The passing of the Inflation Reduction Act (IRA) by the US Senate on Sunday may prove to be the single most important event in the history of green hydrogen to date — and a turning point for the nascent industry beyond American borders.
Not only will the act’s generous tax credits of up to $3/kg (see panel below) for ten years make the renewable H2 produced in the US the cheapest form of hydrogen in the world — but it will also light a fire under the many countries that aim to become major players in the nascent green hydrogen space.
It is little wonder that Dimitry Dayen, a renewables analyst at global equity manager ClearBridge Investments, called the credits a “game-changer” for the clean hydrogen industry.
And despite the fact that blue hydrogen is eligible for the tax credits, it would be hard for such projects to qualify for even a fraction of the full amount, giving a further boost to renewable H2 (see panel below).
What the tax credit means for the US H2 sector
As Recharge reported in late July, according to the latest figures from S&P Global Platts, a $3/kg tax credit on green hydrogen would effectively make it cheaper to produce in most parts of the US than existing sources of grey hydrogen — ten million tonnes of which is used every year in America, mainly for oil refining and chemicals production.
The cheapest cost of production for grey hydrogen in the world today comes in at a monthly average price of $1.71/kg in the US Midwest, according to Platts, with green hydrogen in the US Northwest coming in at $3.73/kg. Subtract the $3/kg via the tax credit, and that renewable H2 would cost a developer $0.73/kg to produce.
And according to a calculator on the online learning platform Keynumbers, reaching that price with grey hydrogen would require natural gas to be priced at zero.
Considering that the costs of wind and solar power are on a downward trajectory — and that green hydrogen producers can also utilise renewable energy tax credits — it is fair to assume that green hydrogen will remain cheaper to produce than grey for the foreseeable future, unless a future Republican-dominated Congress rescinds the H2 tax credits.
In other words, US hydrogen users will soon be able to save money by switching their grey hydrogen supply to green. That’s an immediate potential market of ten million tonnes of H2 — before even considering the possible demand from new hydrogen uses such as transport, steel production and back-up power.
According to a recent Hydrogen Europe report, the price of green hydrogen would have to fall below €1.50 ($1.53) per kilogram in its most pessimistic scenario for green steel to become cost-competitive with steel made using highly polluting fossil fuels.
So a green hydrogen price below $1/kg might immediately stimulate demand for green steel, and could do so in other industrial sectors such as cement and glass-making.
The lower price might even make hydrogen-powered road transport more financially attractive, particularly as the IRA — which is expected to be passed by the House of Representatives and signed into law by President Joe Biden within the week — contains subsidies of up to $7,500 for fuel-cell cars and up to $40,000 for fuel-cell trucks (although battery electric vehicles are also eligible for the same funding).
What this means for green H2 industry outside the US
Green hydrogen developers around the world would be keen to benefit from the $3/kg subsidy and, consequently, it would not be a surprise to see many of them directing more of their efforts and finances to the US market — not least because of a lack of clarity on H2 funding elsewhere.
More than 300GW have been announced around the world, but in almost every case, no final investment decision (FID) has been made. This is largely because developers — and potential customers — are waiting to see what sort of subsidies might be available to ensure that projects will be profitable and the H2 affordable.
Any country that finalised subsidy schemes for green hydrogen would immediately become attract to developers and equipment makers. And not only would the US H2 tax credits be among the first support programmes to be put in place, it is also the most generous yet proposed.
Aside from the US, only the UK has unveiled a national subsidy for clean hydrogen — based on contracts for difference that would make it cost competitive with grey, while the European Commission has announced plans for a similar scheme, which will require the sign-off of 27 nations and the European Parliament. Germany has also revealed a €900m ($920m) auction scheme for green hydrogen imports from outside the EU.
And while sky-high natural gas prices outside of the US are currently making green hydrogen cheaper to produce than grey H2 on paper, this fact does not seem to be leading to FIDs, as gas prices would be expected to fall to more normal levels in the coming years — certainly during the lifetime of any renewable hydrogen project.
There are also concerns surrounding the European draft proposals, which includes stringent “additionality” rules that do not allow renewable electricity to be banked at times of excess power and used later on. As the levelised cost of green hydrogen falls the more hours per year an electrolyser is in operation, this rule could lead to extremely expensive renewable H2.
This all means that the US tax credit plan is the only legislation on the cards that will pretty much guarantee that green H2 will be cheaper than the blue and grey varieties.
The dozen or so countries that have publicly stated their ambitions to become world leaders in green hydrogen — including India, China, Australia, Chile, Egypt, the UAE, Oman and Namibia — will not want to lose out on clean hydrogen investment to the US and will therefore be carefully recalibrating how to lure investors, including equipment makers, with their own ambitious green H2 programmes.
Such moves have been previously seen in the worldwide explosion of renewables feed-in tariffs in the 2000s and 2010s — which was kick-started by Germany's Renewable Energy Sources Act in 2000 — and then the national auction models that replaced them.
