by the IRA, green hydrogen has the greatest possibility of satisfying the requirements for these tax credits. By narrowing the price difference between grey and green hydrogen closer to zero, the IRA also creates the conditions for eliminating the “green premium,” the cost surplus we traditionally see between new clean technologies and their fossil fuel incumbents. For a more detailed look at tax credit structure, see the table below:


Source: ICF Incorporated

Following the passage of the IRA, a leading hydrogen producer, Linde, has announced its plans to build its largest electrolyzer facility as of yet to produce green hydrogen in Niagara Falls, New York. Other areas of the IRA can also bolster green hydrogen. Since the biggest cost component for producing green hydrogen is renewable electricity, more generous Production Tax Credits (PTC) and Investment Tax Credits (ITC) can foster new solar and wind projects that can keep prices in control. The IRA is already creating new waves in the market.
While the IRA has lowered cost hurdles and laid the groundwork for green hydrogen to scale, several concerns remain. The first relates to the difference between carbon intensity of green hydrogen at its point of production and its point of use. Producing green hydrogen takes at least 50 kWh given the current efficiency of electrolyzers. Next, compressing the hydrogen to a level that can be stored or pipelined requires an additional 3 kWh per kg. Considering an estimated carbon lifecycle footprint for solar panels of 46g per kWh, the production process will likely emit 2.5kg CO2 per kg of green hydrogen produced.
Things (unattended) get grayer. According to the GREET model, if gaseous hydrogen is piped with a distance of 750 miles, which represents an empirical average, additional emissions of 0.5 kg CO2/kg  arise.  While the level of carbon emissions would be more than 10 times higher if it is transported by diesel trucks with gas tube trailers, it remains true that the total carbon intensity of producing green hydrogen may well exceed that of grey hydrogen.
Have we got a clearer path? 
Recognizing the incremental carbon intensity that comes from storing and distributing hydrogen, Modern Electron, a clean hydrogen start-up, is working to advance decentralized production at the point of use. By partnering with gas utilities such as Northwest Natural, Modern Electron aims to decarbonize the natural gas traveling via pipelines to industrial customers by installing its technology at the point of connection, heating the gas to separate it into solid carbon and hydrogen and reusing the hydrogen to deliver low emission heating to the end user. While Modern Electron’s solution is not completely clean, it argues that eliminating the need to retrofit or build new pipeline infrastructure helps to remove carbon impacts throughout the entire hydrogen production lifecycle.
Specifically, Mothusi Pahl, Vice President of Business Development, remarks that IRA’s current definition of ‘lifecycle’ only considers carbon intensity up to the point of production. From a cost perspective, distribution alone can also triple the cost of hydrogen from the point of production to the point of use. As industry players navigate the adoption of green hydrogen, it's important to consider whether the hydrogen should be produced onsite or offsite and if produced offsite, how transportation and distribution should be done.
Investors also question the availability of the inputs necessary to produce green hydrogen. Martin Cilloniz, Senior Analyst at Avangrid, notes that most renewable energy projects in the Northeast are already contracted under long-term power purchase agreements, with limited remaining utility-scale projects that can supply green electricity to produce green hydrogen. Existing uncontracted renewable projects tend to be situated in areas with high locational marginal prices for electricity, so procuring electricity from them for green hydrogen production is likely infeasible.
While there are ambitious plans to develop green hydrogen hubs across the country, it remains uncertain is how fast new renewable energy projects can come onlne and how long it will take for electrolyzer producers to ramp up existing manufacturing processes to bring the delivery time down to less than a year.
A third concern involves regulatory uncertainty. Which regulator has the overall regulatory authority for the transport of green hydrogen via pipeline infrastructures? The Federal Energy Regulatory Commission (“FERC”), which approves the siting of interstate natural gas pipelines, currently does not. Given the complexity and lengthiness of the permitting process for new natural gas pipelines under FERC, hydrogen developers have wondered if similar issues will arise for proposals to build new hydrogen pipelines if regulatory jurisdiction also falls under FERC.
The costs associated with the retrofitting and construction of new pipelines are estimated to be substantial and whether the costs would be borne by the federal government, the pipeline company or the consuming entity will have large implications on the likelihood of green hydrogen adoption. As regulatory authority for hydrogen pipelines is moving through Congress, where hearings occurred in July, nobody quite knows who pays for new pipelines. Currently, there are approximately 1,600 miles of hydrogen pipelines and over 3 million miles of natural gas pipelines operating across the US.
The federally-issued National Clean Hydrogen Strategy and Roadmap estimates that US has the potential to reach roughly 20 million tons of green hydrogen production by 2030. While the IRA has taken massive steps to enable green hydrogen to be produced economically, challenges around hydrogen transport and distribution remain a large part of the puzzle to be solved. As green hydrogen producers and buyers are navigating through different operating models, clarity around regulations and cost allocation will grow more critical to resolving green hydrogen's central questions.