US Considers Phased Hydrogen Tax-Credit Plan in Bid to Balance Industry, Activists

(Bloomberg) -- A top climate adviser to US President Joe Biden signaled the administration could phase in some requirements for a valuable new hydrogen tax credit in a bid to nurture a nascent industry critical to decarbonizing industrial operations.

“We’re very optimistic that we can get this right and strike the right balance,” said John Podesta, White House senior adviser for clean energy innovation, as the Treasury Department drafts guidance for claiming the full credit worth up to $3 per kilogram of green hydrogen. 

The goal, he said, “is to get the industry going” and “to create the cost reductions that we need for electrolyzers, but do it in a way that puts us on a path to having the highest standards for green hydrogen going forward during the course of this decade.”

Podesta’s comments send the clearest signal yet that the administration is seeking to find some middle ground between would-be developers who say a flexible approach is critical to driving tens of billions of dollars in potential investments and environmentalists who want qualifying hydrogen production to be tied to new, additional renewable power supplies, generated at the same time and on the same power grids. 

Because electrolyzers that extract hydrogen from water require so much power to operate, some environmental advocates argue strict limits are vital to ensure surging hydrogen production doesn’t drive demand for fossil-based electricity and unleash more greenhouse gas emissions, ultimately undermining US climate goals.

The government is expected to deliver its verdict in coming weeks by issuing formal guidance on the credit created by last year’s climate law. The policy debate has inspired a frenzy of lobbying by environmental activists, energy companies and manufacturers.

The administration is focused on developing a workable approach that will put clean molecules into the system and meet demand, said a senior Democratic policymaker who asked not to be named discussing the matter. Standards that ramp up the environmental performance of hydrogen production over time would allow the industry to meet initial demand and scale up while providing a clear trajectory for growth, the policymaker said.

Administration officials have encouraged some advocacy groups to put forward possible compromise plans that could help bridge the gap between industry and environmentalists, according to people familiar with the matter who asked not to be named discussing private conversations. 

Both the American Clean Power Association and the Energy Futures Initiative advanced blueprints in recent months that would give more flexibility to first-mover green hydrogen ventures and impose strict hourly requirements for clean power on projects developed years from now. 

The ACP framework, for instance, would apply annual time-matching requirements for clean power supplies to hydrogen projects that begin construction before the end of 2028, with tougher hourly-matching standards imposed on those that come later. 

John Ketchum, chief executive officer of NextEra Energy Inc., said that approach would help encourage electrolyzer manufacturers to ramp up production. The coming Treasury Department guidance is key for the company’s $20 billion pipeline of hydrogen projects, he said in a July 25 earnings call.  

Still other floated compromises could allow newly relicensed nuclear plants to qualify as additional clean energy supplies or award the tax credits for hydrogen generated from surplus atomic power produced when demand is low. Those approaches could benefit Constellation Energy Corp., owner of the biggest US nuclear fleet, which is eager to use power from its reactors to produce hydrogen. 

Constellation Chief Executive Officer Joseph Dominguez said Congress was clear when it enacted the Inflation Reduction Act.

“Existing nuclear plants are allowed to earn a tax credit for producing hydrogen. There’s no other way to read it,” he told analysts on a conference call Thursday. “There was never an agreement on additionality — let alone even a discussion of additionality — when this bill was passed.”

If the final policy doesn’t support awarding tax credits for nuclear-powered hydrogen production, Dominguez said he’s willing to challenge it in court.

(Adds further details starting in 10th paragraph, including comments from NextEra and Constellation Energy.)

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