Local hydrogen developers will also be pointing to the US tax credits and seeking similar levels of support from governments — which would be wary that, in a few years’ time, US clean hydrogen might be cheaper on the global marketplace than H2 made in their own countries.
Potential downsides to the tax credits
The tax credits will make the cost of green hydrogen production low — and, in a competitive US market, this would also mean that purchase price of the H2 would be lower than an unsubsidised product.
This might lead some developers to conclude that they could make more money by exporting it to places of high prices and high demand, such as Europe, Japan or South Korea.
If this imported US green hydrogen undercuts the price of domestically produced clean H2 in such countries, that could represent a breach of World Trade Organization rules and lead to import tariffs and other countervailing measures, with the possibility of tit-for-tat tariffs and an international trade war, particularly if the US is by that time led by a nationalist Republican government.
Another potential problem is that the Inflation Reduction Act does not appear to place a limit on the amount of money that the government could end up spending on subsidising green hydrogen.
The lack of a ringfenced budget means that Washington could end up spending billions of dollars more than expected. For instance, one million tonnes of clean hydrogen could cost $3bn per year, while ten million would cost $30bn.
A similar situation occurred in Spain in the 2000s, when its unlimited, generous feed-in tariff for solar energy was launched in 2004 by a Socialist government, but proved to be far more popular than envisaged, leaving Madrid with ten times as much PV power as it had envisaged by 2010, and a €3bn annual subsidy bill. This led to a successor right-wing government scrapping all solar subsidies in 2014 and even retroactively withdrawing the FIT from older projects, despite those having been installed on the basis of the promised 20-year tariff. The move decimated the Spanish solar industry and led to thousands of bankruptcies, while also denting international trust in Spain as a reliable place for private investment.
And as all 50 Republicans in the US Senate opposed the IRA, they might want to overturn it, or elements of it, when they regain some power in the US Congress — which could be as soon as this November.
However, Republicans rarely, if ever, act against the interests of the domestic oil & gas lobby, which largely seems to supports the bill, especially as it contains a requirement — at key Democrat Senator Joe Manchin’s insistence — for the government to offer oil & gas leases on federal land and in the Gulf of Mexico.
And the hydrogen tax credits seem to have won support from even the US oil industry’s biggest climate laggard, ExxonMobil.
“It is encouraging to see the recognition and the desire to try to catalyze investment in this space [clean hydrogen and biofuels] because, as we’ve said, we think they’re going to be absolutely critical to society,” Exxon CEO Darren Woods said about the IRA.
Another potential difficulty that is central to the hydrogen production tax credits is the onus on an “unrelated third party” to verify the lifecycle emissions of each project.
Without some kind of federal oversight — which is not stated in the act — how can anyone be sure of the accuracy of each set of lifecycle emissions analysis?
If these third-party companies are paid by each developer, they may be put under pressure to give favourable opinions that would save their clients millions of dollars, or some unscrupulous executives could even resort to bribery or blackmail to get them.
After all, the US oil & gas industry has a long history of using their deep pockets in underhand ways to get what they want — especially on climate-related issues.
It may not be long before questions start being raised about suspiciously low upstream methane emission levels on certain blue hydrogen projects — or the activities of certain “unrelated third parties”.
The $433bn Inflation Reduction Act of 2022 creates a tax credit that would pay clean hydrogen producers up to $3 per kilogram (adjusted for inflation).
The size of the tax credits available to US clean hydrogen producers depends on the lifecycle greenhouse gas (GHG) emissions of each project — and more importantly, on how much staff are paid.
So the basic tax credit rate for “qualified clean hydrogen” is set at $0.60/kg, with a sliding scale depending on lifecycle emissions — measured in carbon dioxide-equivalent (CO2e) — of the H2 produced.
Hydrogen manufactured with less than 0.45kg of lifecycle CO2e emissions per kg of H2 would receive 100% of the credit, followed by 33.4% for 0.45-1.5kgCO2e/kgH2, 25% for 1.5-2.5kg and 20% for 2.5-4kg.
The lifecycle emissions would have to be verified “by an unrelated third party”, and only projects that start construction before 2033 would qualify.
However, the wage requirement in the new bill seems to be the most important part of the deal — multiplying the size of the tax credit by a factor of five.
Producers would be eligible for this boost if they ensure “that any laborers and mechanics employed by contractors and subcontractors in the construction of such facility… shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor”.
Importantly, these lifecycle emissions are calculated from “well to gate” — in other words, they would include upstream methane emissions in the production of blue hydrogen (which is made from natural gas with incomplete carbon capture and storage).
Also, the IRA states that blue hydrogen projects would be ineligible for H2 tax credits if they already receive federal tax credits for carbon capture and storage — but green hydrogen projects would also be allowed to receive renewable energy tax credits valued at $30/MWh in addition to the hydrogen ones.